DeFi Yield Farming: A Permanent Feature with Evolving Risks

In the summer of 2020, a governance token called COMP turned decentralized finance inside out. Compound, a lending protocol on Ethereum, began distributing COMP tokens to anyone who lent or borrowed on the platform.

Hundreds of millions of dollars flowed into smart contracts that had held a fraction of that the month before. Users were not just earning interest on deposits; they were earning a second layer of rewards, governance tokens, on top of the base yield, and then depositing those tokens elsewhere to earn a third layer.

The practice acquired a name, yield farming, and for a brief, fevered period, annual returns exceeded 1,000% on major platforms. The rates were unsustainable, the risks were poorly understood, and the strategies were genuinely novel.

Three years later, the fever broke, the unsustainable yields collapsed, and what remained was a permanent feature of the DeFi economy: the practice of actively deploying capital across protocols to maximize returns.