How to Earn Money With DeFi?

The possibilities offered by the crypto space are huge, and new ones appear every day. In just over 3 years of DeFi, money-making 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 earning cash among crypto users. Let’s be realistic and honest, isn’t it amazing that we get a certain inflow of money without putting in any effort?

This text will specifically talk about decentralized finance (DeFi) and its methods for passive money-making.

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 is no third party over DeFi, such as banks and other financial institutions that control money and other financial services and products.

The advantages of DeFi are:

The most important goals of this financial technology are to shorten the execution time of transactions and enable greater access to financial services.

Below, you will learn 4 standard methods for earning passive income using the assets you already have on the DeFi.

Staking on DeFi platforms is 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, the ETH is the native token of an Ethereum network.

This method provides additional passive income and originates from networks that use Proof-of-Stake algorithms. This algorithm means that users lock their stakes for a long time on the platform and are rewarded with tokens in exchange for the trust given. Also, those users with the most significant stakes would have the privilege of approving transactions on the platform.

As for Ethereum 2.0, the minimum amount to stake here is 32 ETH, but some platforms allow a pooling mechanism so you can deposit smaller amounts as well.

Providing liquidity to decentralized exchanges (such as SushiSwap and UniSwap) that support the swaps between token pairs can bring you additional income. The thing 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 entire LP. You can earn about 0.3% of the fee from all realized swaps, so the more swaps you realize, the more you will earn. Unfortunately, although it seems tempting, this type of trading carries a high risk of loss.

Becoming a liquidity provider does not always bring in profits. We are aware of the instability and fluctuations in the price of coins, so you may lose the money invested, which is called impermanent loss. You can choose coins with more excellent stability and highly liquid pools to avoid this.

As a continuation of the story of the previous method, we come to yield farming. LP tokens obtained by locking tokens into liquidity pools can also earn by locking them into yield farms. Yield farms are essentially DeFi protocols, and rewards are paid out in an invested or some other token.

You should be pretty careful and choose platforms with a good reputation in this process. Otherwise, there may be a so-called “rug pulling” by programmers who have access to tokens which is, in fact, token theft.

The first and most straightforward answer to the question in the text’s title is undoubtedly lending. The working principle is that you have 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 locked assets on the platform. As you can see, this is an easy way to borrow on DeFi. In an uncomplicated way, you can lock your tokens in smart contracts, and you can also “unlock” them and regain your assets.

When comparing lending on DeFi and in traditional banking, it can be concluded that higher interest rates can be earned here (on DeFi). This is because lending platforms pay APY to lenders when they lock assets in smart contracts on the blockchain. APY stands for Annual Percentage Yield. For example, the APY offered by Compound Finance is just over 8%.

Important to emphasize is that the entire 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 locked assets at any time.

Although there are many lending platforms, here are just a few.

A dual model of the DeFi token is presented by aToken and LEND. 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 lending services such as interest rate changes, Flash loans, and others.

Although everything we have written sounds insanely easy and tempting, we must once again note that every way of investing carries a specific risk and that there is a possibility of disappointment and investment loss.

To earn a yield, you must stake or borrow cryptocurrencies or tokens to the DeFi platform and, in return, receive rewards in the shape of interest or transaction fees. There are 4 basic ways to accomplish this, and they are described in the text above.

We did not come across the exact figure during the research of this topic, but everyone agrees that the more you invest in DeFi, the more you will earn.

The best way would be the one with the least risk of loss, but those who do not take risks will not profit. Depending on your capabilities, choose whether it will be lending and borrowing, staking, yield farming, or becoming a liquidity provider.

There is no universal answer to this question because the level of interest rates, fees, and APY are not the same for all investment methods. But your additional passive income can inevitably be significant.

We have already mentioned some in the text. They certainly are Aave, Compound, Uniswap, Synthetics, yEarn, Balancer, Maker, SushiSwap, Kyber Network, Project Serum.

Read also:

The post How to Make Money With DeFi? Earn Passive Income On DeFi appeared first on CaptainAltcoin.

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