Yield farming refers to involves earning rewards or interest by investing cryptocurrency assets in a liquidity pool or through other decentralized finance (DeFi) mechanisms. Participants, known as liquidity providers, lock up crypto assets in a smart contract-based liquidity pool to facilitate lending, borrowing, or trading on the platform. In return, they earn fees generated from the platform's financial activities or new tokens as rewards, often resulting in high annual percentage yields (APY) compared to traditional banking products.
The strategies for yield farming can be complex, involving moving assets across multiple DeFi platforms to optimize returns, a process facilitated by the composability of DeFi protocols.
While yield farming can offer substantial returns, it comes with high risks, including smart contract vulnerabilities, impermanent loss, and market volatility. Yield farming has been a driving force behind the growth of the DeFi ecosystem, attracting significant capital and attention to innovative financial protocols.
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