Yield Farming
The practice of strategically deploying crypto assets across DeFi protocols to maximize returns through a combination of trading fees, token rewards, lending interest, and liquidity incentives. Yield farmers actively move capital between protocols to chase the highest yields, often compounding returns by reinvesting rewards. Higher yields typically come with higher risks, including impermanent loss, smart contract exploits, and token devaluation.
“A yield farmer might provide stablecoin liquidity on Curve, stake the resulting LP tokens on Convex for boosted CRV rewards, then sell CRV for more stablecoins to compound the position.”
DeFi (Decentralized Finance)
An ecosystem of financial services built on blockchain networks that operate without traditional intermediaries like banks, brokerages, or insurance companies. DeFi uses smart contracts to provide lending, borrowing, trading, insurance, derivatives, and yield generation in a permissionless, transparent, and composable manner. Anyone with a wallet can participate.
Liquidity Pool
A collection of funds locked in a smart contract that enables decentralized trading on AMM-based exchanges. Liquidity providers (LPs) deposit paired tokens in equal value ratios and earn a share of the trading fees generated by swaps in that pool. Pools replace traditional order books in DEX architecture.
APY (Annual Percentage Yield)
The real rate of return on an investment, taking into account the effect of compound interest. APY represents what you would earn over a year if rewards are automatically reinvested. APY is always higher than APR when compounding occurs more than once per year. Extremely high advertised APYs in DeFi often signal unsustainable tokenomic models or elevated risk.
Impermanent Loss
The reduction in value experienced by liquidity providers compared to simply holding the same assets, caused by price divergence between the deposited token pair. As one token's price moves relative to the other, the AMM rebalances the pool, effectively selling the appreciating token and buying the depreciating one. The loss is 'impermanent' because it reverses if prices return to their original ratio, but becomes permanent upon withdrawal during divergence.