# 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 Compounding Rewards: * The rewards earned from liquidity pools are periodically withdrawn and redeposited into the vaults.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.