What Is Yield Farming in Crypto? Beginner Guide 2025
An easy-to-follow explanation of yield farming in 2025: how liquidity pools work, where rewards come from, and what risks to expect.
This guide is for education only and not financial advice. Yields are variable and capital is at risk.
Introduction
Yield farming is a DeFi strategy where you deposit assets into protocols (AMMs, lending markets) to earn trading fees, interest, and/or incentive tokens. In exchange, you usually receive LP tokens that represent your share of the pool.
Quick Start (5 steps)
- Pick a network & wallet. Start on a low-fee chain you know (e.g., Arbitrum, Base, Solana) with a funded wallet.
- Choose a conservative pool. Prefer stable-stable pairs (e.g., USDC/DAI) to minimise impermanent loss (IL).
- Review APR sources. Split of fees vs. emissions; check historical APY and TVL depth.
- Deposit & receive LP. Add liquidity → get LP tokens → (optional) stake LP to earn incentives.
- Monitor & adjust. Track IL, APR changes, and rewards; set alerts and unwind if metrics deteriorate.
Pro tips & safety checklist
- Start small (1–3% per strategy) and scale after a week of live monitoring.
- Avoid thin liquidity & unaudited contracts; verify official URLs.
- Account for gas, swap fees, and exit penalties before entering.
How Yield Farming Works
AMMs pool two assets (e.g., USDC/ETH). Traders swap against the pool and pay fees. Liquidity Providers (LPs) supply both assets and earn a pro-rata share of fees and any incentive tokens. Your LP token tracks your share; when you withdraw, you receive the current pool composition, which may differ from your deposit mix due to price moves.
- Provide liquidity: deposit both sides (or use single-sided routes where supported).
- Earn: trading fees + incentives (if the pool is boosted/farmed).
- Stake LP: some protocols require staking LP tokens in a “gauge” to receive incentives.
- Unwind: withdraw LP → receive assets back (subject to IL and price changes).
Pool Types Compared
| Pool type | Examples | IL risk | Typical fees/APR | Who it suits |
|---|---|---|---|---|
| Stable - Stable | USDC/DAI (Curve) | Very low | Lower but steadier | Beginners, capital preservation |
| Correlated | wBTC/BTC, stETH/ETH | Low–medium | Moderate | Intermediate LPs |
| Volatile - Volatile | ETH/ALT, ALT/ALT | High | Potentially high | Advanced users only |
| Yield tokenization | Pendle PT/YT | Structure risk | Boosted (complex) | Experienced farmers |
Note: “Typical” returns vary by market, incentives, and volatility. Always check live APR and depth.
Risks & Impermanent Loss
- Impermanent loss (IL): price divergence between pooled assets reduces the value of your position vs. simply holding. IL can be offset by fees/incentives, but not guaranteed.
- Smart-contract risk: bugs, oracle failures, or governance attacks.
- Reward volatility: emissions decay, governance changes, or token price drops.
- Liquidity risk: shallow pools → higher slippage and harder exits.
- Operational risk: wrong contract, phishing sites, or bridging mistakes.
How to reduce IL
- Prefer stable-stable or correlated pairs; avoid thin TVL pools.
- Use narrow ranges only if you can actively manage (Uniswap v3).
- Harvest rewards regularly; consider converting incentives to base assets.
Useful Tools
- Revoke.cash — review & revoke token approvals.
- Pools trackers — compare fees/APR and TVL.
- LP position dashboards — monitor ranges and fees.
Popular Yield Farming Platforms
FAQ
How much can I earn from yield farming?
Anywhere from low single-digits to high double-digits APY depending on pool depth, fees, and incentive tokens. Higher APRs usually imply higher risk.
Is yield farming good for beginners?
It can be complex. Beginners should start with stable-stable pools (e.g., on Curve) and avoid leverage or exotic strategies.
How often should I harvest rewards?
Balance gas costs vs. compounding benefits. On L2s, weekly is common; on mainnet, less frequent may be optimal.
Glossary
- LP Token
- Receipt token representing your share of a liquidity pool.
- Impermanent Loss (IL)
- Value loss vs. HODL due to price divergence of pooled assets.
- Emissions
- Incentive tokens distributed by a protocol to attract liquidity.