For decentralized exchanges, collecting funds into liquidity pools makes for quick and easy access for trades to take place moment to moment. The first method of generating yield from crypto assets involves depositing assets into liquidity pools. 3 Simple Yield Farming Methods Liquidity Providers (AMM Protocols) High double-digit and especially triple-digit APY numbers should certainly be cause for extra scrutiny. These ‘rug pull’ or Ponzi protocols often share similar designs in order to attract capital with high APY traps before the protocol’s creators begin selling off their coins or tokens to unwitting investors and disappearing altogether. This could leave yield farmers with their assets earning less than they expected, and as investors pull their tokens out to sell, the prices fall further. These yields are typically seen as red flags, and only offered for smaller, often illiquid crypto assets, with yields turning volatile and gradually dropping significantly over time. Those numbers are small in comparison with DeFi offerings, with smaller protocols offering outrageous yields (think 800% APY) to attract capital to their protocols. Larger DeFi platforms like Celsius, on the other hand, offer higher yields on fiat stablecoins and other highly liquid crypto assets like Bitcoin, Ethereum, Paxos Gold, and many more.

Savings accounts at commercial banks typically offer less than 1% APY for fiat currency deposits. In traditional finance, instruments yielding 5-15% for their asset holders are considered high. This article will discuss several specific methods of generating yields on crypto assets, crystallizing our understanding of the yield farming landscape more broadly. The farming metaphor in yield farming references an initial deposit of crypto assets, and an eventual harvesting of rewards, similar to patterns practiced by farmers and agriculturalists.

The easiest way to conceptualize it is to imagine a high-interest yielding savings account at your traditional bank, or perhaps a dividend-paying bond, but that only scratches the surface when it comes to yield farming. Yield farming is a term used to loosely describe strategies of earning passive income from one’s crypto assets. One of the most exciting opportunities presented by DeFi has to be yield farming. Validator Staking (Proof of Stake Protocols).

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