Is yield farming profitable in 2025?

As of February 2025, yield farming remains a profitable strategy, though it is less lucrative than in previous years due to reduced token incentives and heightened competition among liquidity providers. 

That being said, the DeFi sector continues to expand rapidly, with the total value locked (TVL) reaching $129 billion in January 2025, reflecting a 137% year-over-year increase.

Projections suggest that this figure could escalate to over $200 billion by the end of 2025, driven by advancements in liquid staking, decentralized lending and stablecoins.

This growth, fueled by innovations in liquid staking, decentralized lending and stablecoins, is creating new and potentially lucrative yield farming opportunities.

Moreover, the macroeconomic environment plays a crucial role in shaping DeFi yields. In 2024, the US Federal Reserve implemented rate cuts, lowering its policy rate by half a percentage point for the first time in four years. 

This monetary easing has historically increased the attractiveness of DeFi platforms, as lower traditional savings rates drive investors toward alternative high-yield opportunities. As a result, despite overall yield compression, some DeFi platforms still offer double-digit annual percentage yields (APYs), far surpassing traditional financial instruments.

However, note that yield farming isn’t just about earning passive income — it’s a cycle of reinvesting rewards to maximize gains. Farmers earn tokens as rewards and often reinvest them into new liquidity pools, creating a fast-moving loop of capital flow or token velocity. 

This cycle helps DeFi grow by keeping liquidity high, but it also introduces risks. If new users stop adding funds, some farming schemes can collapse like a Ponzi structure, relying more on fresh liquidity than on real value creation.

How does yield farming work?

Embarking on yield farming within the DeFi ecosystem can be a lucrative endeavor. This step-by-step guide will assist you in navigating the process, from selecting a platform to implementing effective risk management strategies.

Step 1: Choosing a platform

Selecting the right DeFi platform is crucial for a successful yield farming experience. Established platforms such as Aave, Uniswap and Compound are often recommended due to their reliability and user-friendly interfaces.

Additionally, platforms such as Curve Finance, which specializes in stablecoin trading with low fees and minimal slippage, and PancakeSwap, operating on the BNB Smart Chain (BSC), which offers lower transaction fees and a variety of yield farming opportunities, are also worth considering.

Step 2: Selecting a liquidity pool

When selecting a liquidity pool for yield farming, it’s essential to evaluate the tokens involved, the pool’s historical performance and the platform’s credibility to mitigate risks, such as impermanent loss, which will be discussed later in this article.

Did you know? Annual percentage yield (APY) accounts for compounding interest, reflecting the total amount of interest earned over a year, including interest on interest, while annual percentage rate (APR) denotes the annual return without considering compounding.

Step 3: Staking and farming tokens — How to deposit and withdraw funds

Engaging in yield farming involves depositing (staking) and withdrawing funds:

Depositing funds:

Connect your wallet: Use a compatible cryptocurrency wallet (e.g., MetaMask) to connect to the chosen DeFi platform.Select the liquidity pool: Choose the desired pool and review its terms.Approve the transaction: Authorize the platform to access your tokens.Supply liquidity: Deposit the required tokens into the pool.

Withdrawing funds:

Navigate to the pool: Access the pool where your funds are staked.Initiate withdrawal: Specify the amount to withdraw and confirm the transaction.Confirm the transaction: Approve the transaction in your wallet to receive your tokens back.

Step 4: Risk management tips

Mitigating risks is essential in yield farming:

Stablecoin pools: Participating in pools that involve stablecoins like Tether’s USDt (USDT) and USD Coin (USDC) to reduce exposure to market volatility.Diversification: Spread investments across multiple pools and platforms to minimize potential losses.Research and due diligence: Investigate the security measures, audits and reputation of platforms before committing funds.

DeFi yield farming calculator: How to estimate returns

Yield farming calculators estimate returns by factoring in capital supplied, fees earned and token rewards, with several tools aiding projections.

To accurately estimate potential returns in yield farming, calculators require inputs such as the amount of capital supplied to a liquidity pool (liquidity provided), the portion of transaction fees distributed to liquidity providers (fees earned) and any additional incentives or tokens granted by the protocol (token rewards). By inputting these variables, calculators can project potential earnings over a specified period.

Several platforms provide tools to assist in estimating DeFi yields:

DefiLlama: Offers comprehensive analytics on various DeFi protocols, including yield farming opportunities.Zapper: Allows users to manage and track their DeFi investments, providing insights into potential returns.Yieldwatch: A dashboard that monitors yield farming and staking, offering real-time data on earnings.CoinGecko’s APY calculator: Breaks down annual percentage yield across different timeframes, helping estimate earnings based on principal and APY percentage.

Did you know? In yield farming, frequent compounding boosts returns. Manual compounding requires reinvesting earnings, while automated compounding reinvests them for you. The more often it happens, the higher your APY.

Understanding impermanent loss in yield farming

Impermanent loss occurs when the value of assets deposited into a liquidity pool changes compared to their value if held outside the pool. 

This phenomenon arises due to price fluctuations between paired assets, leading to a potential shortfall in returns for LPs. The loss is termed “impermanent” because it remains unrealized until the assets are withdrawn; if asset prices revert to their original state, the loss can diminish or disappear.

In AMM protocols, liquidity pools maintain a constant ratio between paired assets. When the price of one asset shifts significantly relative to the other, arbitrage traders exploit these discrepancies, adjusting the pool’s composition. This rebalancing can result in LPs holding a different proportion of assets than initially deposited, potentially leading to impermanent loss.

Consider an LP who deposits 1 Ether (ETH) and 2,000 Dai (DAI) into a liquidity pool, with 1 ETH valued at 2,000 DAI at the time of deposit. If the price of ETH increases to 3,000 DAI, arbitrage activities will adjust the pool’s balance. Upon withdrawing, the LP might receive less ETH and more DAI, and the total value could be less than if the assets were simply held, illustrating impermanent loss.

For detailed strategies on managing impermanent loss, refer to Step 4 of card 3 in this article.

The future of yield farming

The early days of sky-high, unsustainable returns fueled by inflationary token rewards are fading. Instead, DeFi is evolving toward more sustainable models, integrating AI-driven strategies, regulatory shifts and crosschain innovations.

1. Real yield replaces inflationary rewards

DeFi is moving away from token emissions and toward real yield — rewards are generated from actual platform revenue like trading fees and lending interest. In 2024, this shift was clear: 77% of DeFi yields came from real fee revenue, amounting to over $6 billion. 

2. AI-driven DeFi strategies

AI is becoming a game-changer in yield farming. DeFi protocols now use AI to optimize strategies, assess risks, and execute trades with minimal human input. Smart contracts powered by AI can adjust lending rates in real-time or shift funds between liquidity pools for maximum efficiency. 

3. Regulations

With DeFi’s expansion, regulatory scrutiny is ramping up. Governments are pushing for frameworks to protect investors and prevent illicit activities. While increased oversight might add compliance hurdles, it could also attract institutional players, bringing more liquidity and legitimacy to the space. 

4. Crosschain yield farming

Single-chain ecosystems have limited features. Crosschain yield farming and interoperability solutions are breaking down barriers, allowing users to move assets seamlessly across blockchains. This opens up more farming opportunities and reduces reliance on any single network’s liquidity. 

What’s next?

Several emerging trends are reshaping yield farming. Liquid staking lets users stake assets while still using them in DeFi. Automated vaults simplify farming by dynamically shifting funds for optimized returns. Decentralized index funds offer exposure to multiple assets through a single token, reducing risk while maintaining yield potential.

In short, yield farming is becoming more sophisticated, sustainable and interconnected. The days of easy money are gone, but the opportunities for smart, long-term strategies are only getting better.

Yield farming vs staking: Key differences

The primary distinction between yield farming and staking is that the former necessitates consumers depositing their cryptocurrency cash on DeFi platforms while the latter mandates investors put their money into the blockchain to help validate transactions and blocks.

Yield farming necessitates a well-considered investment strategy. It’s not as simple as staking, but it can result in significantly higher payouts of up to 100%. Staking has a predetermined reward, which is stated as an annual percentage yield. Usually, it is approximately 5%; however, it might be more significant depending on the staking token and technique.

The liquidity pool determines the yield farming rates or rewards, which might alter as the token’s price changes. Validators who assist the blockchain establish consensus and generate new blocks are rewarded with staking incentives.

Yield farming is based on DeFi protocols and smart contracts, which hackers can exploit if the programming is done incorrectly. However, staking tokens have a tight policy that is directly linked to the consensus of the blockchain. Bad actors who try to deceive the system risk losing their money.

Because of the unpredictable pricing of digital assets, yield farmers are susceptible to some risks. When your funds are trapped in a liquidity pool, you will experience an impermanent loss if the token ratio is unequal. In other words, you will suffer an impermanent loss if the price of your token changes when it is in the liquidity pool. When you stake crypto, there is no impermanent loss.

Users are not required to lock up their funds for a set time when using yield farming. However, in staking, users are required to stake their funds for a set period on various blockchain networks. A minimum sum is also required in some cases.

The summary of the differences between yield farming and staking is discussed in the table below:

Is yield farming safe?

Every crypto investor should be aware of the risks, including liquidation, control and price risk related to yield farming.

Liquidation risk occurs when the value of your collateral falls below the value of your loan, resulting in a liquidation penalty on your collateral. When the value of your collateral diminishes or the cost of your loan rises, you may face liquidation.

The difficulty with yield farming is that small-fund participants may be at risk because large-fund founders and investors have greater control over the protocol than small-fund investors. In terms of yield farming, the price risk, such as a loan, is a significant barrier. Assume the collateral’s price falls below a certain level. Before the borrower has an opportunity to repay the debt, the platform will liquidate him.

Nevertheless, yield farming is still one of the most risk-free ways to earn free cash. All you have to do now is keep the above mentioned risks in mind and design a strategy to address them. You will be able to better manage your funds if you take a practical approach rather than a wholly optimistic one, making the project worthwhile. If you have a pessimistic view of yield farming, on the other hand, you’ll almost certainly miss out on a rich earning opportunity.