A way of trying to maximize a rate of return on capital by leveraging different DeFi protocols. (ie: chasing yield)

• Similar to traditional savings accounts, people look for places that offer the highest APY to park their money. APY = annual % yield and it’s a common way of comparing rates of return on your money across different products 

There are 3 main elements that make DeFi yield farming APY’s so high and lucrative: 

1. Liquidity Mining: Process of distributing tokens to the users of a protocol 
   1. Liquidity mining creates additional incentives for yield farmers as the token rewards are added on top of the yield that is already generated using a certain protocol 
      1. In some cases, the incentives may be so strong that farmers may actually be willing to lose on their initial capital just to get more rewards in distributed tokens 
2. Leverage: Using borrowed money to increase the potential return of an investment 
   1. Farmers can deposit their coins as collateral to one of the lending protocols and borrow other coins 
      1. They can then use these borrowed coins as further collateral and borrow even more coins 
3. Risk: In order to earn these double/triple digit APY’s, farms take on high risk 
   1. Leverage:
      1. All the loans that farmers are taking are overcollateralized (they have to post more collateral than what the loan is worth) and supplied collateral is susceptible for liquidation if the collateralisation ratio drops below a certain threshold  
   2. Smart Contract: 
      1. Also subject to standard smart contract risks such as bugs, platform changes, admin keys and systemic risks (a coin sharply losing value) 
      2. Oracle risk also plays into smart contract risk because they rely on the data oracles fetch 
   3. Attacks on Liquidity pools: 
      1. DeFi specific risk where attackers aim to drain a certain liquidity pool 
   4. APY Risks:
      1. The annual percentage yield displayed is very unstable and depends on the following variables 
         1. Deposited assets prices
         2. Pool liquidity, and your respective share in the pool rewards allocation 
         3. Tokens Prices