Yield farming

The key distinction in yield farming separates organic yield, which comes from trading fees or interest paid by borrowers, from incentivized yield, which comes from the scheduled, temporary issuance of reward tokens. The user supplies assets to a pool, receives a position token (an LP token on an AMM, an aToken in Aave or a cToken in Compound) and often stakes it in a rewards contract that distributes the incentive token by share of contribution. It is common to chain several protocols, reinvesting the position token into a new strategy to compound returns.

The term became popular during the DeFi Summer of 2020, triggered by Compound's launch of the COMP token and its liquidity mining program, which distributed the governance token among those who lent and borrowed. A second generation arrived with Curve Finance's gauge and vote model (veCRV), which steers rewards toward the pools chosen by voters, and its optimization through Convex, alongside occasional incentive programs from protocols such as Uniswap.

It is how protocols bootstrap their liquidity, paying in tokens to attract capital before they have organic volume. Its risks deserve a neutral technical reading: impermanent loss when providing in an AMM, smart contract risk, mercenary liquidity that leaves once incentives stop, and dilution of the reward token through its own issuance. Good practice always separates real yield from merely subsidized yield, and assesses whether the advertised return is sustainable once incentives run out.