9 Common Yield Farming Mistakes That Are Costing You Money

This guide is part of the “Guide to Yield Farming” series.

Yield farming has grown from an experiment in cryptocurrency improvements to one of the most widely used ways of earning crypto income. At its core, you provide your cryptocurrency, the system uses it for liquidity, to stake assets, or to lend them out, and in return, you receive rewards. But the reality is much messier. Behind those flashy APYs are hidden risks, structural flaws, and behavioral traps that catch newcomers and veteran traders alike.

This article explains the most common mistakes that yield farmers make, why they are so damaging, and how to avoid them. We will also give you multiple examples from recent history. Think of this as your yield farming playbook. By knowing about these risks in advance, you can avoid losses, structure a working strategy, and give yourself a much better shot at long-term success.

Mistake 1: Ignoring or misunderstanding impermanent loss

What is impermanent loss?

Impermanent loss is a term that confuses even seasoned traders because it sounds abstract. It is the difference between what your tokens would be worth if you had left them in your wallet (at their initial prices) versus what they are worth now after being deposited into a liquidity pool.

When does it occur?

Any time the price between two assets in a pool changes, impermanent loss happens. The more the future prices diverge, the bigger the hit. 

For example, a ETH/USDC pool will experience significant impermanent loss if ETH doubles while USDC stays at $1. Even if trading fees partially offset this, the imbalance often overwhelms rewards.

How to mitigate it

• Choose pools with highly correlated assets, such as ETH/stETH or stablecoin pairs like USDC/DAI.
• Treat “IL protection” promises with skepticism. Bancor and others once offered it, but most programs collapsed under stress. And Bancor no longer offers IL protection.
• Calculate worst-case scenarios before entering. If you can’t stomach the loss, skip the pool entirely.

Bancor’s IL protection collapse in 2022

Bancor once offered impermanent loss protection, promising to cover liquidity providers if markets moved against them. During the 2022 downturn, the program proved unsustainable, was paused, and never reactivated. Farmers who assumed they were safe faced losses anyway. Protocol promises are only as strong as their balance sheets.

Mistake 2: Chasing unsustainably high APYs

If it looks too good to be true, it probably is

The lure of high APYs is perhaps the oldest trap in yield farming. In the early DeFi boom, it was common to see farms offering 10,000% annual yields. The obvious problem is those rates are usually fueled by inflationary reward tokens that collapse in value anyway. 

The pattern is predictable: token price pumps, farmers pile in, new emissions dilute supply, and then the token crashes. Classic rug pull crypto schemes exploit this cycle.

Differentiating APR and APY

APR is a simple percentage return, while APY includes compounding. In practice, many protocols quote inflated APYs. This is because they are assuming you compound daily, even when trading fees or gas costs make that unrealistic. 

Don’t trust the APYs. Always ask yourself, how often can I actually compound, and what is my real return after costs?

Mistake 3: Neglecting protocol and contract risk

The dangers of unaudited farms

Every yield farming position is built on a smart contract. If that code has flaws, your funds are at risk. Even a well-audited protocol can fail. Curve’s 2023 exploit came from a compiler bug, not a lack of audits. This shows you why contract risk is never zero.

How to do your own research (DYOR)

A practical checklist:

• Look for multiple platforms with audits from reputable firms, not just one quick review.
• Read whether the audits found high-severity issues and if they were fixed.
• Assess whether the team is anonymous or public, and how responsive they are in a crisis.
• Gauge how the community is on Twitter, Discord, and forums. Dead silence is a red flag.

Any DeFi strategy means assuming things will break and limiting your exposure, not blindly trusting “well audited” labels. Below is an example why.

The Curve Finance exploit

Curve, one of the oldest DeFi protocols, suffered a major loss in 2023 due to a compiler bug in the Vyper language. It’s mind-boggling because they went through multiple audits and had years of credibility, but the exploit went unnoticed and ultimately drained their pools and shook our confidence. The lesson is that smart contract risk never fully disappears.

Mistake 4: Underestimating gas and trading fees

How fees eat into your profits

Every step in farming, depositing, staking, harvesting, withdrawing – all incurs fees. On the Ethereum mainnet before the major upgrades, a single transaction could cost $50 or more. Small investors often found their entire yield wiped out by these costs.

Strategies for managing gas costs

Now we have an upgrade called Dencun (EIP-4844) that lowers fee costs and easy access to Layer 2 protocols. Here are some tips for managing gas costs:

• Use Layer 2 solutions like Arbitrum, Optimism, or Base.
• Time transactions during periods of low congestion.
• Avoid over-compounding. Harvesting daily might sound good, but if trading fees exceed rewards, you’re going backwards.

This is why position sizing matters: farming with $100 may not work on the mainnet, but it could work on L2.

L2 fee compression after Dencun

The Ethereum Dencun upgrade came out in March 2024 and reduced Layer 2 fees by over 90%. Farmers who were quick to grasp the change and shifted to Arbitrum or Base saw compounding strategies become viable again, while those stuck on mainnet continued to bleed profits to gas. The fee environment will actually dictate strategy to the uninformed.

Mistake 5: Not understanding the farm token’s tokenomics

The inflationary nature of reward tokens

Most yield farming rewards come in the form of freshly minted tokens. Without mechanisms to create demand or limit supply, those tokens drift toward zero. This is why many 2020–2021 “food farms” collapsed, their reward tokens had no purpose other than being dumped.

What to look for in tokenomics

• A capped supply or at least a slowing emission schedule.
• Utility beyond governance, such as fee discounts or collateral use.
• Buyback or burn programs that recycle protocol revenue.

If a project only issues new tokens as rewards and has no demand drivers, it’s a big red flag.

Iron Finance’s death spiral of 2021

Iron Finance’s TITAN token collapsed to almost zero after runaway emissions and a panic bank run. Runaway emissions is when a protocol issues (or emits) too many reward tokens too quickly, overwhelming market demand and crashing the token’s price. 

This event in 2021 showed us how fragile tokenomics can destroy a farming operation overnight. Uncontrolled token emissions are inherently unstable, so watch out for them. They can collapse overnight, wiping out your capital.

Mistake 6: Lack of a clear strategy and risk management

“Apeing in” without a plan

This is a meme, it means jumping into farms because of hype, FOMO, or influencer peddling and is a recipe for disaster. A profitable DeFi strategy requires planning. What are the main criteria for a good trade?

Start with your trade size, entry level, profit target, and most importantly your stop loss point. Without this, you’ll freeze when prices swing against you.

The importance of diversification

Do not put all your funds in one farm. Spread exposure across multiple platforms, chains, and asset classes. Stablecoin pools, blue-chip assets, and newer experiments can all play a role in a profitable investment strategy, but no single asset should dominate. Diversification is the most practical form of DeFi risk management.

Case study: Terra collapse

Back in 2022, many farmers concentrated their capital in Anchor Protocol (billions of $) because it offered around 20% stablecoin yield. Believable numbers, compared to other projects at the time. But then, Terra’s algorithmic stablecoin UST collapsed, it blindsided the entire market. Those who had no diversification saw their holdings evaporate. 

This caught many people off guard and made investors wary of the other stablecoins. Because this is so hard to plan for, when you are considering your investments, you must assume black swans. Black swans are rare, unpredictable events with extreme impact that most people fail to anticipate.

Mistake 7: Forgetting the volatility of the underlying assets

Yield farming returns are denominated in volatile crypto assets. Even if the farm itself is “safe,” the underlying asset’s market risk is inescapable.

Even a safe protocol cannot protect you from the market. A 50% drop in ETH wipes out most farming rewards. So if you’re a potential farmer you need to consider asset volatility and its market price along with the yield you’re going to get.

Example from an ETH drawdown

During 2022, ETH fell from about $3,500 to under $1,000. Farmers in ETH pools still earned amazing double-digit yields, but the ETH price drawdown erased all gains. So the right frame of mind would be farming amplifies market risk, it doesn’t replace it.

Mistake 8: Poor wallet security practices

When you’re farming, your wallet is the gateway to everything. That also makes it the single biggest target. Many investors lose money not because of bad tokenomics or market swings, but because they made basic security errors.

Common mistakes

These are the slip-ups that leave farmers exposed:

• Connecting wallets to malicious websites without double-checking.
• Leaving unlimited approvals on contracts.
• Storing seed phrases online or in screenshots.

Even experienced crypto users fall for these traps occasionally when moving quickly between farms. One wrong click or careless habit can cost you an entire portfolio.

Safer practices

Fortunately, good habits go a long way:

• Use hardware wallets for meaningful capital.
• Periodically revoke token approvals using tools like Revoke.cash.
• Separate farming wallets from cold storage.
• Never share private keys. Never lose them.

Yield farming attracts scammers because participants interact with many contracts. By treating your wallet hygiene as seriously as your investment strategy, you cut out the easiest attack route for scammers.

Mistake 9: Neglecting tax implications

Crypto taxes are often the last thing on a farmer’s mind, but regulators are clear on this: staking rewards, farming yields, and swaps (trades) are taxable events. In the US, the IRS treats rewards as income when you gain control over them. In the UK and around the world, yields may be taxed as income and swaps as capital gains.

IRS Revenue Ruling 2023-14

In 2023, there was a big court case in the US regarding taxing peoples staking and farming yields. The case was ultimately dropped but the IRS clarified that staking and farming rewards are taxable when received. Many US farmers who ignored this now face back taxes and penalties. 

The lesson here is that regulators view crypto yields as taxable income, so ignoring crypto taxes is not a viable strategy. Ignoring taxes can lead to nasty surprises like frozen accounts and interest charges. The best practice is to:

• Track every transaction, including trading fees, in crypto-specific tax software.
• Keep screenshots and records in case of audits.
• Consult a tax professional if your activity is significant.

Crypto taxes are just part of the game, they really don’t take much time to document once you get into the flow of things.

Farm smarter, not harder

Yield farming is not free money. It takes smart contract risk, volatile asset prices, fees, tax obligations and stacks them on top of each other. But at least now you have the tools to avoid the most common mistakes. With discipline and information, you can tilt the odds in your favor.

1. Avoid high APYs that hide the fragility of the tokenomics.
2. Diversify across multiple platforms and assets.
3. Set an exit strategy (stop-loss) with clear take profits and risk management.
4. Track your crypto taxes like any other financial obligation. (Koinly, CoinLedger, CoinTracker)

In the future, prices will always surprise us. Some protocols will fail, others will thrive. The winners will be those who treat yield farming like portfolio management, and not gambling. 

vTrader offers zero-fee trading and AI-powered price prediction tools, which can help you minimize trading costs and make more informed DeFi strategy decisions. Farm smarter, not harder.