Yield farming uses crypto assets in DeFi strategies that can earn trading fees, borrowing interest or token rewards. The term covers several activities, from depositing into an incentivized pool to using a vault that manages a position. Understanding the source of returns helps you compare strategies that otherwise look similar on an APY list.
Liquidity pools, farms and managed vaults
A liquidity pool holds assets used for trades. A farming program may add token incentives to eligible positions. A managed vault can automate tasks such as reinvesting rewards or adjusting a liquidity position. Compare the assets deposited, the actions automated and the conditions for withdrawing.
Compare more than the annual rate
- Deposit assets: one token, a pair or another position token.
- Yield source: trading fees, borrowing interest, incentives or a combination.
- Management: manual claiming, automatic compounding or position adjustments.
- Costs and exit: management fees, transaction costs, lockups and withdrawal conditions.
APR and APY are annualized measures. APY includes a compounding assumption, while APR generally does not. A recent high rate can fall if trading slows, more capital enters or rewards change.
Match the strategy to the assets you want to hold
A liquidity position can end up with a different balance of tokens as prices move. This can produce a lower result than simply holding the original assets, often called impermanent loss. Concentrated-liquidity positions also need an appropriate price range to participate in trades.
For interest-based markets, compare crypto lending platforms. For rewards connected to network validation, compare staking tools. These activities can overlap in interfaces, but their mechanisms differ. Each strategy also depends on its contracts and underlying markets.