Yield Farming's Evolution: From Unsustainable Yields to Permanent DeFi Feature

The concept of yield farming emerged in the summer of 2020 when Compound, an Ethereum-based lending protocol, started distributing governance tokens called COMP to users who lent or borrowed on its platform. This led to a surge of hundreds of millions of dollars into smart contracts that had previously held only a fraction of this amount.

Users were earning not just interest on their deposits but also a second layer of rewards in the form of governance tokens, which they could then deposit elsewhere to earn even more returns. This practice was dubbed 'yield farming' and led to annual returns exceeding 1,000% on major platforms.

The fevered period of high yields eventually subsided as unsustainable rates collapsed, but what remained was a permanent feature of the DeFi economy: actively deploying capital across protocols to maximize returns.