Yield farming is the practice of moving capital between DeFi protocols to chase whichever one is offering the highest returns at any given moment. A yield farmer might deposit into a lending protocol on Monday, withdraw and move to a liquidity pool on Wednesday when that pool starts emitting extra token rewards, and then shift again on Friday when a new protocol launches with even more attractive incentives. The activity is both a rational response to the large yield disparities that exist across DeFi at any given time and a recognisable category of crypto behavior that became famous during the 2020 “DeFi summer” when the rewards were at their peak.
The underlying mechanism of most yield farming is liquidity mining: protocols bootstrap their usage by distributing their own governance tokens as rewards to users who deposit, trade, or otherwise interact with the protocol. The token rewards, on top of whatever base yield the protocol generates, can push the effective APY well above what the base activity alone would produce. In the peak of DeFi summer, some protocols were advertising APYs in the hundreds or thousands of percent because their token rewards were being valued at whatever the market was currently willing to pay, and those prices were high during the bull phase.
How Compound Kicked It Off
The specific event that started DeFi summer was Compound’s launch of its COMP token in June 2020. Compound had been operating for a few years as a lending protocol, but until COMP, users had no token-level exposure to the protocol’s success. The COMP launch distributed governance tokens to users based on how much they were borrowing and supplying on the protocol, effectively subsidising borrowing and lending activity with token emissions. Because the COMP token was trading on open markets at a price that valued the emissions at a substantial dollar amount, users suddenly saw the possibility of earning extra yield on top of their normal supply APY, and behavior changed overnight.
Within weeks, sophisticated users were borrowing and lending through Compound in loops (supply DAI, borrow DAI against it, re-supply the borrowed DAI, borrow again, repeat until the gas cost and the borrow rate made further looping unprofitable) specifically to maximise the COMP emissions they were receiving. Some users were effectively paying to borrow because the COMP rewards exceeded the borrow rate, which sounds absurd but was rational as long as COMP held its value. The total value locked in Compound tripled within a few weeks of the launch, and a new meta emerged where every protocol was expected to launch a governance token to distribute as rewards and attract liquidity.
The pattern spread rapidly. Yearn Finance launched YFI in July 2020 with no pre-mine, no team allocation, and no investor allocation — all 30,000 YFI tokens were distributed to yield farmers who had deposited into Yearn vaults. YFI became one of the most talked-about tokens in crypto and reached a peak price of over $90,000 per token. Sushi, an unofficial fork of Uniswap, launched in August with aggressive liquidity-mining rewards that temporarily drained liquidity away from Uniswap itself. Curve Finance, Balancer, Harvest, Pickle, YAM — dozens of protocols launched or relaunched with liquidity-mining programs, and the competition for user capital pushed effective yields into ranges that made traditional finance look stationary.
The Mechanics of Chasing Yield
Yield farmers developed a handful of common strategies to squeeze the most out of the available emissions.
Single-sided staking. Deposit a single token into a protocol that pays governance rewards for holding. Low-risk in theory, because your exposure is just to the token you are staking plus the rewards, but the rewards themselves are often being issued at rates that lead to massive dilution for anyone holding the reward token long-term.
LP farming. Deposit two tokens into a liquidity pool, receive LP tokens, stake the LP tokens in a farming contract that pays additional rewards. Higher potential yield, but with impermanent loss risk plus the volatility of the reward token. This became the dominant farming pattern because the extra rewards were usually large enough to compensate for the IL.
Leveraged farming. Use a lending protocol to borrow against deposits, redeposit the borrowed amount, and multiply the farming yield by the leverage factor. This amplifies both returns and liquidation risk, and it was responsible for a substantial fraction of the worst DeFi summer blowups when prices moved against leveraged positions.
Vault strategies. Protocols like Yearn automated the process of moving funds between the highest-yielding opportunities, and users could deposit into a vault and let the vault handle the rebalancing. This made yield farming accessible to non-technical users who did not want to manually migrate their capital every few days. The vaults generated real value by amortising gas costs and executing complex strategies more efficiently than most individual users could, and they remain a real feature of DeFi today even after the peak farming era wound down.
Where Yield Farming Went
DeFi summer peaked in late 2020 and early 2021. The effective APYs that had been absurdly high in the first few months came down as more capital chased the same opportunities, diluting the rewards and bringing yields closer to something resembling a normal rate. Many of the tokens that had been distributed at peak prices traded down substantially as farmers sold their rewards into the market. Some of the protocols that had briefly attracted enormous TVL via farming programs lost most of it when the rewards ran out — “mercenary capital” was the term for this, describing users who had no loyalty to any specific protocol and would move the moment a better opportunity appeared.
By 2023, most serious DeFi protocols had abandoned aggressive liquidity-mining programs and were experimenting with more sustainable ways to attract users. ve-tokenomics (popularised by Curve) let users lock tokens for long periods in exchange for boosted voting power and a larger share of rewards, which reduced the mercenary capital problem by making the rewards depend on long-term commitment. Points programs — where users farm an abstract “points” reward that will later convert to tokens — became a way to attract early users without immediately distributing tokens at launch, which both delayed the selling pressure and let projects retroactively reward the best users.
Yield farming as a distinct phenomenon has faded into the background of DeFi. The strategies still exist, the rewards still get distributed, and farmers still chase them, but the intensity and the financial returns are lower than they were during the peak. What remains is a residual set of practices that more experienced DeFi users deploy to earn returns on idle capital — typically with more realistic expectations about what is actually achievable and more care about the underlying risks than the 2020 crop of farmers exhibited.