Yield farming, also known as liquidity mining, is a process in decentralized finance (DeFi) where users lend or stake their cryptocurrencies in exchange for rewards, typically in the form of additional tokens. This practice leverages decentralized platforms built on blockchain technology, primarily using Ethereum and other smart contract platforms.

Yield farming involves providing liquidity to DeFi protocols, such as decentralized exchanges (DEXs) or lending platforms. Users deposit their assets into liquidity pools, which are smart contracts that hold funds and facilitate trading or lending operations. In return, they receive rewards, which can come from transaction fees, interest, or additional tokens issued by the platform.

The primary goal of yield farming is to maximize returns on crypto assets. Farmers often move their funds between different protocols to chase the highest yields, a practice known as "yield hopping." This dynamic environment is driven by the varying interest rates and incentives offered by different platforms.

While yield farming can be highly profitable, it comes with significant risks. These include smart contract vulnerabilities, impermanent loss (where the value of staked assets changes compared to if they were simply held), and the potential for platform insolvency. Despite these risks, yield farming has gained immense popularity due to its potential for high returns, playing a crucial role in the growth and development of the DeFi ecosystem.