Many cryptocurrencies into their protocols, and people who develop strategies for moving crypto across DeFi protocols to maximize their returns are called 'yield farmers.' DeFi yields constantly fluctuate, so it makes sense to 'rotate' the deposits across protocols to chase the highest yields. This requires highly sophisticated strategies and advanced knowledge of DeFi to work, which are guarded jealously to maintain profitability.
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how decentralized exchanges (DEXes) work. Liquidity pools have to provide rewards to their liquidity providers (LPs), which is where yield farming rewards come from.
Yield Farming Is Difficult And Risky
It isn't easy to get into yield farming, nor is it always safe to maintain. Higher APYs are almost always associated with a higher risk of loss. New DeFi protocols with shallow liquidity pools are more prone to high volatility and the possibility of collapse. Yield farmers have to manage risk and reward actively while keeping tabs on which DeFi protocols offer higher yields to move their tokens to the next highest-paying pool. Yield farmers who keep their crypto inside a high APY pool for too long risk the mistake of getting wrecked and losing some or all of their crypto.
Yield farming is a well-known term in cryptocurrency, but it's also challenging to get into and can lead to losses if the yield farmer isn't careful with their strategy. Yield farming is very sophisticated and usually requires knowledge of smart contract development and connecting multiple DeFi protocols to maximize returns. Yield farmers also have to rely on bots and blockchain oracles to know when it is time to rotate their crypto crops, and they have to use risk management and hedging strategies to mitigate their cryptocurrency losses.
Sources: Binance Academy