Decentralized Finance

4 Ways Decentralized Finance Can Generate Passive Income

Here are some ways Decentralized Finance can earn you income with only minimal effort.

We are indeed at a point in time where fiat money is on its way out. Coming to take its place it seems are cryptocurrencies and forms of online investments which have quickly grown to a trillion-dollar industry.

Despite that, many are still apprehensive of cryptocurrency and its ability to be a lucrative source of investment. Indeed they have reason to be with the many tales of fortunes made and lost to the online money markets. Luckily, Decentralized Finance came into being and is quickly gaining popularity.

In this article, I’ll go over the reasons why Decentralized Finance is the future of the financial industry and how you can get started earning from it:

 

What is DeFi (Decentralized Finance)?

Whereas financing has traditionally centralized into a system of banks, brokerages, and financial institutions, Decentralized Finance allows you to make various kinds of financial transactions through a specific blockchain.

Blockchains are, at their simplest, databases that use the computer storage of their members to duplicate and record information that is unchangeable and secure (due to its being decentralized and spread out). Although unassuming, blockchains have found use in everything from keeping ledgers, storing and securing large amounts of data, and of course — serving as ideal formats to conduct financial transactions.

Mainly engaged in using a series of smart contracts (self-executing programs that are written into the computer code) in blockchains, the most common of which being Ethereum, a DeFi platform that allows members to trade in cryptocurrencies, borrow funds, get insurance, and even save.

History

After the founding of blockchains, it did not take long before internet users discovered its applicability towards creating a safer trading environment compared to other crypto markets. That being said, MakerDAO is credited as the first truly mainstream DeFi platform.

By the second quarter of 2020, several platforms online began capitalizing on the growing demand for DeFi, and news agencies like Bloomberg and the Washington Post would report how rapidly it was starting to make up most of the cryptocurrency transactions overall (around 2/3rds).

By January of 2021, the DeFi industry posted double the amount of investments at over 20 billion dollars. Surprising when compared to the 11 billion dollars of October of the previous year.

 

Why DeFi Will Revolutionize the Financial Industry?

At this point, it’s not really a question if fiat money will become obsolete but when the transition to a digital model will be complete. Decentralized Finance is already making waves in the financial industry and more people are starting to notice. The main reason for this includes but are not limited to:

Availability

The main and most enticing aspect of DeFi is that it’s decentralized. For those who are not aware of what this means: it essentially means that it is accessible anywhere and at any time so long as the internet is available.

Imagine for a second how incredibly convenient this is. Where other banks will charge you more for you to access your money abroad, keeping your money online in different forms allows you greater mobility.

Affordability

Transactions are done in most DeFi platforms cost next to nothing or nothing at all. The fact that there is no middleman drives the cost of fees down greatly. Being an online platform, there isn’t much need to add charges for the things brick-and-mortar banks need to pay for like salaries and building maintenance.

Being Your Own Bank

The ability to manage your own finances like a bank in your own right is one of the many things those who engage in cryptocurrency trading say they most enjoy. Taking only the risks you are comfortable with, having full accountability and control over your hard-earned money, and being free from the fear of a market collapse or freezing of assets all make DeFi worth the try.

Lucrative

The DeFi market has expanded exponentially since the beginning of its discovery. This is a signifier of its ability to serve as a viable source of income for countless online investors. And as the world becomes more and more interconnected, we can only expect DeFi to become all the more popular among those looking for an alternative to the highly volatile financial market of the recent past.

 

Top 3 DeFi Market

To get started in your journey into the DeFi Market you’ll need to understand the main venues in which the transactions are conducted. More and more platforms pop up each year as the system gets more popular but listed below are the 3 main and most well-known markets:

Maker

Also known as MakerDAO and the Maker Foundation by extension, Maker is a decentralized governance platform where members are able to engage in the tradition of a stable coin called Dai.

Dai has quickly become the most traded stable coin in the market today and with good reason. Using Dai, traders can engage in actions like hedging, buying and selling financial instruments, making remittances, even some use in retail shopping.

To earn a Dai, a member creates a Maker Vault. A Dai’s value is pegged to the US dollar and thus is a collateral-backed currency. The Dai lives on the Ethereum blockchain and has no centralized control or a single governing body that dictates the value.

Aave

If you are a novice to the whole DeFi game and are only looking for something easy to comprehend and capable of earning you income passively, then Aave is the ideal choice.

The Aave protocol operates under an easy system of depositors and borrowers. Depositors deposit money into the market to supply it with liquidity. Borrowers borrow money from the market either collateralized or collateralized.

Depositors earn from the platform by accepting interests from the loans they essentially provide to the borrowers. Aave then takes a small percentage from this as a commission.

One might wonder who would ever want to borrow instead of deposit — to that the simple answer is that money begets money. Borrows take out loads that are highly liquid capital usually to invest it in other more highly profitable investments that might have higher risks.

Compound

The Compound Protocol is an algorithmic and autonomous service that seeks to replace the usual inefficiency seen in today’s current financial institutions. The interest rate protocol is built to be open to other developers which allows for the creation of a myriad of financial applications under its umbrella.

Indeed, Compound is all kinds of DeFi pulled together in a single platform. In that regard, you have a one-stop-shop for any and all kinds of crypto investments you might want.

 

4 Ways To Make Money with DeFi

We all have that dream of earning income passively, generating profit doing nothing at all. With certain DeFi techniques, this dream can be a reality. Indeed you need not even leave the comfort of your home.

The top ways to earn passive income with DeFi includes:

 

Become a Lender

This technique was already hinted at above. It operates quite the same way your savings are used by banks. You basically lock your assets into a smart contract. Borrowers will then borrow that asset for their own ends and pay interest, a portion of which goes to you.

It’s a simple way to earn passive income that you hardly have to think of. That being said, simplicity also comes with its own set of risks. Assets can and have always been volatile in terms of value — online or otherwise — and that could mean just as much a loss as it does a gain.

Bugs and problems within the protocol and smart contracts themselves can also lead to a real material loss on said assets. On top of that, many platforms exist which are happy to scam hundreds of dollars from you with a promise of insane amounts of returns. It goes without saying that you’ll need to do your due diligence before committing to any investment.

Compound Finance and DEX both offer APYs in exchange for the lending of DAI or BTC. Returns may vary but many still consider these the safest ways to engage in passive income by lending.

 

Yield Farming

Think of yield farming like time deposits or government bonds. What you are essentially doing is tying up your assets into an institution or in this case a platform, which gives them liquidity. That liquidity is then used to make investments and lend money out for interest, which generates profits that you get a cut out of.

The same can be said for Yield Farming. By depositing your assets into the market, you provide it with the liquidity it needs to lend money out to borrowers or even trade in cryptocurrency. On top of that certain protocols give you rewards for reaching a benchmark in terms of investment.

Currently, yield farmers to this manually by searching out the best deals but new applications are being released, such as Robo yield toppers or Robo Advisors, which can help you yield farm automatically.

 

Staking

Though complex at first, once you understand its mechanics, staking is a fairly simple way to earn passive income with minimal effort. To explain, we must understand the nature of a blockchain. You see the fact that this system is decentralized means that the community works together in order to ensure the safety of their shared assets. Sometimes though, a user will try to cheat the system and attempt to acquire the assets in the blockchain that aren’t his, To prevent this, stacking was invented.

When a person “stakes” their assets, they are essentially signing a smart contract in which they lock in their assets for a period of time. In exchange for this, they are rewarded with cryptocurrencies for their effort to make the blockchain more secure. Those who engage dishonestly will have their stakes penalized and lose a part of their assets.

Stacking works on two levels: it generates passive income without you really having to do anything, and it incentivizes users to keep the blockchain a safe and honest place.

 

Liquidity Provider

In simple terms, a Liquidity Provider or LP funds what is called a Liquidity Pool with assets he/she is the owner of. Using this pool, he or she lets the pool be used to facilitate various other financial transactions.

As the owner of the pool, he or she will be entitled to a percentage of the fees and interests on the transactions that use the pool.

There are several platforms that allow you to do this but the most famous ones are SushiSwap and UniSwap which deal in ETH (Ethereum) and USDT (Tether). When engaging as an LP, be sure to remain up to speed at least with all the current prices and value of your assets. The last thing you want is an impermanent loss to occur — when the price of your assets changes from the price they were when you deposited them.

 

Reminders and Conclusion

And those were the main ways to earn passive income from decentralized finance and more. Even with all that, we’ve only just scratched the surface of what DeFi can provide. There are also a number of other methods by which users use DeFi to generate income but they usually require more experience and tech-savvy.

Like with any form of investment, we would be remiss if I didn’t remind you of the importance of proper research before investing. There are, sadly, a lot of unaudited and unregulated sites out there that promise great things but only succeed in robbing you. Only stick to the well-known and trusted sites, platforms, and protocols.

Also, know that caution is key with these kinds of things. Do not go into this expecting to become rich overnight — lucrative as though it might be for many people.

Finally, I certainly hope this article was of help to you. Happy trading and good luck out there!

 

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