Yield farming is the method of staking or landing crypto goods to a platform that produces high yield or rewards which is in the form of incremented cryptocurrency. This ingenious idea of creating such a volatile application of decentralized finance (Defi) has boomed the (Defi) market by its popularity latterly thanks to further innovations like liquidity mining.
Yield farming is becoming the biggest growth driver of the still-nascent Defi world, supporting it to expand from a market cap of $500M to $10 billion in 2021
In brief, yield farming protocol is all about incentivizing Liquidity providers (LP) to stake or lock up their crypto goods in a smart contract-based liquidity pool. These incentives from the liquidity pool can be a percentage of the transaction fee made by users or interest from lenders.
These returns are represented as an annual percentage yield which is also known as (APY). As more investors add funds to the related liquidity pool, the value of the issued returns rise in value.
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