The concept of yield farming has become a cornerstone of decentralized finance (DeFi), but its evolution was neither sudden nor simple. In this article, originally penned by Andre Cronje — the founder of yearn.finance (YFI) — before launching the project, we trace the intellectual and technical journey that led to the birth of modern yield farming.
This narrative explores how early DeFi protocols laid the groundwork, how incentive mechanisms evolved, and why a new kind of automated market maker (AMM) was needed to unlock true capital efficiency.
Early Days of Passive Income in DeFi
Before yield farming became a buzzword, there were already several ways for users to earn passive income on their crypto assets:
- Lending on platforms like Aave, Compound, Fulcrum, and Dydx, where users could deposit assets and earn interest.
- Providing liquidity on decentralized exchanges such as Uniswap, earning trading fees in return.
- Participating in incentivized pools — a concept pioneered by Synthetix (SNX).
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Synthetix introduced a game-changing idea: rewarding liquidity providers with its native token. For example, users who supplied liquidity to the sETH/ETH pool on Uniswap received SNX tokens as incentives. This model highlighted a powerful truth — aligning user incentives with protocol growth drives adoption.
However, due to Uniswap V1’s limitations at the time, Synthetix had to incentivize multiple pools rather than focusing solely on sUSD/ETH, complicating the user experience.
Then came Curve Finance, which brought a new level of efficiency to stablecoin trading. Its AMM design minimized slippage and allowed users to earn fees by depositing stablecoins like DAI or USDT. Curve made it easier than ever to generate returns from low-volatility assets.
The Birth of Yield Aggregation
At this point, several income streams existed:
- Trading fees from Uniswap
- Token rewards from SNX
- Interest from lending protocols
- Fees from Curve
Enter iearn.finance (later rebranded as yearn.finance) — a protocol designed to simplify and optimize these fragmented opportunities.
Initially, iearn v1 acted as a basic yield aggregator, automatically shifting user funds between lending platforms like Aave and Compound to capture the highest interest rates. But Andre Cronje envisioned something more powerful.
Collaborating with Curve, they developed the Y Pool, an automated yield-switching mechanism that combined iearn’s optimization logic with Curve’s efficient stablecoin pools. When users traded on y.curve.fi, they interacted with yTokens (like yDAI or yUSDT), while the backend dynamically managed underlying deposits to maximize returns.
But the real breakthrough came when another layer was added — integrating SNX rewards into the mix. Now, liquidity providers could earn:
- Interest from deposited assets (via yTokens)
- Trading fees from Curve
- SNX token incentives
This triple-yield structure marked the emergence of what we now call yield farming — actively optimizing strategies across multiple protocols to maximize returns.
The Incentive War Begins
The launch of COMP, Compound’s governance token, ignited a chain reaction across DeFi. Suddenly, every major protocol followed suit:
- Balancer released BAL
- mStable launched MTA
- Fulcrum introduced BZX
- Curve prepared CRV
These tokens weren’t just governance tools — they became valuable income streams. Users could now earn not only interest and fees but also newly minted tokens proportional to their contribution.
But complexity soared.
Example Yield Farming Strategies (circa 2020):
- Deposit DAI into Compound, receive cDAI; then deposit cDAI into Balancer to earn COMP + BAL + trading fees.
- Deposit DAI into Curve’s yPool, then stake the resulting LP token in Synthetix Mintr to earn CRV + SNX + Curve fees.
- Use USDC to mint DAI via MakerDAO, then apply any of the above strategies.
Each strategy required careful balancing of risks, reward token valuations, gas costs, and impermanent loss considerations.
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And crucially, these yields depended on volatile token prices — COMP, BAL, CRV, etc. Without reliable price oracles for these new tokens, strategies were vulnerable to manipulation, including flash loan attacks.
The Need for Smarter AMMs
As strategies grew more intricate, limitations in existing AMMs became apparent.
Consider this scenario: You deposit BAT into Compound to earn COMP, then use cBAT in a Balancer pool to earn BAL. On the surface, it seems you’re earning both yields.
But in reality:
- The Balancer pool earns COMP — not you.
- The pool earns cBAT interest — which is captured by arbitrageurs.
- Your actual return? Mostly just BAL rewards and trading fees.
This reveals two key problems:
- Liquidity pools, not individual providers, collect interest and token rewards.
- You must sell half your asset (e.g., BAT) to provide liquidity — reducing exposure and increasing friction.
To solve this, a new type of AMM was needed — one that is yield-aware.
Introducing Yield-Aware Automated Market Makers
A yield-aware AMM can track and distribute earnings from interest-bearing tokens like cTokens (Compound) and aTokens (Aave).
For aTokens, the solution is relatively straightforward: Aave supports redirectInterestStream, allowing interest to be sent directly to LPs. However, this breaks compounding unless reinvested manually.
For cTokens, it's trickier — their value increases over time based on a supply index. A standard AMM would misprice them unless it understood their underlying value (i.e., the base asset: BAT, DAI, etc.).
By building an AMM that tracks underlying asset value, not just token balance, we enable:
- Accurate pricing
- True compounding
- Direct distribution of yield and rewards to LPs
This innovation allows users to provide BAT/ETH liquidity using only BAT — no need to sell half — while still earning lending yields and protocol incentives.
Rethinking Stablecoins and Value Transfer
To further improve capital efficiency, Cronje proposed a novel stablecoin mechanism built on AMM principles.
Traditional stablecoins like USDT or USDC rely on 1:1 fiat backing. DAI uses over-collateralized ETH but remains sensitive to volatility.
Instead, imagine an AMM-based system where:
- Users deposit any asset (e.g., BAT)
- Receive a "value-transfer" token pegged to the system’s total asset value
- Arbitrage ensures equilibrium: if one asset inflates, traders rebalance to maintain parity
This creates a self-stabilizing ecosystem where liquidity can be provided with just one asset type — eliminating the need to split holdings.
Such a system has since been implemented under what’s known as Stable AMM, enabling higher capital efficiency without sacrificing stability.
Frequently Asked Questions
Q: What is yield farming?
A: Yield farming involves strategically deploying crypto assets across DeFi protocols to maximize returns through interest, fees, and token rewards.
Q: Who coined the term "yield farming"?
A: While the practice evolved organically, Andre Cronje and early yearn.finance contributors helped popularize and define the concept during mid-2020.
Q: Why did COMP’s launch trigger the yield farming boom?
A: Compound’s distribution of COMP tokens directly to users created immediate financial incentives, sparking competition among protocols to offer similar rewards.
Q: What is impermanent loss?
A: It’s the temporary loss LPs face when asset prices change after depositing into a liquidity pool, especially in volatile markets.
Q: How do yield aggregators work?
A: They automatically move user funds between protocols to chase the highest available yields, reducing manual effort and optimizing returns.
Q: Are yield farming strategies still profitable today?
A: Yes, but they require deeper understanding of risk, gas costs, tokenomics, and smart contract security. Tools like OKX Web3 Wallet help monitor and manage positions efficiently.
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Final Thoughts
Yield farming didn’t emerge overnight. It was born from a series of innovations — from lending markets and AMMs to token incentives and yield aggregation. Andre Cronje’s vision helped connect these pieces into a cohesive framework that empowered users to do more with their capital.
Today’s DeFi landscape continues to evolve, but the core idea remains: maximize returns through intelligent automation and composability.
As new layers emerge — from Layer 2 scaling to cross-chain interoperability — the principles laid out here will continue to shape the future of decentralized finance.