This article explores the foundational concepts behind Yield Farming, as originally articulated by Andre Cronje, founder of YFI, in a series of pre-yearn.finance blog posts.
The Evolution of Passive Income in DeFi
Early Lending Markets (2018–2019)
When developing iearn, our options were straightforward:
- Aave, Compound, Dydx, and Fulcrum offered lending markets for various assets
- Users could deposit assets to earn passive interest
Incentivized Liquidity Pools Begin
Synthetix (SNX) pioneered incentivized pools by rewarding Uniswap V1 liquidity providers for sETH/ETH trading pairs with SNX tokens. This model faced limitations due to Uniswap's ETH-only pairing requirement.
Curve Finance Enters
Curve (CRV) introduced a simplified AMM design specializing in stablecoins. Key innovations:
- Efficient stablecoin swaps with low slippage
- LP rewards from trading fees
- Later integration with iearn's yield-optimizing "Y Pool"
The Yield Farming Trinity Emerges
By mid-2020, the optimal strategy combined:
- Yield-bearing tokens (yTokens from iearn)
- Trading fees (from Curve/Uniswap)
- Protocol incentives (SNX/COMP rewards)
👉 Discover how modern yield strategies work
The COMP Effect and Farming Wars
Compound's COMP token distribution (June 2020) ignited competitive liquidity mining:
- Balancer launched BAL
- mStable introduced MTA
- Curve prepared CRV launch
Sample Strategies Became Complex:
- Deposit DAI → Compound → cDAI → Balancer (earning COMP + BAL)
- Curve LP → Synthetix Mintr (CRV + SNX)
- Maker → DAI → Repeat #1
Core Problems in Modern Yield Farming
Liquidity Pools Capture Rewards
- COMP/BAL goes to pools, not LPs
- Interest accrues to pools via arbitrage
50% Sell Requirement
- Traditional AMMs force 50% token conversion
Oracle Dependence
- No reliable price feeds for new tokens
- Uniswap/Balancer prices vulnerable to manipulation
Building Yield-Aware AMMs
Technical Solutions Developed:
- aToken Support: Redirect interest streams
- cToken Integration: Track underlying asset values
- Index-Based Allocation: Distribute COMP rewards proportionally
Stablecoin Innovations
New AMM transfer mechanisms enabled:
- Single-asset liquidity provision
- Value-transfer tokens maintaining parity
- Internal stability without USD pegs
FAQ: Yield Farming Essentials
Q: What's the simplest yield farming strategy?
A: Deposit stablecoins to Compound/Aave for interest + protocol tokens.
Q: Why do liquidity pools capture rewards?
A: Traditional AMMs weren't designed for yield-bearing assets, creating misaligned incentives.
Q: How does Curve differ from Uniswap?
A: Curve specializes in stablecoin swaps with lower slippage and concentrated liquidity.
Q: Is yield farming still profitable?
A: Yes, but requires active management as protocols constantly adjust incentives.
Q: What risks does yield farming carry?
A: Smart contract vulnerabilities, impermanent loss, and token volatility.
The Future of Yield Optimization
👉 Explore advanced yield strategies
As DeFi matures, we're moving beyond simple yield aggregation toward:
- Protocol-native yield awareness
- Single-sided liquidity solutions
- Dynamic rebalancing against volatility
The original vision of "seeding options rather than choosing" remains central to yearn.finance's evolution, now expanded through coordinated multi-protocol strategies.