A Beginner’s Guide to Yield Farming | by Tracy Hardwick | The Capital | Mar, 2025

If you’ve ever wished your crypto could work for you instead of just sitting in your wallet, yield farming might be exactly what you’re looking for. It’s one of the most exciting ways to earn passive income in crypto, but it also comes with risks that every beginner should understand.

Let’s break down what yield farming is, how it works, and how you can get started without making costly mistakes.

Yield farming is like earning interest at a bank — except instead of putting your money in a savings account, you deposit crypto into decentralized finance (DeFi) platforms to earn rewards.

Here’s how it works:

• You lend or stake your crypto on a DeFi platform.
• Your funds are used to provide liquidity, process transactions, or issue loans.
• In return, you earn rewards — usually in the form of more crypto.

Think of it as putting your crypto to work while you sleep.

Most yield farming happens through liquidity pools — big digital pools of crypto that allow users to trade or borrow assets without a middleman. Here’s what happens behind the scenes:

1. You deposit your crypto into a liquidity pool on a DeFi platform like Uniswap, Aave, or Curve Finance.
2. The platform uses your funds to facilitate trades or loans.
3. You earn rewards based on how much liquidity you provide and how the platform distributes fees or tokens.

The best part? Many DeFi platforms reward early adopters, meaning those who get in early on a strong project often see higher returns.

There are a few different ways to earn with yield farming. Some are low-risk, while others come with higher potential rewards (and risks).

Liquidity Mining

• You provide two cryptocurrencies (e.g., ETH and USDC) to a liquidity pool.
• Traders use your funds to swap between assets.
• You earn a share of the trading fees and extra tokens from the platform.

Lending and Borrowing

• You lend crypto to DeFi platforms like Aave or Compound.
• Borrowers pay interest, and you earn a portion of it.

Staking

• You lock up your crypto in a network like Ethereum or Cardano.
• The network rewards you for helping secure the blockchain.

If you’re looking for the easiest way to start, staking is often the best choice.

Yield farming isn’t free money — it comes with risks that you need to understand before diving in.

Impermanent Loss

When you add liquidity to a pool, the value of your deposited tokens can change due to market fluctuations. If one token’s price moves significantly, you could end up with less value than if you had just held the tokens in your wallet.

Smart Contract Vulnerabilities

Since yield farming relies on smart contracts, any bugs or hacks could lead to lost funds. If a platform gets exploited, your crypto could disappear overnight.

High Gas Fees

On networks like Ethereum, every transaction costs gas fees. If fees are too high, your profits from yield farming could be wiped out. Consider using lower-cost blockchains like Binance Smart Chain, Polygon, or Arbitrum.

Platform Risks and Scams

Not all DeFi projects are trustworthy. Some platforms disappear overnight, taking users’ funds with them. Stick to well-known, audited platforms and avoid anything that sounds too good to be true.

If you’re ready to dip your toes into yield farming, here’s how to start safely and smartly.

1. Choose a Reputable Platform

• Good options: Uniswap, Aave, PancakeSwap, Curve Finance.
• Avoid unknown platforms with no audits or little transparency.

2. Start Small

• Never invest more than you can afford to lose.
• Experiment with small amounts before committing larger funds.

3. Watch Out for High Fees

• If you’re using Ethereum, gas fees can be brutal.
• Consider using Polygon, Binance Smart Chain, or Avalanche for lower fees.

4. Reinvest or Cash Out

• Some yield farmers compound their rewards by reinvesting earnings.
• Others take profits regularly to avoid potential losses.

5. Stay Updated

• Follow DeFi news and trends.
• Check for smart contract audits before depositing funds.

Yield farming can be a powerful way to grow your crypto — but it’s not without risks. The key is to do your research, start small, and choose reliable platforms.

If done correctly, yield farming offers an exciting way to earn passive income in the crypto world. Just remember: no investment is risk-free, so always farm responsibly.