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Definition: yield farming

Yield farming used to only refer to rather risky leveraged lending (see below); however, it evolved into an umbrella term for various DeFi (decentralized finance) lending and borrowing services. The following farming methods are handled on most decentralized exchanges and some centralized exchanges. See DeFi and crypto exchange.

Liquidity Mining
Users become liquidity providers by depositing their crypto tokens into liquidity pools that enable other people to trade one token for another very quickly on a decentralized exchange such as UniSwap and SushiSwap. As compensation, liquidity miners receive their portion of the trading fees. See liquidity pool and crypto trading pair.

Staking is investing tokens to make money on proof-of-stake blockchains such as Tezos and Ethereum 2.0. Stakers hope to reap mining rewards periodically after staking the required amount of crypto. See staking provider and Ethereum 2.0.

Lend and Borrow
In the crypto world where anyone can participate with no approval process, users can only borrow by putting up collateral. For example, a person can put up ETH (ether) as collateral and borrow a percentage of that ETH back in fiat currency or some other token. As long as people feel their crypto collateral will remain stable or possibly rise over time, this is like a traditional collateral loan at a bank except that the only qualifications are having the crypto to deposit.

Leveraged Lending: Lend/Borrow Iterations
Using the lend/borrow example above, people can lend their ETH as collateral and borrow a percentage of that collateral in tokens of another type. They then take the borrowed tokens and swap them back into ETH that they lend once again to increase their collateral. They can do this for a couple iterations to increase their capital (see below).

Lend, Borrow, Lend
This example of lending, borrowing and then lending again is done hoping that the interest received on lending offsets the interest paid for borrowing. This can be risky in the volatile crypto market if the collateral tokens fall in value. However, all crypto investments are uncertain depending on the length of time people are willing to stay invested (see hodling).