“Yield farming” is an umbrella strategy for maximizing onchain returns by moving assets across DeFi protocols (DEXs, lending, vaults) to harvest fees, interest, and token incentives. “Liquidity mining” is one (very common) incentive mechanism within that world: protocols reward users for supplying liquidity—often with newly issued governance tokens, plus a share of fees. In practice, yield farmers may participate in liquidity mining, but they can also earn yield via lending markets and automated vaults that route capital across strategies.
Clear definitions
Yield farming
A strategy of depositing assets into DeFi protocols to earn returns (fees, interest, incentive tokens). It spans DEX liquidity, lending/borrowing, and automated vaults. Think of it as “how users chase yield.”
Liquidity mining
A program where a protocol distributes rewards to users who supply liquidity—e.g., DEX pool LPs, or lenders/borrowers on money markets. Classic examples include Uniswap’s UNI distribution to LPs and Compound/Aave distributing governance tokens to suppliers and borrowers.
How each one works (with concrete examples)
Liquidity mining on DEXs (AMMs)
- You deposit token pairs into an AMM pool (e.g., Uniswap). You earn trading fees and, if a program is active, extra tokens (the “mined” rewards). Uniswap v3 represents LP positions as NFTs, because each position has its own price range.
- Some protocols layer governance-controlled emissions to direct rewards (e.g., Curve’s gauges allocate CRV to eligible pools via on-chain votes).
Liquidity mining on lending markets
- Money markets have also used liquidity mining to bootstrap usage. Compound’s 2020 program distributed COMP daily to suppliers and borrowers, materially increasing activity; Aave has run stkAAVE incentives on selected markets.
Yield farming beyond mining
- Yield farmers may route assets through vaults/aggregators (e.g., Yearn), which programmatically move capital to the best opportunities across protocols—sometimes into liquidity mining, sometimes into lending, sometimes into other strategies.
Key differences at a glance
- Scope: Yield farming is the broad strategy; liquidity mining is a specific incentive program that often powers part of that strategy.
- Where returns come from:
- Yield farming: any mix of fees, interest, and token incentives.
- Liquidity mining: rewards for providing liquidity (plus the underlying fees), usually time-limited and parameterized by protocol governance.
- Examples:
- Yield farming: depositing into Yearn vaults that rotate strategies.
- Liquidity mining: Uniswap’s 2020 UNI program for LPs; Compound’s COMP distribution; Aave’s stkAAVE incentives.
Risks you should actually plan for
- Impermanent loss (AMMs): When relative prices move, an LP can underperform simply holding. Uniswap documents the effect and provides the standard formula; concentrated-liquidity ranges add “being out-of-range” risk (earning no fees).
- Token-emission dilution: Liquidity mining rewards are discretionary and can change via governance (allocation, gauges, durations). Example: Curve’s gauge votes direct emissions to specific pools over time.
- Smart-contract & governance risk: Bugs, oracle issues, or parameter changes can impact returns; even large protocols have adjusted distribution rules mid-flight (e.g., Compound changed COMP allocation mechanics).
- Strategy/operational risk (vaults): Vaults automate moves to chase yield; that convenience adds contract complexity and dependency on external protocols.
How returns are actually generated
- Trading fees: The AMM takes a fee from each swap and distributes it to LPs pro rata; Uniswap’s constant-product design explains where those fees come from.
- Interest: In lending protocols, suppliers earn variable rates driven by utilization.
- Incentive tokens: Liquidity mining distributes governance or reward tokens based on your share of provided liquidity or borrowing/supplying activity.
Choosing between them (practical playbook)
- Decide your risk budget. If you can’t tolerate price divergence risk, prefer lending yields or stable-stable AMM pools (still not risk-free). For LPing volatile pairs, model impermanent loss first. Uniswap’s docs provide the IL math and important caveats.
- Check if incentives are real (and sustainable). Look at governance pages for current/approved programs (e.g., Curve gauges; Aave proposals). Rewards can end, change, or move.
- Understand position representation and exits. On Uniswap v3 your LP is an NFT with a price range; your returns depend on staying in-range and on trading activity in that range.
- Prefer audited, battle-tested protocols—and read docs. Start with Uniswap, Aave, Compound, Curve—each maintains clear technical documentation of mechanics and risks.
Example scenarios
- Liquidity mining on an AMM: Provide USDC/ETH liquidity on a DEX that runs a reward program. You earn swap fees plus periodic governance tokens while your position is active and in-range (v3). When the program ends, only fees remain.
- Yield farming via a vault: Deposit stablecoins into a yield vault that allocates capital across lending markets and occasional incentive programs to maximize net APR after gas/costs. You don’t manage individual positions, but you accept vault contract and strategy risks.
FAQs
Are “yield farming” and “liquidity mining” the same?
Many sources use them interchangeably, but a helpful distinction is: liquidity mining is an incentive mechanism; yield farming is the broader strategy that may include liquidity mining, lending yields, and vaults.
What causes impermanent loss?
Price changes between the two tokens in your pool position. The bigger the change, the larger the potential underperformance vs. holding—Uniswap provides the canonical explanation and formula.
Do lending protocols do liquidity mining?
Yes. Compound pioneered it in 2020 (COMP to suppliers/borrowers). Aave has also incentivized markets via governance-approved distributions.
