Yield Farming
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In Brief
Yield farming is a DeFi strategy where users lend or stake their crypto in protocols to earn rewards typically interest, trading fees, or governance tokens — often by moving funds between platforms to maximize returns.
What Is Yield Farming?
Yield farming is a way to earn rewards by putting your cryptocurrency to work in decentralized finance (DeFi) protocols. Instead of letting tokens sit idle, you deposit (or "lock") them into platforms that lend, trade, or stake on your behalf — and in return you earn yield in the form of interest, trading fees, or extra tokens.
Yield farmers often chase the highest returns by moving funds between protocols, a practice that helped fuel the explosive growth of DeFi.
How Does Yield Farming Work?
You deposit crypto into a DeFi protocol — for example, a lending platform or a liquidity pool.
The protocol uses your funds (to facilitate loans or trades) and pays you a return.
Rewards can come from interest paid by borrowers, a share of trading fees, or newly issued governance tokens.
Many farmers compound rewards by reinvesting them, and some move capital to whichever protocol offers the best rate.
Where Do Yield Farming Rewards Come From?
| Source | Description |
|---|---|
| Lending interest | Borrowers pay interest on funds you supply |
| Trading fees | A share of fees from a liquidity pool you provide to |
| Token incentives | Protocols distribute governance tokens to attract liquidity |
| Staking rewards | Rewards for helping secure a network or protocol |
What Is APY in Yield Farming?
Returns are usually shown as APY (Annual Percentage Yield), which includes the effect of compounding. High advertised APYs can be attractive but are often variable and can drop quickly as more capital enters a pool — so today's rate is rarely guaranteed.
Risks of Yield Farming
Smart contract risk — bugs or exploits in a protocol's code can lead to loss of funds.
Impermanent loss — providing liquidity can underperform simply holding the tokens.
Token price volatility — reward tokens can fall sharply in value.
Rug pulls and scams — malicious projects can disappear with deposited funds.
Variable yields — high APYs are often temporary and can change rapidly.
Yield Farming and Trust Wallet
Trust Wallet gives you a secure, non-custodial gateway to DeFi. Using the in-app dApp browser and WalletConnect, you can connect to lending platforms and liquidity protocols to put your assets to work — across 100+ blockchains — while always keeping control of your private keys. Because Trust Wallet is non-custodial, your farmed assets and rewards remain yours alone.
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## 3. Liquidity Pool
**Title:** Liquidity Pool
**Slug:** `liquidity-pool`
**Description:** A liquidity pool is a smart contract holding a pair of tokens that traders swap against on a decentralized exchange; users who deposit tokens into the pool (liquidity providers) earn a share of the trading fees.
**Markdown Block:**
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## What Is a Liquidity Pool?
A liquidity pool is a collection of crypto tokens locked in a smart contract that powers trading on a decentralized exchange (DEX). Instead of matching individual buyers and sellers like a traditional order book, a DEX lets users trade directly against the pool.
Anyone can become a **liquidity provider (LP)** by depositing tokens into the pool. In return, they earn a share of the trading fees generated whenever someone swaps using that pool.
## How Does a Liquidity Pool Work?
1. A pool is created for a token pair — for example, ETH and USDC.
2. Liquidity providers deposit an equal value of both tokens into the pool.
3. Traders swap one token for the other directly against the pool's reserves.
4. An **automated market maker (AMM)** algorithm sets the price based on the ratio of tokens in the pool.
5. Each trade charges a small fee, which is distributed proportionally to the liquidity providers.
## What Are LP Tokens?
When you deposit into a liquidity pool, you receive **LP tokens** that represent your share of the pool. These tokens can be redeemed to withdraw your portion of the underlying assets plus your accumulated fees — and in many protocols, LP tokens can themselves be staked for additional rewards.
## Benefits of Liquidity Pools
| Benefit | Description |
|---|---|
| Always-on trading | No need to match a counterparty; trade anytime |
| Passive income | LPs earn a share of trading fees |
| Permissionless | Anyone can create or join a pool |
| Powers DeFi | Underpins DEXs, lending, and yield farming |
Risks of Providing Liquidity
Impermanent loss — if the prices of the two tokens diverge, your position can be worth less than simply holding them.
Smart contract risk — vulnerabilities in the pool's code can be exploited.
Low-liquidity pools — small pools can suffer high slippage and price manipulation.
Liquidity Pools and Trust Wallet
With Trust Wallet, you can connect to DEXs and DeFi protocols through the built-in dApp browser and WalletConnect to provide liquidity and manage your LP positions — across 100+ blockchains. As a non-custodial wallet, you keep full control of your private keys and your deposited assets at every step.