The possibilities offered by the crypto space are enormous, and new ones appear every day. In just over 3 years of DeFi, lucrative methods have been developed that are suitable even for beginners. Users can leave their crypto assets to provide decentralized protocols.
In return, they will receive income for the deposited money. Lately, this has been an innovative way of making money among crypto users. Let’s be real and honest, isn’t it amazing that we receive a certain influx of money without making any effort?
This text will talk specifically about decentralized finance (DeFi) and his methods to earn money passively.
What is DeFi?
Decentralized finance (DeFi) is a new financial technology based on blockchain technology. Transactions are recorded in blocks and then verified by other users. After verification, the block is locked and encrypted. Then a new block is created, containing the necessary information about the previous one.
Unlike traditional banking, there are no third parties on DeFi, such as banks and other financial institutions that control money and other financial services and products.
The advantages of DeFi are:
- removal of fees charged by banks for their services;
- keep money in a secure digital wallet and it can be transferred in minutes;
- the existence of an internet connection is all that is required to use your funds without additional approvals.
The most important objectives of this financial technology are to shorten the execution time of transactions and to allow better access to financial services.
Below, you’ll learn 4 standard methods for earning passive income using the assets you already have in DeFi.
DeFi Passive Income Method #1: Staking
Staking on DeFi platforms equivalent to having a savings account in ordinary banks. Staking is a procedure in which users lock assets into smart contracts and in return earn more than that same token. The token here refers to the original blockchain token in which the assets are locked. Thus, ETH is the native token of a Ethereum network.
This method provides additional passive income and comes from networks that use Proof-of-stake algorithms. This algorithm means that users lock in their stakes for a long time on the platform and are rewarded with tokens in return for placing trust. Additionally, users with the highest stakes would have the privilege of approving trades on the platform.
Best protocols for betting on DeFi
- BitDAO- BitDAO is one of the most extensive DeFi protocols that seek to symbolize the economy. It has its own token called BIT. When staking tokens, the average annual return is around 15%, and there is the so-called prize pool with around one and a half million BIT.
- ByFi – for beginners and those who are afraid of falling prices when staking, it is best to start staking with stablecoin. Of course, it’s up to you which one to choose, but it can also be Tether. It currently has a huge trading volume, which is why you can replace it with another more lucrative token. At ByFi, the average annual rate is around 3.5% for USDT staking.
- PancakeSWAP – lately this has been a viral platform on Binance Smart Chain to stake out CAKE pieces. When you bet, you choose to receive CAKE or other currencies as a reward. The annual returns of this coin vary between 30 and 42%.
Method #2: Become a liquidity provider
Provide cash to decentralized exchanges (such as SushiSwap and UniSwap) that support trading between pairs of tokens can bring you additional revenue. The trick is to lock your assets in a liquidity pool and get LP tokens (liquidity pool tokens) in return. They represent the share of users in the whole LP. You can earn around 0.3% of the fees from all swaps made, so the more swaps you make, the more you will earn. Unfortunately, although it sounds tempting, this type of trading carries a high risk of loss.
Beware of impermanent losses
Becoming a liquidity provider does not always bring profits. We are aware of the instability and fluctuations in the price of coins, so you may lose the invested money, which is called an impermanent loss. You can choose coins with more excellent stability and very liquid pools to avoid this.
Method #3: Yield farming
Continuing the story of the previous method, we arrive at agricultural yield. LP tokens obtained by locking tokens in liquidity pools can also earn by locking them in yield farms. Yield farms are basically DeFi protocolsand the rewards are paid in the form of an invested token or another token.
You need to be careful enough and choose platforms with a good reputation in this process. Otherwise, there may be a so-calledcarpet pullingby programmers who have access to tokens, which is actually token theft.
Method #4: Ready
The first and simplest answer to the question in the title of the text is undoubtedly ready. The working principle is that you need to lock the digital assets you own on the platform into a smart contract. Then borrowers who need loans access the deposited assets (loan) by leaving their assets as collateral.
Finally, they repay the loan with interest. Smart contracts distribute interest to lenders based on assets locked on the platform. As you can see, this is an easy way to borrow on DeFi. In a simple way, you can lock your tokens into smart contracts, and you can also “unlock” them and recover your assets.
When comparing loans on DeFi and in traditional banks, it can be concluded that higher interest rates can be earned here (on DeFi). Indeed, lending platforms pay APY to lenders when they lock assets into smart contracts on the blockchain. APY stands for Annual Percentage Yield. For example, the APY offered by Compound Finance is slightly above 8%.
It is important to point out that the whole borrowing and lending process is regulated by smart contracts, so there is no fear or risk that the borrower will not repay the debt. It is also important to say that you can withdraw your blocked assets at any time.
The best places to lend on DeFi
Although there are many lending platforms, here are a few.
- Compound – DeFi lending platform based on the Ethereum blockchain allows lenders to lock assets into smart contracts. In addition to the lending method already described, users can add assets to the liquidity pool and thereby earn compound interest. Compound maintains multiple assets and uses a different pool of capital for each.
- Aave – DeFi, an open source Ethereumplatform on which users can be lenders and borrowers. If you are a lender, you deposit the selected assets and amount and earn passive income based on borrowing. In addition, the deposited asset can be used as collateral if you are a borrower. The interest you earn as a lender can serve as the interest you pay as a borrower.
A dual model of the DeFi token is presented by aToken and LEND. The model of aToken is an ERC-20 token where the lender’s interest is compounded. LEND is a model of governance token where who is responsible for loans and other loan services such as interest rate changes, flash loans and others.
- ManufacturerDAO – is also a decentralized protocol based on the Ethereum blockchain enabled by stablecoin YES. The Maker Protocol includes smart contracts whose role is to reduce DAI volatility by allowing borrowers and lenders to borrow digital assets without counterparty risk.
Although everything we have written sounds incredibly easy and tempting, we must note once again that each way of investing carries specific risk and there is a possibility of disappointment and investment loss.
How do you earn a return on DeFi?
To earn a return, you must stake or borrow cryptocurrencies or tokens on the DeFi platform and, in return, receive rewards in the form of interest or transaction fees. There are 4 basic methods to achieve this, and they are described in the text above.
How much money do you need for DeFi?
We didn’t come across the exact figure while researching this topic, but everyone agrees that the more you invest in DeFi, the more you will earn.
What is the best way to invest in DeFi?
The best way would be the one with the least risk of loss, but those who do not take risks will not benefit. Depending on your abilities, choose whether it will be lending and borrowing, staking, agricultural yieldor become a liquidity provider.
How much money can you make in DeFi?
There is no universal answer to this question because the level of interest rates, fees and APY is not the same for all investment methods. But your additional passive income can necessarily be significant.
Best DeFi Earnings Protocols
CaptainAltcoin writers and guest authors may or may not have a vested interest in any of the projects and ventures mentioned. None of CaptainAltcoin’s content is investment advice or a substitute for advice from a certified financial planner. The opinions expressed in this article are those of the author and do not necessarily reflect the official policy or position of CaptainAltcoin.com