Yield farming vs liquidity mining refer to providing your cryptocurrency assets as liquidity in DeFi protocols to earn additional crypto rewards. In short, both yield farming and liquidity mining are about putting your crypto to work and earn more crypto from it.
Decentralized finance has locked up $50 billion in value in just under a year. The explosive growth is primarily due to a craze known as yield farming or liquidity mining.
Both yield farming and liquidity mining refer to the same process of depositing cryptocurrency assets in DeFi pools to earn crypto rewards. Regardless of whether you prefer to call the process yield farming vs liquidity mining, the result is the same: DeFi farming is all about earning more crypto by providing liquidity.
If you’re new to the DeFi world, all of these terms will be confusing. In this guide, you’ll find clear definitions for yield farming, liquidity mining, and other important DeFi concepts, along with how to start your own DeFi journey.
What is Yield Farming?
Yield farming, also known as liquidity mining, is depositing cryptocurrencies into DeFi protocols such as Compound and Uniswap in return for rewards paid in crypto.
Depositing crypto into DeFi pools is known as providing liquidity, making you a liquidity provider. To understand these concepts better, take the terms one word at a time:
- Yield: On its own, the word yield means to produce. For instance, a tomato plant yields tomatoes at harvest time. In the context of yield farming, the crypto you deposit into DeFi protocols yields a return paid in more crypto.
- Farming: The pools and protocols wherein you provide liquidity are a lot like farms. You plant your seeds (provide liquidity), then let them grow over time into fruit-bearing plants (allow your deposited crypto assets time to generate yields).
- Liquidity: DeFi protocols like Uniswap, Sushi, and Compound are decentralized exchanges that depend on having crypto assets on hand for people buying and selling or borrowing and lending crypto from one another. Liquidity refers to having those assets on hand. The more liquidity a DeFi protocol has, the better price discovery and overall experience it can offer its users.
- Mining: In the DeFi world, mining has a similar meaning to farming. In essence, when you provide liquidity to earn rewards in the protocol’s native token (i.e., earning COMP by depositing USDC on Compound), you are mining COMP tokens by providing another token the protocol needs (in this case, USDC).
What is the Difference Between Staking & Yield Farming?
Staking is another popular concept that seems similar to yield farming but is quite different. In the section above, yield farming is defined as depositing tokens into pools on DeFi protocols to earn rewards paid in crypto.
When you yield farm, your rewards might be paid in one or both of the tokens you deposited or another token altogether (such as the protocol’s governance token).
However, staking isn’t about providing liquidity.
When you stake your tokens, you’re more than likely participating in a blockchain’s proof of stake consensus algorithm and are thereby securing the network, which is why you are rewarded with a certain APY (Annual Percentage Yield) paid in kind.
Are Yield Farming & Liquidity Mining the same?
Yield farming and liquidity mining are essentially the same processes, albeit with one tiny difference. Whereas yield farming can refer to any time you provide liquidity to earn more tokens, liquidity mining references bootstrapping a new DeFi platform with liquidity in return for the platform’s token more specifically.
How To Start Yield Farming
Here’s how you can get started with yield farming quickly:
- Choose a DeFi platform with rewards paid to liquidity providers like SushiSwap. Other options include Compound Finance, Curve Finance, Badger DAO, Yearn Finance, Uniswap, Aave, and Synthetix.
- Next, provide liquidity where the APY is highest for your assets. Pick a pool of assets if depositing to a DEX like SushiSwap or Uniswap; or a single asset if depositing to a lending platform like Compound or Curve.
- Rewards begin to accrue immediately and are paid in kind (same as the asset you deposited), as LP tokens (liquidity provider tokens representing your growing share of the pool), or in the platform token (such as CRV for Curve).
Keep in mind that while yield farming always carries risks, you can keep your funds relatively secure as long as you use reputable DeFi platforms.
DeFi shows no signs of slowing down and is on its way to being integrated with centralized exchanges like Coinbase. Yield farming gives you the necessary tools for joining the future of finance by earning yields on your crypto assets.
Frequently asked questions
Liquidity mining is the act of providing liquidity (tokens) to a new DeFi platform to earn that platform’s native token.
Yield farming is the act of putting your cryptocurrency tokens to work in DeFi protocols that pay rewards on deposited assets.
Staking refers to securing or validating a blockchain by locking your cryptocurrency tokens as a stake on the network.
Liquidity mining and yield farming essentially mean the same thing, whereas staking is about network security, not decentralized finance.