A liquidity pool is a smart contract holding two tokens in a ratio, e.g. ETH/USDC. When you deposit, you receive LP tokens representing your share. Traders swap against your liquidity, and you earn a percentage of every swap fee.

Protocols like Uniswap and Curve use AMM formulas instead of order books:

• Uniswap v2: Constant product formula

  x * y = k

• Uniswap v3: Concentrated liquidity - you set a price range
• Curve: Optimised for stablecoin pairs (low slippage)

Impermanent loss (IL) occurs when the price ratio of your deposited tokens changes relative to when you deposited.

Example: You deposit 1 ETH + 2,000 USDC when ETH = $2,000. If ETH rises to $4,000, the AMM rebalances your position - you end up with less ETH and more USDC than if you had simply held.

| ETH Price Change | IL | |---|---| | +25% | ~0.6% | | +100% | ~5.7% | | +400% | ~20% |

IL only matters if you withdraw. Fees can offset IL on high-volume pools.

Deposit USDC/USDT/DAI on Curve or Aave. Minimal IL risk, predictable APY (3-15%).

ETH/WBTC or ETH/stETH pairs. High volume = high fees, modest IL exposure.

Farm governance tokens from newly launched protocols. Highest APY but rug-pull and smart contract risks.

• APY vs APR: APY compounds, APR does not
• TVL (Total Value Locked): Higher TVL = more trusted
• Token emission schedule: Will rewards inflate or deflate?
• Audit status: Always check for security audits

• DeFiLlama: Track TVL across protocols
• Beefy Finance: Auto-compounding vaults
• Zapper.fi: Manage all positions in one dashboard

1. Never put more than 10-20% of your portfolio in a single farm
2. Use a hardware wallet for large positions
3. Monitor governance proposals - protocol changes can affect APY
4. Set price alerts for major token movements

Yield farming rewards those who do their research. Start small, learn the mechanics, and scale gradually.