*https://jumpcrypto.com/yield-farming-for-serious-people/*

Nihar Shah & Lucas Baker, June 2022

TL;DR

• This piece uses a conceptual lens to study yield farming, i.e., earning compounding returns on crypto assets. It illuminates the fundamental exchange of value that yield farming entails.
• Yield farmers passively provide five forms of value: operating the network, lending to traders, providing liquidity, governing protocols, and raising visibility.
• Yield farmers are compensated for these activities by a mix of users, non-farming protocol owners, and each other.

Introduction

Warren Buffet warns that you should "never invest in a business you cannot understand." So an investor could be forgiven for looking at yield farming — a landscape full of free money ("airdrops") and scams ("rug pulls"), ruled by characters calling themselves "degens" and "apes" — and running away.

However, a closer examination reveals that yield farming is simply another type of business activity, one which provides value by bearing risk. Obscured by the frenzy of new protocols, misspelled slang, and coordinated capital flows, yield farming rewards entrepreneurial efforts to build new platforms.

In this article, we examine yield farming through a fundamental economic interpretation. In particular, we ask two questions:

1. What core value do yield farmers create, for which they are compensated?
2. Who pays that compensation, whether explicitly or implicitly?

For many traditional businesses, the answers are straightforward. For instance, our local sandwich shop provides a range of services — sourcing quality ingredients, assembling sandwiches, and wiping tables — and diners pay for those services directly. Yield farming is not much more complicated. Jargon aside, most yield farming strategies engage in five core types of economic activity, in passive and delegated ways:

1. Farmers support network operations, such as validating transactions.
2. Farmers provide lending for traders.
3. Farmers provide liquidity to token holders.