How does yield farming work?

The yield farming process involves user deposits and generating on-chain income through farming and exchanging rewards for the principal asset. Each time the yield farming process compounds rewards, a small fee is charged, which is distributed among participants, such as the harvest initiator, strategist, and incentive distribution contracts.

1. Users and Vaults:

• Users: Individuals who wish to earn yield on their crypto assets.

• Vaults: Smart contracts where users deposit their assets. Vaults are the primary entry and exit points for users’ funds.

2. Deposits and Withdrawals:

• Users deposit their crypto assets into the vaults.

• They can also withdraw their funds from the vaults whenever needed.

3. Strategy Implementation:

• The assets deposited in the vaults are then allocated to various Strategies. These strategies determine the best yield-generating opportunities available in the DeFi ecosystem.

• The strategies implement automated processes to optimize yield, including compound interest techniques.

4. Farming:

• The strategies typically deposit the assets into Farms. Farms are DeFi protocols where users can stake their assets to earn rewards.

• The farming process involves staking assets in liquidity pools or other yield-generating platforms.

5. Liquidity Pools:

• Assets are staked in Liquidity Pools, where they help provide liquidity to the DeFi ecosystem.

• In return for providing liquidity, users earn rewards. These rewards can be in the form of native tokens of the liquidity pool, trading fees, or other incentives.

6. Compounding Rewards:

• The rewards earned from liquidity pools are periodically withdrawn and redeposited into the vaults.

• This process of withdrawing rewards and reinvesting them back into the farming strategy compounds the yield, leading to exponential growth in earnings over time.

7. Revenue Distribution:

• The yield farming process generates revenue, a portion of which is taken as fees.

• These fees are handled by the Revenue Bridge, which manages the distribution of these fees among various participants, such as the harvest initiator, strategist, and incentive distribution contracts.

8. Fee Batch and Treasury:

• Collected fees are sent to the Fee Batch module.

• From there, stablecoin earnings are transferred to the Treasury to support platform sustainability and development.

9. Incentive Distribution:

• The remaining portion of the fees is distributed to liquidity pools and incentive mechanisms, such as DEXTR - $WETH Liquidity Pool.

• This incentivizes continued participation and growth of the platform.

Key Components Explained

• Vaults: Smart contracts where user assets are held and managed.

• Strategies: Automated plans that determine how and where to allocate assets for maximum yield.

• Farms: DeFi protocols where assets are staked to earn rewards.

• Liquidity Pools: Pools where assets are deposited to provide liquidity and earn rewards.

• Revenue Bridge: Handles the conversion and distribution of fees collected from yield farming.

• Fee Batch: Aggregates fees and distributes them to the Treasury and liquidity pools.

• Treasury: Stores stablecoin earnings to support the platform.