A typical position has several layers. Deposit two assets into a <a href="/glossary/liquidity-pool/">liquidity pool</a>, take the LP token you receive, stake that somewhere else, and collect a third token as an incentive. Every layer adds a contract that must behave, a token that must hold value, and an assumption that must stay true. Farmers move between protocols as incentives shift, which is why the capital is often described as mercenary: it arrives for the rewards and leaves the moment they stop.
Those rewards are usually funded by token emissions rather than by revenue. A protocol mints its own token to bootstrap deposits, and the advertised rate reflects the market value of that emission at that moment. If enough recipients sell the reward token, its price falls and the rate falls with it. Nothing has malfunctioned when that happens, because it is the design working as intended, and it explains why headline rates are so unstable.
The risks are not footnotes. <a href="/glossary/impermanent-loss/">Impermanent loss</a> can quietly consume more than the rewards pay. Contract exploits have drained farms outright, and stacking protocols means inheriting the weakest one in the stack. Reward tokens can be illiquid, so the figure on the dashboard is not the amount you could actually sell for. Lock-ups, unbonding periods and fees limit how fast you can leave when something turns. And a farm engineered purely to gather deposits before vanishing is a well-established scam pattern, covered in our <a href="/toolkit/how-to-spot-crypto-scams/">guide to spotting crypto scams</a>. A yield is the price paid for accepting risk, and a high price is the market telling you the risk is high too.
DeFi Basics and Risks
Key takeaways
- Every extra protocol in a farming position adds a failure point, and the position is only as sound as its weakest link.
- Rewards paid in a freshly minted token are worth whatever that token is worth at the moment you can actually sell it.
- Advertised rates are live snapshots funded by emissions, not a rate anybody has committed to paying you.
Yield Farming — frequently asked questions
Is yield farming the same as staking?
No. Staking usually means locking a network's own coin to help secure it, with rewards coming from protocol issuance and the main risks being lock-up periods and slashing. Farming means chasing incentives across applications, often with several contracts and borrowed complexity involved. The two get lumped together because both display a rate, but the risk profiles are very different.
Where does the yield actually come from?
From three places, in roughly increasing order of comfort: fees paid by real users, interest paid by real borrowers, and new tokens minted by the protocol itself. The third funds most eye-catching rates and is not income in any conventional sense, because it dilutes existing holders in order to pay new depositors. Knowing which one you are receiving matters a great deal.
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