What is Crypto Farming?
This text is written by the CEO of Nordom, Giorgi Shonia. To learn more about the author, visit Giorgi Shonia’s Official Website. Shonia started his tech career in cybersecurity and then rapidly expanded his expertise to become a full-stack developer. Shonia’s extensive background in technology and market dynamics (having successfully launched multiple large projects across the US and Europe) shapes Nordom's innovative approach to transforming the crypto trading landscape.
Crypto farming, also known as yield farming is currently one of the most popular concepts in decentralized finance (DeFi). With the current financial situation looking ever more precarious, a way to generate passive income from cryptocurrency holdings has understandably generated quite a buzz. However, dazzled by the promises of great returns, many tend to dive in head-first without properly educating themselves and end up under more financial strain than ever.
As with many other tactics associated with the crypto industry, crypto farming only seems simple, but the nitty-gritty of it can make or break a person, and one should most definitely learn about the practice and the associated risks, before even deciding if it’s worth getting started.
In the guide below, I'll be breaking down what crypto farming is, how it works, the potential benefits and risks associated with it, and whether this investment strategy is right for you.
What is Crypto Farming?
To put it very simply, crypto yield farming is a way to earn rewards by lending or locking up your cryptocurrency in a specialized decentralized finance (DeFi) application. When you give your cryptocurrency to such a platform, be it a decentralized exchange or a lending service, you can earn additional tokens in return. Yield farming has been observed to generate, on average, higher returns than traditional financial instruments - at least that’s how things stand now, by January 2025, as I’m writing this article. Considered a relatively simpler option, web3 investing has become an increasingly popular way for individuals to participate in the growing DeFi ecosystem.
The concept of yield farming gained more traction among us, involved in the industry, in the summer of 2020 with the launch of the COMP token on the Compound protocol. Since then, crypto farming has grown into one of the biggest industry subdirections, with billions of dollars in total value locked across various platforms.
How Does Crypto Yield Farming Work?
Specific mechanics of yield farming in crypto vary from platform to platform, but generally, the process is structured pretty similarly in most of them.
First, the investor has to deposit their cryptocurrency assets into a liquidity pool on the decentralized exchange or lending platform of their choice. Typically the deposit is of equal values of two tokens, such as ETH and a stablecoin like USDC. In return, the investor receives liquidity provider (LP) tokens equal to their share in the pool.
Next, yield farmers stake their LP tokens in a yield farm to start earning rewards, which are usually paid out in the protocol's native governance token. Investors then have to monitor their positions and can periodically claim their rewards (when and how are individual to the platform). Many choose to reinvest their earnings to compound their returns over time. How to navigate the Web3 hype in 2025 is a hot question right now and crypto yield farming seems to have taken a solid spot on the list of potential answers.
Is Crypto Farming Legal?
Yes. Sort of. It’s complicated.
I know it sounds suspicious, but the truth is that crypto is such a new industry, and crypto farming in itself is such a new practice, that the regulatory landscape is all over the place. The vague answer is that the legality can vary depending on the jurisdiction and only a lawyer specializing in legalities surrounding crypto can give you a foolproof answer.
That said, in most countries, yield farming itself is not explicitly prohibited, though certain aspects may fall under existing securities or investment regulations.
For example, some yield farming tokens may be considered securities (tradable financial instruments that fall under specific laws), which could trigger registration and disclosure requirements. Similarly, some territories may view yield farming rewards as taxable income, subject to capital gains or other forms of taxation, while others do not.
As cryptocurrency is still in its infancy, the comprehensive regulatory practices that reach across borders have yet to be developed, so it's crucial to learn about the local laws and tax obligations that you fall under.
One thing I can say for sure is that you shouldn’t get started without consulting a qualified financial advisor and a legal professional who can explain the tax and regulatory complexities to guide you through ensuring compliance.
Potential Risks of Crypto Farming
While most crypto farming enthusiasts seem to talk a lot about potential rewards, they seem to gloss over the risks.
But don’t be hasty, there are certainly multiple risks involved. Before getting started you should seriously consider if the theoretical benefits are worth the possible loss.
One major risk is impermanent loss. It occurs when the token prices in a liquidity pool diverge significantly. In this scenario, yield farmers may get tokens of less value than if they had simply held onto their assets without participating in the liquidity pool.
Smart contract vulnerabilities are also a risk. DeFi protocols rely on complex smart contracts that are self-executing with the terms of the agreement directly written into code. They are stored and replicated on a blockchain network, and they automatically execute when predetermined conditions are met. They can potentially contain bugs or exploitable flaws that put users' funds at risk. And as DeFi platforms are still in the technological equivalent of infancy, there's always a risk that a protocol could fail or be abandoned by its developers.
Lastly, as cryptocurrency prices are inherently volatile, yield farming could amplify losses as much as gains. Sudden market downturns can quickly erode the value of farmed tokens and impact the overall profit.
Potential Benefits of Crypto Farming
However let’s not get it twisted: while the risks are there, crypto farming certainly offers multiple potential benefits, which is why it has developed such an ardent following in the community.
Firstly, it allows investors to generate passive income by putting the otherwise idle assets to work, without requiring active position management. Secondly, depending on the platform and market conditions, yield farming sometimes offers APYs that significantly surpass those of traditional savings accounts or bonds.
Additionally, yield farming gives investors an opportunity to diversify their holdings further. If you’re careful in depositing your crypto across multiple protocols and asset pairs, you could potentially mitigate the main risks associated with the strategy.
And last but not least, yield farmers play a crucial role in supporting the growth and functionality of DeFi ecosystems by providing liquidity. Crypto community networking can be a valuable asset in itself, allowing us to connect with other yield farmers and stay informed about the latest trends and successful strategies.
Best Crypto Yield Farming Strategies
While crypto farming is still a relatively new concept, it’s been around long enough for us to be able to figure out certain patterns in how people who’ve seen success approached it.
Firstly, you need to diversify your portfolio. Spreading your investments across multiple platforms and asset pairs will make you less dependent on any single platform or token. This will help mitigate the impact if any of them underperforms.
Secondly, it is advisable to only work with platforms that have undergone security audits and have a track record of reliability. Before diving in, you need to learn more about crypto exchanges, how they work, and the risks they can pose, especially if you’ll be diversifying (and thus working with multiple platforms at once). The success of a crypto yield farming strategy usually hinges on striking a balance between risk and reward.
Monitor gas fees, especially when using the Ethereum network. High transaction costs can eat into your yield farming profits, so consider using layer-2 solutions or alternative blockchains with lower fees. Automating your strategies with specific tools (ex. Yearn Finance, Alpha Homora, etc.) can help optimize your returns without much need to manually intervene.
Lastly, identify potential risks and come up with a plan for managing them before you start yield farming. This may involve setting stop-losses, regularly rebalancing your portfolio, or having a portion of your holdings in more stable assets. Always prepare for the worst, while hoping for the best.
Crypto Farming vs Staking
Crypto farming and staking can both earn passive income from your cryptocurrency holdings, but they differ in some key aspects. Staking involves holding a specific cryptocurrency in a wallet to support the network and earn rewards, while yield farming typically provides liquidity across a wider range of assets.
Staking rewards are usually paid out in the cryptocurrency being staked, while yield farming rewards are distributed in the platform's native token. Staking is generally considered less risky than crypto farming, as there’s no exposure to impermanent loss or the smart contract risk is relatively low.
That said, yield farming offers higher potential returns, as the rewards are generated from multiple sources, all mitigating each other. You can use a crypto farming calculator to get a rough estimate and compare the potential returns from different staking and yield farming opportunities, but that’s all it will be - a rough estimate. You’ll need to do most of the in-depth trend research and data analysis yourself.
The Future of Crypto Farming
As the DeFi space continues to evolve, crypto farming is likely to evolve with it. Cross-chain yield farming, which allows investors to seamlessly move their assets between different blockchain ecosystems, seems to be on the rise, for example
Another potential development is yield farming integrating with other DeFi primitives, such as derivatives, insurance, and prediction markets. This could create new avenues for generating returns and managing risks.
I think more user-friendly interfaces and tools are going to emerge, as well, making crypto farming more accessible to a wider audience. The fewer the barriers, the more investors may be drawn to the potential returns offered by yield farming strategies.
However, as the space grows and matures, it's also likely to attract greater regulatory scrutiny. Yield farmers will need to keep their fingers on the pulse and carefully monitor legal and compliance requirements to ensure they don’t accidentally break the law.
Despite the risks, on-paper yield farming is a compelling opportunity to maximize cryptocurrency returns. But to see success, one needs to stay informed, manage risks, and adapt to rapidly changing market conditions. It’s not as passive a way to earn as many seem to think.