- Not everyone, only those who succeed in DeFi make the informed decision as this is still a hostile domain.
DeFi offers financial freedom and the CGAR shows that the marketcap is expected to grow huge in the coming years.
Decentralized finance (DeFi) is a concept that has received a lot of attention since the so-called DeFi Summer of 2020, owing to the fact that its usage, often measured in total value locked (TVL), has increased dramatically since then. According to DefiLlama, TVL has increased by more than 240% in the last year to a current $209 billion in “value locked” within DeFi projects. Not only have investors become interested in investing in promising DeFi projects through their tokens (hoping for capital gains), but also in using these platforms to generate a regular and consistent income through various activities. And it’s become even more appealing in bear markets.
This allure of solid risk-free returns uncorrelated to crypto market movements is what draws many investors out onto the ice. Keep in mind that there is no such thing as a free lunch. In this article, we will define DeFi and delve into its ecosystem, strategies, and risks, all of which are important for private and professional investors considering allocating capital to this space.
Ways to generate passive income in DeFi
Decentralized Finance, or DeFi, offers numerous advantages for any newcomer to begin participating in the rapidly evolving ecosystem. Furthermore, the most striking aspect of DeFi directly highlights the opportunity to earn passive income with DeFi. Users can pledge their crypto assets to secure decentralized protocols in exchange for passive income on the assets deposited. In recent years, cryptocurrency owners have turned to passive income generation techniques to extract value from their assets.
In the three years since DeFi’s inception, many new types of DeFi passive income generation methods have emerged. In the DeFi landscape, you can find a variety of decentralized protocols and smart contract applications that provide unique opportunities for passive income.
Following are the four common methods for earning passive income in DeFi that you can use to get more value out of your crypto assets.
Using assets for success in DeFi
The ability for any individual to access the ecosystem is the most intriguing aspect of decentralized finance, or DeFi. On top of that, there are key features of DeFi that distinguish it as a unique intervention in finance. With a wide range of value advantages as well as risks, DeFi has given birth to numerous new opportunities for income generation. Because DeFi is decentralized, participants can interact with financial products and services in a variety of ways.
Furthermore, the DeFi ecosystem is constantly expanding with each passing day. As a result, DeFi is developing new perspectives on how to invest in DeFi to maximize returns. Surprisingly, DeFi users do not need to go through any complicated measures to earn passive income with DeFi. You can earn passive income in DeFi by staking, yield farming, and lending your digital assets.
Tricks for getting succeed in DeFi
If you’re looking for answers to the question “how to earn passive income with DeFi,” you might find them quickly. The evolution of DeFi has simplified financial services as well as the process of earning favorable returns on digital asset investments. However, keep in mind that DeFi does not provide any ‘get-rich-quick’ schemes for increasing the value of your assets.
Lending is one of the most common answers to the question “how to earn passive income with DeFi.” It is the most commonly followed DeFi activity, owing to the early DeFi protocols’ emphasis on lending. MakerDAO, for example, was one of the first entrants into the DeFi ecosystem, focusing on lending protocols. Surprisingly, the concept of loans in DeFi is quite simple, and there are simple ways to earn passive income.
You must lend your digital or crypto assets to a platform via a smart contract. Borrowers could then access the deposited assets as loans by pledging their own assets as collateral. Borrowers must repay the platform the loan plus interest. The interest is then distributed among lenders based on the proportion of their assets locked in the platform by the smart contracts.
For a variety of reasons, crypto lending is one of the most trusted approaches for DeFi passive income generation. To begin with, the DeFi lending process is quite clear and straightforward, as well as simple to use. Simply place your tokens in smart contracts for lending purposes. You could also unstake them if you want to retrieve the tokens. The next critical aspect of lending as an answer to “how to invest in DeFi” is higher interest rates.
DeFi lending can help you earn higher APYs than traditional bank accounts that pay interest. For example, you can learn more about Compound, a popular DeFi Lending Protocol, to uncover some intriguing details. The crypto lending platform provides an exceptional rate of return on your assets of more than 8.1% APY. In addition to enforcing interest repayments from collateral deposits, smart contracts act as intermediaries or facilitators of loans to borrowers.
Staking is another popular response to the question “how to earn passive income with DeFi.” It is the process by which users can earn more of the same token by locking their tokens in a smart contract. In the case of staking, the token generally refers to the native token of the blockchain network. In the case of the Ethereum network, for example, ETH is the native token.
Staking, which derives its origins from networks that use Proof-of-Stake algorithms, provides a credible avenue for passive income in DeFi. The Proof-of-Stake consensus algorithm essentially implies that platform users will stake their assets in the platform. The platform rewards users with tokens in exchange for their trust in the network.
Staking in DeFi is more than just a way to earn passive income. In fact, it is critical in encouraging users to store their assets in DeFi platforms for longer periods of time. Users who invest in the platform would be rewarded with a portion of the net revenue.
Take on the identity of Liquidity Providers
The third tried-and-true method for generating promising levels of passive income with DeFi is to provide liquidity. Many popular decentralized exchanges, including Yearn Finance and Uniswap, have found success by implementing Automated Market Maker, or AMM, protocols.
With the share of swap commission or fee, liquidity providers can find a flexible answer to “how to earn passive income with DeFi.” The platform determines the swap fee that should be awarded to an investor based on their share of the liquidity pool. APYs for liquidity providers in DeFi platforms can be significantly higher, but with significant risk. Being a liquidity provider adds the risk of temporary loss, which you must be aware of.
Because of the significant fluctuations in the price of pooled tokens, there is clearly an impermanent loss. However, in the DeFi passive income method of providing liquidity, you can take the necessary precautions to address the risk of impermanent loss. Liquidity providers could address concerns about impermanent loss by offering a variety of pools with high liquidity. Liquidity providers, on the other hand, can select pools with stablecoins or assets with lower volatility.
- Yield Farming
The most common response to “how to invest in DeFi” would undoubtedly focus on yield farming. The intriguing aspect of yield farming is that it provides liquidity as well as a reliable instrument for passive income in DeFi. You receive LP tokens when you provide liquidity to a DeFi protocol by locking your assets in it.
The similarities between yield farming and staking and the practice of providing liquidity were obvious. However, yield farming is only available for LP tokens. As a result, if you want to earn passive income with DeFi by yield farming, you must first become a liquidity provider. Another critical aspect of yield farming is the need for proper due diligence on the relevant DeFi platform.
You can easily earn passive income with so many promising methods such as yield farming, staking, becoming a liquidity provider, and crypto lending. All of the answers to “how to invest in DeFi” have one thing in common: locking your assets in a DeFi protocol. The type of returns on your assets is determined by the method you have chosen.
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Disclaimer: This blog is for educational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.