Earnings on DeFi: how farming works and why it is risky

What is farming in decentralized finance? It is a way to earn cryptocurrency by locking your assets in various protocols. Instead of keeping cryptoassets idle, users direct them to DeFi protocols and earn interest or coins as rewards. Essentially, you are lending your money and receiving income in return.

How the earnings mechanism works

Yield farming works through several channels. You can provide liquidity to decentralized exchanges, participate in staking, or lend through lending protocols. All these tools operate on the blockchain and automatically distribute rewards among participants.

Users who have locked their cryptoassets earn passive income without the need to engage in active trading. This means that your assets continue to work and generate profit even when you are not trading.

Why This Is Attractive

The main advantage of farming is the high potential for returns. In some cases, the annual percentage can significantly exceed traditional financial instruments. Additionally, rewards are often paid out in the form of new coins, the value of which can increase. At the same time, you retain ownership of your cryptoassets.

Real dangers to be wary of

But behind high profits lie serious risks. Rug pull schemes are when developers suddenly take all the project's funds and disappear. As a result, the value of the coin drops almost to zero, and investors lose their investments.

Smart contract vulnerabilities pose a technical risk. Even minor errors in the code can lead to hacks and theft of funds. Such incidents occur regularly, and the recovery of lost assets is highly unlikely.

Price volatility also harms farmers. Cryptocurrency prices fluctuate sharply, affecting the value of locked assets. Rewards can be earned, but at the same time, losses can occur due to the decline in the price of the underlying asset — this is called impermanent loss.

Regulatory risk — it cannot be ruled out that governments may tighten regulations, making farming illegal or unprofitable in your region. This could lead not only to financial losses but also to legal issues.

Is it worth the risk

Yield farming truly opens up new opportunities for earning and makes financial services more accessible by providing an alternative to the traditional banking system. However, before investing money, it is essential to carefully assess whether you are prepared for potential losses. Never invest more than you can afford to lose.