Yield farming: how to earn in DeFi and what to pay attention to

The desire to earn passive income attracts more and more people to decentralized finance. One of the popular methods is yield farming, a strategy that allows crypto asset holders to lock their funds and receive interest or coins as rewards. It sounds simple, but behind the apparent simplicity lies a whole set of risks that need to be understood.

How Yield Farming Works in DeFi

The mechanism is quite straightforward: you provide liquidity to decentralized exchanges, lend through lending protocols, or participate in staking, and in return, you receive rewards. There are a plethora of tools on the blockchain—from simple token staking to more complex schemes with multiple income levels. The main advantage: you remain the owner of your assets, while the money works for you.

This is why farming attracts investors, promising returns that far exceed bank interest rates. Additionally, rewards are often paid out in the form of new coins, which adds extra earning potential.

The main dangers to be aware of

But before rushing to block funds, it is necessary to understand the risks. And they are more serious than they may seem.

Rug pull — when developers disappear with your money. This is one of the scariest schemes in the cryptocurrency space. Project creators can launch an attractive farming scheme, attract investors, and then suddenly withdraw all funds and vanish. The price of the coin drops to zero. Your investments simply evaporate.

Issues with smart contracts. Code is king in blockchain, but codes can contain errors or vulnerabilities. Hackers actively look for ways to exploit protocols, and if they find a hole, your assets can be stolen. Even a security audit does not provide a 100% guarantee.

Price volatility and impermanent losses. The prices of crypto-assets can spike sharply. This affects not only the value of your rewards but also the assets themselves in staking. Additionally, when farming through decentralized exchanges, there can be an issue of impermanent losses — when you lose money not due to the project, but because of the price difference between the pair of assets.

Regulatory risks. Legislation is changing rapidly, and what is legal today may be banned tomorrow. Changes in the regulatory framework can not only reduce the profitability of a strategy but also create legal issues for participants.

When to Try and When to Stay Away

Yield farming is a tool that has opened access to financial services for people without a bank account. It offers a real alternative to traditional systems. However, before throwing money into the first protocol you like, conduct an honest risk assessment. Study the team, check if the contract has been audited, look at the project's history. And remember: the higher the promised yield, the higher the risk. There is no such thing as free money in this market.