A farming position typically supplies assets to a lending market or a liquidity pool and collects two streams: the protocol's organic income, and additional tokens distributed as an incentive. The advertised rate combines both, which is why headline yields can be very large and why they fall as more capital arrives to share the same rewards.
The risks stack. On top of the underlying market exposure sit smart contract risk in every protocol touched, impermanent loss where liquidity is provided, and the price risk of the reward token itself — an APY quoted in a token that halves is not the yield it appeared to be. Rates quoted as APY also assume continuous compounding that gas costs may make uneconomic.
Why are farming yields so high?
Most of the rate is a token incentive paid to attract capital, not income from real activity. It dilutes as more capital arrives and depends on the reward token holding its value.
Last updated October 17, 2026