DeFi Economy Grows Up: Yield Farming Evolves Beyond 'Fevered Period' Yields

The concept of yield farming originated in the summer of 2020, when Compound's governance token $COMP started distributing tokens to users who lent or borrowed on the platform. This led to a surge in capital flow into smart contracts, with hundreds of millions of dollars flowing in within weeks.

Users were earning interest on their deposits and governance tokens on top, which they would then deposit elsewhere to earn a third layer of rewards. The practice was called yield farming, and it produced annual returns exceeding 1,000% on major platforms for a brief period.

The unsustainable yields eventually collapsed, but the concept of yield farming remained a permanent feature of the DeFi economy. It involves actively deploying capital across protocols to maximize returns, much like players accumulate resources in gaming culture by repeating actions.

There are different types of yield farming, including liquidity provision, incentivized farming, lending farming, and points farming. Each type has its own return profiles and risk characteristics, with some being higher-risk and higher-reward than others.

Liquidity provision farming involves depositing tokens into decentralized exchange pools to earn trading fees. Incentivized farming adds a second layer of rewards in the form of governance tokens. Lending farming is lower-risk but also lower-return, while points farming emerged as a new incentive model in 2024-2025.