Companies and private individuals are now seeing the benefits of using DeFi services and products. They can access them via various channels such as decentralized exchanges (DEX), dApps, via decentralized Web3.0 gateways, or via common web interfaces.
The DeFi Market
Since DeFi is decentralized, it makes it possible for people to determine the interface they desire to interact with the various DeFi products and services. As a market that is large and growing, companies and businesses globally are now leveraging the features of smart contracts to automate various aspects of their businesses and investments. The DeFi smart-contract tools allow enterprises to get the most out of services like insurance pooling and escrow.
However, the benefits of the DeFi sector are not limited to businesses that use smart contracts alone. DeFi participants are also rewarded for being a part of the system. This is because the participants can effortlessly make money from leveraging their existing cryptocurrency capital.
Staking on DeFi
This means that you can stake your assets into a DeFi protocol and earn profits by leaving the assets there. This process is known as “yield” in the crypto space. With yield, you can grow your crypto investment without the risk of investing or trading cryptocurrencies. Just like other investment forms, there are risks attached to interacting with DeFi protocols. However, the systems allow you to enjoy a safe method of generating regular profits.
Other DeFi Finance Income Avenues
Decentralized finance makes it possible to earn passive income using various methods like yield farming, staking, and lending. However, before you start earning money through decentralized finance, you will need a little capital and patience. Unlike the other methods, investing in DeFi doesn’t guarantee quick profits, but your capital could grow with time.
This guide is designed to help you learn four of the most popular methods of earning passive income in DeFi and how you can leverage them to your advantage.
Major ways to earn passive income via DeFi
Here are four of the leading ways you can earn passive income via DeFi.
The staking process is perhaps the most popular way to make money via decentralized finance. It is a process that allows you to lock or stake your tokens into a smart contract and earn more of the coins as profits. Usually, the token you are staking is the native asset of the blockchain.
For instance, you can stake ETH or ADA. ETH (Ethereum) is the most staked because it is the most widely used blockchain by DeFi smart contracts.
Staking is a popular way of earning passive income and is found amongst blockchains that use the Proof-of-Stake (PoS) protocol. The PoS protocol dictates that users are required to lock their assets into special smart contracts. The smart contracts are controlled by the network validators, who are also tasked with maintaining a blockchain’s consensus rules and ensuring there is absolute honesty within the ecosystem.
Validators who are not honest and try to cheat the system are penalized by losing part of their stake.
Those who stake their assets earn incentives for locking up the assets for an extended period. They also stand to earn rewards for contributing to a network’s security and decentralization. The Ethereum network is migrating to a proof of stake protocol, and users who lock their ETH into the Ethereum 2.0 smart contract stand to earn extra ETH coins since they’re participating in enforcing its consensus rules.
The DeFi staking process is automated. After depositing your coins into a smart contract, the PoS mechanism will handle the rest, and you earn your rewards.
Serving as a Liquidity Provider
Another popular way you can earn passive income through DeFi is by becoming a liquidity provider. Decentralized exchanges like Pancakeswap, SushiSwap, and Uniswap permit users to swap token pairs like ETH and USDT. The liquidity available on the platforms is obtained from pooled tokens belonging to liquidity providers (usually called LPs). The liquidity providers are usually ordinary DeFi users that lock their tokens into a smart contract controlling a pool.
By serving as a liquidity provider to a smart contract, you can earn as much as a 0.3% fee from all swaps equal to the amount you pooled. The more trades carried out through that pool, the higher your earnings.
However, keep in mind that serving as a liquidity provider doesn’t mean that you will always earn profits. This is because the decline in the price of one of the pooled tokens could lead to you losing money in a process called impermanent loss (IL). However, you can mitigate these losses by only using highly liquid pools that contain less volatile assets.
Yield farming is another way you can earn money via DeFi. Similar to the way an LP functions in a decentralized exchange, you can lock your tokens into a yield farm and generate profits. The yield farms are DeFi protocols designed to reward the users with more of the same token they locked or with another token. The process allows you to earn a share on all fees on the decentralized exchange, while your LP tokens also earn you extra income.
However, you need to conduct in-depth research on the platform you intend to use for yield farming. This is to ensure that the platform is clean, and the developers don’t intend to pull an exit scam on the users by stealing liquidity provider tokens and withdrawing liquidity from the pools. We recommend using established platforms with a positive reputation as they usually use externally audited smart contracts.
You can also earn money via lending in DeFi. Lending platforms will pay you profits for locking your assets into a smart contract. The locked tokens are borrowed by other people who pay them back with interest. A portion of the interest is returned to you as your profit. There are numerous DeFi lending platforms, including Compound Finance, which is currently one of the leading DeFi lending platforms.
The lending and borrowing processes are controlled by smart contracts. You are normally free to withdraw your staked assets anytime you wish.
The DeFi sector has undergone tremendous change over the past few years, making it easy for users to earn passive income by participating in the system. People can earn money by staking, pooling, farming, and lending their crypto tokens.