What is yield farming?

Yield farming is popular strategy in the decentralized finance (DeFi) sector of cryptocurrency, where investors lend or stake their crypto assets on a platform to earn rewards, typically in the form of interest or additional digital tokens. This process often involves contributing to liquidity pools—smart contracts filled with funds—that facilitate various transactions on the DeFi platform, like token swaps

How does yield farming work?

DApps attract people’s cryptoassets by issuing rewards for deposits. When a person decides to deposit, they send cryptoassets to a smart contract which will hold the assets and keep track of rewards earned. The smart contract issues the depositor a token that acts as a kind of receipt. The token is used to realize any outstanding rewards, and to withdraw cryptoassets from the smart contract.

Liquidity providing: Liquidity providers, or LPs for short, contribute cryptoassets to a decentralized exchange (DEX) and receive a percentage of exchange fees from trades. LPs must deposit equal amounts of two cryptoassets into a trade pair.