Yield farming in DeFi (Decentralized Finance) refers to the process of earning a yield or return on investment by providing liquidity to a decentralized protocol. It involves users locking up their cryptocurrency assets in decentralized lending or liquidity protocols, and in return, they receive rewards or interest in the form of additional tokens.
In yield farming, users typically provide liquidity to decentralized exchanges (DEXs) by depositing funds into liquidity pools. These pools allow users to trade different tokens peer-to-peer without the need for intermediaries. By providing liquidity to these pools, users earn transaction fees and, sometimes, additional tokens as a reward.
Yield farming often involves using automated market makers (AMMs), which are protocols that automatically adjust the price of tokens based on supply and demand. Users contribute to these AMMs by depositing an equal value of two different tokens into a liquidity pool, receiving liquidity pool tokens in return, representing their share of the pool's assets. These tokens can be staked or held in other protocols to earn additional rewards.
Yield farming has become popular because it allows users to earn passive income by utilizing their cryptocurrency assets. At the end of the day, yield farmers are in the business of maximizing returns by taking advantage of arbitrage opportunities and maximizing yield.
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