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Liquidity Pools vs Yield Farming: Understanding the Key Differences in DeFi
This post outlines the key differences between liquidity pools and yield farming, helping readers understand the unique roles they play in DeFi.
As decentralized finance (DeFi) continues to evolve, two of the most popular mechanisms that have emerged are liquidity pools and yield farming. Both are essential components of the DeFi ecosystem, enabling users to earn rewards by participating in decentralized protocols. However, they serve different purposes and operate in distinct ways. In this guide, we’ll explore the differences between liquidity pools and yield farming, breaking down their functions, benefits, and risks to help you understand how they fit into the broader DeFi landscape.
What Are Liquidity Pools?
Liquidity pools are the foundation of decentralized exchanges (DEXs) and many DeFi platforms. They consist of funds (cryptocurrencies) that are locked into a smart contract by users known as liquidity providers (LPs). These pools provide the necessary liquidity for trading and other DeFi activities, ensuring that users can buy and sell tokens without the need for a traditional order book.
