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What is yield farming?

Yield farming, or liquidity farming, is a DeFi strategy where cryptocurrency holders earn passive income by providing liquidity to DeFi protocols. Users lock up their assets in liquidity pools, forming trading pairs, and receive liquidity provider (LP) tokens in return. These LP tokens can be staked or deposited into other protocols to earn additional rewards, such as transaction fees and governance tokens. Yield farming carries risks, including impermanent loss and smart contract vulnerabilities, requiring participants to conduct thorough research before engaging in this potentially lucrative but risky activity.