DeFi farming operates through smart contracts—self-executing code on blockchains like Ethereum, Binance Smart Chain (BSC), or Solana—that automate financial transactions without intermediaries. Here’s a step-by-step breakdown of how it works:Liquidity Pools: Users deposit pairs of cryptocurrencies (e.g.,$ETH /USDT) into a liquidity pool on a DEX like Uniswap or PancakeSwap. These pools provide the liquidity needed for traders to swap tokens or borrowers to access funds.Rewards Mechanism: Liquidity providers earn rewards in multiple ways:Transaction Fees: A percentage of each trade in the pool (e.g., 0.3% on Uniswap, 0.2% on PancakeSwap).Governance Tokens: Many protocols distribute native tokens (e.g., COMP from Compound, SUSHI from SushiSwap) as incentives, which may appreciate in value or grant voting rights.Interest Payments: In lending protocols like Aave, providers earn interest from borrowers.Automated Market Makers (AMMs): Most DEXs use AMMs, algorithms that price assets in pools based on supply and demand, ensuring seamless trading without traditional order books.Compounding Returns: Farmers can reinvest their rewards into the same or other pools to compound their earnings, amplifying returns over time.To start farming, users connect a cryptocurrency wallet (e.g., MetaMask, Trust Wallet) to a DeFi platform, deposit assets into a chosen pool, and monitor their returns. Platforms like Yearn Finance automate this process by optimizing strategies across multiple protocols to maximize APYs
