What do you need to know before entering yield farming in DeFi?

Although it sounds attractive to made money while your cryptocurrencies remain in a wallet, farming in DeFi protocols is much more complex and risky than many beginners imagine. This investment strategy has attracted thousands of users seeking passive income, but it has also left significant losses in its wake.

How yield farming works in practice

Yield farming is fundamentally a mechanism where users deposit their assets into DeFi platforms —such as decentralized exchanges, lending services, or staking protocols— and receive rewards in return. These platforms need liquidity to operate, which is why they incentivize participants by offering them yields in the form of tokens, interest, or fees.

Users can move their funds between different platforms to optimize returns, comparing APY rates and assessing where they will make better gains. Blockchain technology allows this whole process to be transparent and without traditional intermediaries.

The risks you should consider before doing farming

Before considering participating in farming, it is critical to understand the potential dangers:

Rug pulls and project abandonments: Developers can suddenly disappear with the deposited funds, leaving tokens worthless. This is one of the most devastating scenarios for investors.

Vulnerabilities in smart contracts: Security bugs, hacks, or code failures can result in total loss of funds. Not all protocols are adequately audited.

Extreme price volatility: Fluctuations can quickly destroy your gains. If the reward token price drops dramatically or the staked asset depreciates, you could end up with less money than you started with.

Impermanent loss: In liquidity pools, if the prices of the tokens deviate significantly, liquidity providers face losses that would not occur if they had simply held the tokens.

Regulatory changes: New regulations may affect the operation of DeFi protocols or declare them illegal in certain jurisdictions, impacting the value and viability of farming.

Real opportunities in yield farming

Despite the risks, farming in DeFi continues to offer genuine opportunities for users who research adequately. It generates passive income without intermediaries, allows access to yields that traditional banks would never offer, and promotes financial inclusion in economies without access to conventional banking services.

The key is to choose established protocols, fully understand where your funds are going, diversify your investment, and never risk more than you can afford to lose. Yield farming can be a powerful tool if approached with knowledge and caution.