TL;DR
Yield farming is the practice of depositing crypto into DeFi protocols to earn rewards, typically through providing liquidity, lending, or staking in incentivized pools.
You deposit tokens into a DeFi protocol and earn returns. The yield comes from different sources: trading fees (from LP positions), protocol incentive tokens (emissions), lending interest, or a combination. For example, providing SOL/USDC liquidity on Raydium earns you swap fees plus any RAY token incentives on that pool. Yield is usually quoted as APR (simple) or APY (compounding).
LP farming (Raydium, Orca, Meteora) earns trading fees plus incentives. Lending (Kamino, MarginFi, Solend) earns interest from borrowers. Liquid staking (Marinade, Jito) earns staking rewards while keeping tokens liquid. Vaults (Kamino, Tulip) auto-compound yields. Each type has different risk profiles — LP farming carries impermanent loss risk, lending carries liquidation risk for borrowers, and all carry smart contract risk.
High APYs are often temporary and unsustainable — they drop as more capital enters the pool. Impermanent loss can eat into LP returns, especially in volatile pairs. Token incentive emissions can cause the reward token to drop in value. Smart contract exploits, while rare on audited protocols, can result in total loss. Always check TVL trends, protocol audit history, and whether the yield source is organic (fees) or subsidized (emissions).