What Is Crypto Farming and How to Start Earning?

The DeFi ecosystem is one of the most diversified financial environments that humanity has ever produced. With hundreds of novel investment instruments to experiment with, contemporary investors are always second-guessing themselves while trying to find the perfect portfolio composition. The journey to optimize profits is a challenging one even for experienced investors.

Farming digital assets in the world of cryptocurrencies seem to be quite a difficult area of expertise for many financiers. Newcomers to the industry often feel overwhelmed with the variety of options presented to them. Making a sound judgment is something that comes with years of experience, trial, and error.

What is yield farming?

The concept of farming yields sounds foreign to investors from the world of tradfi where receiving profits in assets that are different in nature from the principal currency is not a common occurrence. Holding one type of asset to receive another is not something completely out of this world but rare enough to confuse some investors who spent decades mastering finance.

In the DeFi sector, these setups are quite common. In fact, it is the preferred method of providing compensation to liquidity providers for the vast majority of decentralized protocols. Lending platforms, exchanges, bridges, aggregators, and many other projects will gladly pay their users in native, governance, or layer 2 tokens.

A typical yield farming protocol operates thusly:

• The development team creates an application with smart contracts that can make swaps happen and secure funds for them to occur in liquidity pools.
• Liquidity pools pay contributors in principal currency by giving them a share of fees collected by the protocol.
• To incentivize additional user activity, attract more funds, or simply make up for the difference between expected and real APYs, pools may pay users in native tokens.

Due to high gas fees, the vast majority of protocols operate on layer 2 chains like Optimism or Polygon. These are designed to increase scalability by, in part, reducing fees for individual transactions by “packing” them into a single one that is later resolved on the mainnet. Layer 2 chains often have their own tokens that may carry additional utility (discounts, free swaps, etc.) or be used for governance purposes.

How do decentralized exchanges (DEXes) offer high APYs?

The simplest explanation is the fierce competition in the DeFi ecosystem. All platforms are battling for liquidity. Some attract investors by offering incredibly safe investment instruments (lending protocols like Compound Finance or Aave). Others may focus on increasing potential rewards by offering native tokes as incentives.

In some cases, rewards can be incredibly valuable and provide useful utility to users. Let’s take Aerodrome Finance (Base) as an example:

• The exchange offers rewards exclusively in AERO tokens with only a handful of pools having APY in principal currency.
• AERO tokens can be used for voting and to receive additional dividends. To use these features, investors must lock their tokens for a fixed period of up to 4 years.
• Locking in assets for 4 years allows holders to vote with 100% efficiency (100 tokens equals 100 votes) and receive the full amount of fees dedicated to this particular stake as rewards.
• Locking in assets for, let’s say, 2 years provides half of the benefits (100 tokens equals 50 votes) so investors receive only 50% of fees collected by the protocol.

Note that AERO tokens themselves are among the best performers in 2024. You should not expect the price to go up significantly but a slow depreciation in line with declining inflation is excellent for long-term holders. So far, the price dynamic and trading volumes have been indicative of a strong potential for that exact scenario.

The difference between APR and APY

If you are interested in yield farming or simply exploring the world of DeFi and its many investment opportunities, you must clearly understand the difference between annual percentage rate and annual percentage yield. In some cases, you may also come across another abbreviation CRP (Current Reward Percentage) used by some chains to define the share of tokens dedicated to paying out rewards. CRP should not be confused with APY or APR. For instance, Polygon’s CRP is 4.95% while the APY is 3.72% in November 2024.

Below are surface-level explanations of what APR and APY mean:

• APR is the interest rate that you will be paid by the end of the year. For example, a 5% APR on a $10,000 investment will yield you $500 in year 1 and $5,000 by the end of year 10.
• APY is the same rate that includes compounding. In the DeFi sector, compounding is usually daily. A 5% APY will net you $512 by the end of the first year and $6,486 at the end of the decade.

The difference after only one year is negligible. However, it grows to a significant difference of 29.7% in just a decade. The compounding effect is incredibly powerful over long. However, investors must be aware of the shorter investment horizon in the world of DeFi. If you are interested in significantly improving profits, you have to use riskier approaches.

Risks of engaging in yield farming

There are several issues that prevent many investors from entering the world of DeFi. We will talk about some of them in detail.

• Difficult onboarding. While it may seem like an insignificant issue, it can severely affect the way you invest. Many platforms have complex interfaces with too many choices and too much information for an inexperienced user to process. Moving assets from one protocol to another can be challenging if you do not feel confident using different types of wallets. Learning how to navigate Dapps efficiently is incredibly important.
• Impermanent loss occurs when the price of the principal asset staked in a pool loses value in the open market. For example, you may have invested ETH at $3,400. Over the next week, you see the price dropping to $3,200. The $200 is an impermanent loss because it can be recovered if the price goes up. Of course, this particular process works in the other way too making each investment in the DeFi sector a small gamble.
• Technological risks. The world of blockchain has matured and turned into a massive juggernaut. However, many challenges remain unsolved. One of them is the problem with smart contracts and their autonomy. Any error during the development process can lead to dramatic failures and massive losses. It is critical to work with protocols that practice responsible development and conduct audits by third parties to ensure the integrity and robustness of their smart contracts.
• The lack of regulation is another problem. On one hand, many crypto enthusiasts believe that operating in an unregulated financial system is better because the accessibility is universal. The democratic nature of the DeFi ecosystem is what draws in many libertarians, conservatives, and other politically charged individuals. On the other hand, newcomers are afraid to make moves since there is no consumer protection, and making a single mistake can cost you a fortune.
• Gas fees can be very high when interacting with layer 1 blockchains. For example, it costs roughly $4 to send any amount of assets over the Tron network. Infamously, Ethereum network fees can go up by an order of several magnitudes when there is a significant level of congestion. Paying $22 just to send $10 seems outlandishly inefficient. Some protocols operate on the mainnet making every single move expensive for investors. For instance, Lido operates on Ethereum directly.

Investors, who are interested in allocating capital to the DeFi ecosystem, must be aware of the risks that they may face on top of typical risks like overly concentrating positions, economic uncertainty, and many others.

How to make money by farming yields?

You can receive rewards for providing liquidity to protocols in many ways. With over 3,000 tracked protocols and 11,000 pools, finding a good combination of investments is incredibly difficult yet more than possible. An investor must be prepared to do an unfathomable amount of research and burn themselves a couple of times before they find a good strategy that works in the vast majority of cases.

We want to talk about various options available to investors interested in working with decentralized protocols.

Staking and liquid staking

While staking itself does not allow you to receive any rewards, you can still engage in yield farming, albeit at higher risk levels. We will give you several examples:

• Staking DAI at 6% APY on MakerDAO using its DAI Savings Rate module grants you sDAI at a 1:1 ratio. Staked DAI can be used as collateral to take out a loan in USDC. Stablecoins are incredibly valuable. Pools focused on them usually yield higher interest rates allowing you to offset interest payments on USDC loans (can be up to 5%). For example, staking USDC on Fluid Lending will pay 17.85% in base APY and up to 3% in USDC rewards.
• You can stake with Lido, the biggest protocol by TVL (over $26 billion). The base APY here is 3.58% which is slightly lower than what direct ETH staking provides (over 4%). However, you will receive stETH which can be used as collateral and staked directly with some protocols. For instance, staking STETH at Pendle for liquidity pools with a fixed maturation date will yield up to 3.28% in base APY and up to 3% in PENDLE rewards.

These options expose you to multiple risks and can be quite dangerous during bearish periods in the market or when volatility is through the roof potentially causing sudden liquidation. At the same time, these setups can double or triple expected gains and dramatically improve the outcomes of investment operations.

Lending tokens

Some lending platforms offer incredibly generous interest rates and give native tokens on top. Lending is considered safer than other investment instruments in the sector because all loans must be collateralized protecting lenders from various market risks. APYs here are generally lower compared to DEXes and other protocols.

Here are some interesting options for people interested in lending platforms:

1. Aave is the biggest lending protocol with over $16.9 billion in TVL and 145 pools averaging 3.24% APY. Here, you can invest in the WETH pool for 1.99% APY or focus on ultra-safe investments like allocating capital to USDC and USDT pools on Ethereum with 4.28% base APY.
2. JustLend is the largest protocol in this category on the Tron network. With a $4.81 billion TVL and 18 pools with an average APY of 0.69%, it is one of the safest options for many investors interested in lending. The USDD pool has a 0.14% base APY but offers up to 6.12% in TRX rewards.
3. Avalon Finance operates across 11 different chains including Ethereum, Bitlayer, and CORE. The protocol combines features of centralized and decentralized applications. You can invest in the BTCB pool for 1.36% APY and 3x Avalon points. Points can be used to receive discounts on the platform.

Yield aggregators

In many cases, managing DeFi investments personally can be less efficient than employing some automation to simplify the process and increase the effectiveness of capital allocation. For example, you can go to Rivo.xyz to start investing in a strategy specifically designed for your asset composition. It is one of the best platforms for newcomers to the world of crypto investments. The whole process is streamlined to ensure that users can get started with just a couple of clicks.

Yield aggregators are also tools for automation. They monitor the market and search for the best investment options to quickly move your assets to the most efficient pool out there.

Here are three great yield aggregators to check out in 2025:

1. Beefy Finance is the most popular aggregator that works primarily with Ethereum-based protocols. The platform operates across 8 chains and offers a wide range of interesting pools. For instance, you can invest in the BIFI pool on Ethereum to earn up to 9.15% base APY or receive up to 13.5% on USDC holdings invested in Compound pools.
2. Yearn Finance works across 6 chains and has a $221 million TVL. The protocol offers 153 pools averaging 543% APY. These numbers change quite often as the protocol regularly adjusts its strategies and focuses on adapting to the dynamic nature of the crypto market. Investing in the DAI pool yields 6.03% which is 0.3% higher than investing directly in MakerDAO.
3. Sommelier is a Dapp working on Ethereum, Arbitrum, and Optimism. Currently, it has a respectable $56 million TVL and offers 18 pools averaging 4.44%. Positions are leveraged so you will be exposed to excess risks which should be reflected in the way you build your strategy. Pools have APYs ranging from 0.02% to 11.6% depending on the principal asset.

The main takeaway

Crypto farming can be extremely profitable if you understand how the world of DeFi works. Knowing when to exit positions and how to protect yourself from various market risks is also valuable. We strongly suggest exploring and researching yield farming opportunities personally since nothing can be better than hands-on experience.