Yield farming in DeFi: how passive income strategies work ( and why you should be cautious )

If you've ever seen that your cryptocurrencies can “work for you” while you sleep, you've probably come across yield farming. But before you put all your savings into a liquidity pool, there's something you need to know: this game has dangerous rules.

How does the yield farm really work?

The mechanics are simple in appearance. You deposit your tokens in a DeFi protocol —whether it's a decentralized exchange, a lending platform, or a staking service— and in return, you receive rewards. In other words, instead of letting your crypto assets sit in a wallet, you lock them in a smart contract that generates returns for you.

Platforms encourage you to do this because they need liquidity. The more funds are contributed, the more transactions they can process, and that makes them more attractive. It's a cycle: you earn interest, the platform grows, everyone wins. Or at least, that's what they say.

What can go right

Not everything is bad. Yield farming genuinely offers:

• Real passive income: while you wait, your tokens generate yield
• Potentially high returns: some legitimate protocols offer double-digit APY
• Democratized access: anyone with a wallet and funds can participate, without traditional intermediaries

It is more inclusive than a bank that sets barriers to entry. And that is valuable in decentralized economy.

But here come the serious problems

Now the ugly side. These are the risks that can liquidate your capital:

Rug pulls: Developers simply disappear with the money. It's a classic. You see a new protocol promising 500% APY, you get excited, deposit, and a week later the token drops 99% and the website is offline.

Vulnerabilities in smart contracts: Bugs exist. Hackers find security holes, exploit the contract, and people lose funds. This has happened countless times in the history of DeFi.

Uncontrolled volatility: The price of your deposited tokens can plummet. Even if the protocol is secure, if the market turns, you lose value. Worse still, there is “impermanent loss” if you are in liquidity pools: prices move so much that you end up with less value than if you had simply kept them in your wallet.

Regulatory changes: Governments around the world are hardening their stances on cryptocurrencies. Tomorrow, your perfect farming strategy could become illegal in your jurisdiction.

So what do I do?

Before getting into yield farming, ask yourself these questions:

Do I know who the developers behind the protocol are? Are there published security audits? Is it an established protocol or something newly launched? Can I lose money that I really can't afford to lose?

The reality is that yield farming is not a magic money machine. It is a high-risk investment tool that can generate returns, but it can also annihilate your capital. Financial inclusion is real, but you must first understand where you are putting your money.