# What is Yield Farming?

## What is Yield Farming?

Yield farming is a method of generating cryptocurrency from your crypto holdings. It has drawn analogies to farming because it’s an innovative way to “grow your own cryptocurrency.” The process involves lending crypto assets for interest to DeFi platforms, who lock them up in a liquidity pool, essentially a smart contract for holding funds.

The funds locked in the liquidity pool provide liquidity to a DeFi protocol, where they’re used to facilitate trading, lending and borrowing. By providing liquidity, the platform earns fees that are paid out to investors according to their share of the liquidity pool. Yield farming is also known as liquidity mining.

Liquidity pools are essential for AMMs, or automated market makers. AMMs offer permissionless and automated trading using liquidity pools instead of a traditional system of sellers and buyers. Liquidity provider tokens, or LP tokens, are issued to liquidity providers to track their individual contributions to the liquidity pool.