How to Earn Passive Income With DeFi

How to Earn Passive Income With DeFi

Here’s the thing: we all want to earn passive income. I mean, it’s one of the sweetest things making your money work for you. If you have the time to invest for profitability, then sure, using your financial assets to grow more in the financial world is fantastic. With cryptocurrencies, there are many possibilities, and the decentralized finance of DeFi is one of those.

If you want to yield a 20% increase annually or more on your crypto assets, DeFi should be the first in line in our consideration. 

The DeFi ecosystem, which primarily operates on the Ethereum blockchain, experienced a huge boom in 2020. Many new innovative projects have emerged from it, which have attracted huge capital to the Decentralized finance Ecosystem.

More than $42 billion is currently locked in DeFi projects and smart contracts, and that number is constantly rising day by day.

Yet, several people all around the world know little or nothing about DeFi. In this article, we’ll look at various ways to earn a passive income in DeFi. First, we will explain what it is.

What Is DeFi?

DeFi is the acronym that defines decentralized finance. It is an experimental form of financing that does not depend on central financial intermediaries such as banks, brokerages, stock exchanges, etc. Instead, it uses smart contracts on blockchains, the most common being Ethereum.

DeFi is inspired by the blockchain ecosystem, the technology behind the digital currency bitcoin and lots more. DeFi sets itself apart because it expands the use of blockchain from a simple transfer of value to more complex financial use cases. 

One of the sweetest things about it is that it is not under a single central authority jurisdiction. This is significant because centralized processes and human gatekeepers will slow down and complicate transfers while giving users less direct control of their funds.

Eliminating intermediaries from all types of transactions is one of the main advantages of DeFi. This is why it is commonly known as decentralized finance or “open finance.”

When it comes to Bitcoin and other digital native properties, you’ll notice that they stand out from traditional digital payment methods like those operated by Visa and PayPal because they eliminate middlemen.

When you make payment with a credit card for a coffee, a financial institution is between you and the company. That institution has complete control over the transaction, including the ability to halt or pause it and record it in your private ledger.

Such institutions are no longer important with crypto.

What are Smart Contracts

I have mentioned smart contracts a few times in this article. Smart contracts are self-executing contracts with the terms being directly written in code and distributed across decentralized blockchain networks.

Smart contracts automatically execute transactions if certain conditions are met, offering much more flexibility.

DeFi applications, generally, support smart contracts. Remember that DeFi is built on Ethereum, and Ethereum is more than just a blockchain or coin; it’s a network with loads of projects.

Due to the vast functionality of the Ethereum platform, hundreds of DeFi applications run on Ethereum, with smart contracts at their heart. Ethereum 2.0 has the potential to improve these applications by addressing Ethereum’s scalability challenges.

How to Earn Passive Income With Decentralized Finance

There are several ways to earn passive income with DeFi, and I will look at them in this section.

Invest In Stocks

The first way is to invest in DeFi related currencies.

Ether – the native cryptocurrency of Ethereum, which is the core of DeFi – and governance tokens distributed are all bought and sold on exchanges. In addition, some currencies have undergone rapid price increases in recent years, so it is possible to obtain foreign exchange gains by holding those currencies.

Lending

The second method is to earn an income is by pooling funds/Lending to DeFi. It’s simply a lender giving out their coins to a borrower to make an interest. Usually, the borrower will have some collateral in crypto assets to secure the lender’s coins. 

Click here to learn more about lending crypto.

Yield Farming/Liquidity Mining

Yield Farming is a process where users who have crypto assets (holders) decide to put the assets to work to generate the highest possible profitability by mining liquidity.

A basic way to achieve this is by participating in DeFi protocols, providing liquidity to the reserves of its pools, to generate income in the form of tokens and coin reward.

If you are confused, read this complete guide to yield farming/liquidity mining.

Many of these DeFi protocols have their own governance token that allows holders to participate in a programmatic voting system that governs the direction of the protocol.

In addition, these tokens are also used as an extra incentive to reward yield farmers in DeFi platforms since they have a market value and can be exchanged for other assets in exchange houses. Examples of such protocols that have their own governance token are Compound with its COMP token, Uniswap with its UNI token, and Balancer with its BAL token.

This reward is usually indicated by an interest rate that is typically different for each asset. That depends mainly on the supply, demand, and value of the said asset and some tokens.

Yield Farming is one of the use cases of the DeFi ecosystem that is creating the most expectations among the community since the users who participate obtain high returns on their investments by a great deal.

If you chose this, it could serve as a sustainable passive income because the rewards are higher than those offered by traditional financial markets.

How Much Should I Know to do Yield Farming?

As shown in our liquidity mining guide, you don’t need to be an expert to participate; you can join a pool. For example, on a DeFi platform such as Aave, you can provide liquidity to the automated market makers (AMM) pool to get rewards for providing liquidity to the system.

Staking

Staking is the method of locking (or “staking”) your crypto to receive more crypto. Your locked coin is used to support the security and operations of a blockchain network. Your earning will come from transaction fees or automatically minted crypto.

Proof-of-Stake, the system that controls this, protects the blockchain using those locked coins and network validators who enforces the blockchain’s consensus rules and ensures that no one has attempted to defraud the framework. Meanwhile, the validators who behave dishonestly risk losing a portion of their stake.

Staking runs on ETH. The users who deposit ETH into the Ethereum 2.0 smart contract will receive additional ETH in exchange for helping to enforce the consensus rules.

Like yield farming, you don’t need to know the technical details; you can join a staking pool. The minimum stake in Ethereum 2.0 is 32 ETH, though some pools require you to deposit more.

As such, this system is also often used to earn passive income using DeFi because all you just need to do is join a pool and stake your crypto assets for a particular time.

We have an extensive guide to crypto staking here.

Decentralized Exchanges

Decentralized exchanges or DEX help you earn crypto by relying on market factors. It’s simply buying cryptocurrency when the price is low to sell it when the value goes up. We all have seen how far bitcoin and ether have come in gaining value through the years.

Depending on market factors and the coin you buy, you might end up with a 700% profit in a few months or weeks. You will have to follow the news to see if there are major changes in the value. There are several crypto news apps that you can use to follow the news. 

You could play it safe and go with stable coins and follow the changes of government established money or fiat. Or go big with any of the unstable or regular coins.

Deposit Crypto for an APY

Depositing your money is one way to earn passive income. If you don’t want to have to deal with market factors and checking anything every day, the simplest thing to do is deposit your crypto in a DeFi that will pay you an annual percentage yield for it.

It’s just like depositing your cash in a savings account. All you have to do is buy some crypto coins. Many DeFi platforms accept several cryptocurrencies, but because most of DeFi is on Ethereum, BTC is typically not accepted.

Are There Simpler Methods to Generate Passive Income?

You won’t find anything simpler than depositing your coins in a DeFi and chilling or waiting for an increase in value to sell. But, I will admit that the first three methods run on the more technical side. The complexity for new users can lead to a loss of funds if you make an irreversible mistake.

Sure, there are things like pools that help, but there are simpler methods to earn cryptocurrencies. These are simpler (and centralized) alternatives that offer high interest, which they get through loans and other operations.

With these cryptocurrency apps, you can generate interesting interests ranging from 4% to 12% per year. Currently, these are the two most recommended platforms, with best interests and safest: 

1. Celsius Network

An image of the Celsius Network website, where you can make a passive income with crypto.

Celsius Network is an all-in-one banking and financial services platform for cryptocurrency users. This platform was launched in June 2018. It offers rewards for depositing cryptocurrencies, along with services such as loans and wallet-type payments. There’s even more if you sign up to be an ambassador.

Users of the platform receive regular payments and interest for their holdings. Celsius’ native token, CEL, performs some internal functions, including increasing user payments if used as a payment currency.

2. Coinbase

An image of the Coinbase website where you can earn and trade crypto.

You can start earning with Coinbase when you sign up by clicking on this link. That offers you some bonus along with other incentives like cheaper transaction fees. Staking is also available to all coinbase customers in selective countries, including the US.

Is It Safe to Invest In DeFi?

No one is safe in DeFi. GIF from Giphy.

No, nothing is safe with investments. Whoever said there’s a safe investment probably wants $1 from $100,000 in 12 months. Even that is risky.

Many believe that DeFi is the future of finance and that investing early in disruptive technology could lead to massive returns, but it is difficult for newcomers to separate the good projects from the bad ones, and there have been some bad things.

As DeFi has risen in activity and popularity through 2020, many DeFi apps such as the YAM meme coin have crashed and burned in mere minutes. Other DeFi projects, including Hotdog and Pizza, suffered the same fate and many investors lost a lot of money.

Also, DeFi bugs are still, sadly, very common. Smart contracts are powerful, but they cannot be changed once the rules are incorporated into the protocol, making mistakes permanent.

It can be challenging to calculate short-term earnings as the DeFi market is still maturing. As a result, you can experience volatile returns. Also, keep in mind that the market is very competitive at the moment. Just because a specific strategy works right now doesn’t mean it will work in the long run.

If you are familiar with the digital currency market, you know that DeFi can be much more complicated than typical banking. There are risks in the world of digital coins and tokens, so if you’re not completely sure when starting out, try starting with a small amount before moving on to something bigger.

How Much Can You Earn?

Even if DeFi pools an APR of 15% to 20%, profitability depends on the amount of deposited funds.

Therefore, it is difficult to obtain high profits if the capital is small. Also, it all depends on the strategy you choose. For example, liquidity mining will provide better returns than waiting for APY at the end of the year. 

Also, note that the offered APY fluctuates daily and may be lower than the current interest rate depending on the cryptocurrency quote and the amount of pooled funds.

Is There Any Other Way to Earn Passive income?

Yes, there are many ways to earn, and we have written about them in this blog and will continue to write on them even more. We even mentioned ways to earn free cryptocurrency

A Little FAQ

  1. Stable coins: Cryptocurrencies have more frequent price swings than fiat currencies, which is inconvenient for people who will love to know how much their money will be worth in a week. Stable currencies provide stability because their value is linked to a fiat. For example, USDT and USD
  2. Wrapped Bitcoins (WBTC): This is a method of sending bitcoins to the Ethereum network, allowing them to be used directly in the Ethereum DeFi scheme. WBTCs enable users to earn interest on the bitcoin they lend through decentralized lending platforms.
  3. Composability: DeFi applications are open source, which means the code behind them is public to anyone in sight. These applications can be used to “compose” new applications with code as building blocks.
  4. Prediction markets: One of the oldest DeFi applications that run on Ethereum is the prediction market. Users can bet on the outcome in any event, such as “Will Trump win the 2020 presidential election?”. The goal of the participants is obviously to make an income.

Conclusion

DeFi is a big deal. If you have some cryptocurrencies, consider investing in decentralized finance platforms through any of the strategies we mentioned, such as lending decentralized finance. You can make higher interest than centralized platforms or using a traditional financial institution.

DeFi is expected to develop further in the future, so paying attention to this will be fantastic for you. High-interest rates are offered compared to other financial products, so funds are gathering from all over the world and attracting attention.

There’s so much freedom to this, too; you can become a nomadic entrepreneur or still work wherever you are without wondering where to get the next meal.

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