DeFi Yield Farming Explained

This article was first published on Chainlink

DeFi Yield Farming Explained

Through the power of DeFi’s permissionless composability, Chainlink’s decentralized oracles, and new financial primitives such as Yield Farming, smart contract developers across the world have been rapidly building, iterating, and deploying new decentralized applications at an unprecedented pace. Year to date, DeFi has already grown 10x from less than $0.7B USD to now over $8B USD in total value locked from user deposits, with $3B+ directly secured by Chainlink price feeds.

Fueling this growth is the high speed nature of development and innovation within DeFi. It has led to many new financial primitives that previously couldn't exist due to the inefficiencies and counterparty risk present in today’s traditional financial system. The most recent innovation taking the DeFi space by storm is Yield Farming, also referred to as Liquidity Mining.

Yield Farming rewards users for provisioning liquidity or providing other value-added services to a decentralized application's ecosystem. Yield Farmers are paid pro rata in an application’s native governance token, granting the user a higher Annual Percentage Yield (APY) on their provisioned liquidity. The rewards from Yield farming are in addition to any built-in revenue streams inherently generated, such as trading fees within a decentralized exchange and/or interest from lending in a money market. Some projects also include yield farming rewards for other services, such as user participation on the platform or supporting community, marketing, or developer initiatives.

Yield Farming is often implemented with two primary goals in mind:

  • Incentivize users to deposit and lock up their liquidity into a DeFi application, growing the Total Value Locked (TVL) and bootstrapping the supply side of the ecosystem. More liquidity decreases slippage for users, and fosters growth in the demand side of the ecosystem by creating a superior offering relative to competitors.
  • Fairly distribute a DeFi application’s governance token to protocol ...

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