3.2 Example

Assume there are two tokens, Token A and Token B, and a liquidity pool that allows users to provide liquidity using these tokens. Let's say you decide to provide 10,000 Token A and 100 Token B to the liquidity pool.

The liquidity pool rewards participants with a yield farming token, let's call it Token Y. The yield farming rewards are distributed proportionally to the liquidity you provide in the pool. For this example, let's assume that you receive 1 Token Y for every 1 Token A and 1 Token B provided.

Now, let's say that the current value of Token Y is $10. Based on the liquidity you provided, you would receive 10,000 Token Y (10,000 Token A * 1 Token Y/Token A) and 100 Token Y (100 Token B * 1 Token Y/Token B).

You decide to hold the earned Token Y for a certain period. During this time, the value of Token Y increases to $15 due to demand and market dynamics. Now, the value of your Token Y holdings would be 10,000 Token Y * $15 = $150,000 for Token A and 100 Token Y * $15 = $1,500 for Token B.

At this point, you can choose to sell your Token Y for Token A and Token B or any other desired tokens. By participating in yield farming, you not only earned the yield farming token (Token Y) but also benefited from the appreciation in its value, resulting in additional gains.

It's important to note that this example is oversimplified and does not consider factors such as fees, impermanent loss, or price volatility. The actual returns and dynamics of yield farming can vary significantly based on the specific protocol, market conditions, and individual strategies employed.

Always do thorough research, consider the risks involved, and understand the specific mechanisms of the yield farming protocol you plan to participate in.