Yield farming in plain terms
Yield farming is the practice of depositing crypto into DeFi protocols to earn returns. Those returns come from trading fees, interest payments, token rewards, or some combination of all three.
The "farming" metaphor comes from the idea that you're planting your capital (seeds) into protocols (fields) and harvesting rewards over time. Some farmers stick with one field. Others constantly move their capital to wherever the yields are highest — that's where it gets both interesting and dangerous.
Where the yield comes from
- Trading fees. When you provide liquidity to a DEX pool (say ETH/USDC on Uniswap), you earn a share of the 0.3% fee charged on every swap in that pool.
- Lending interest. Deposit USDC into Aave, and borrowers pay you interest. Rates fluctuate based on supply and demand.
- Token incentives. Many protocols distribute their own governance tokens to attract liquidity. This is the "bonus APY" you see advertised — and it's often temporary.
- Staking rewards. Lock tokens in a protocol to help secure or govern it, and receive rewards in return.
The APY numbers are misleading
You'll see DeFi protocols advertising 50%, 200%, or even 1,000% APY. These numbers are technically correct in the moment but deeply misleading in practice. Here's why:
- High APYs attract capital quickly. As more people deposit, the yield dilutes for everyone.
- Token reward APYs depend on the price of the reward token. If that token drops 80% (which happens constantly), your "200% APY" becomes much less impressive.
- Impermanent loss can eat 5-20% of your position if token prices diverge significantly.
- Gas fees for entering and exiting positions can negate weeks of yield on smaller deposits.
A realistic example
You deposit $10,000 worth of ETH and USDC into a Uniswap V3 pool. The pool earns 0.3% on every trade. Over a month, the pool processes $5 million in volume. Your share of the pool is 0.2%. That means you earned roughly $30 in trading fees.
If the protocol also gives you governance tokens worth $50 that month, your total return is $80 on $10,000 — a 0.8% monthly return or about 9.6% annualized. That's decent. But it's not the 200% APY the dashboard showed when you entered.
The risks are real
- Impermanent loss. If one token in your pair moves significantly in price relative to the other, you end up with less value than if you'd just held the tokens.
- Smart contract risk. Bugs in the protocol can lead to loss of funds. Audits help but don't eliminate risk.
- Rug pulls. Some yield farms are created specifically to attract deposits and then drain the pool. Common with new, unvetted protocols.
- Token devaluation. Reward tokens are often inflationary. Everyone who receives them is selling them, which pushes the price down.
Before you farm
Yield farming is an advanced DeFi activity. Before you get there, you need to understand basic trading, fee mechanics, and how token pairs work. Korvex is designed for exactly that phase — practice the fundamentals with virtual money and real market data, so when you're ready for DeFi, you go in with knowledge, not just hope.