Use these straightforward methods to maximize the potential of decentralized finance and open-banking tools.
Suppose you’re a newcomer to the crypto sphere, especially the decentralized finance world (DeFi). In that case, you could have heard about various attractive hooks that enable owners of cryptocurrencies to generate passive income. There are many decentralized protocols where you can grow your digital nets eggs instead of trying other potentially risky trading activities.
Read on and discover the four leading DeFi activities you can use to earn a passive income. All you’ll need to join the fray is a digital asset wallet with the Ethereum blockchain, and you’re good to go.
Cryptocurrency staking is a process that involves locking (staking) your tokens into a smart contract where you earn a portion of the same token in return. Blockchains that use the proof-of-stake consensus mechanism to secure their networks rely on users who lock their assets in special smart contracts.
These are controlled by network validators, who are tasked with upholding the blockchain’s consensus rules and ensuring that no one has tried to cheat the system. Users are incentivized to stake their assets for an extended period and earn rewards for contributing to the network’s security and decentralization. Users can lock their ETH into the Ethereum 2.0 smart contract and earn additional ETH for playing their part in enforcing its consensus rules.
2. Provide Liquidity
Uniswap and Sushiswap are modern-day decentralized exchanges supporting swapping token pairs such as ETH and USDT. The liquidity comes from crypto belonging to DeFi users who place their tokens into a smart contracting pool. Users who become liquidity providers earn a percentage of the fee proportionate to their pool share. The more trades conducted via a pool, the more you’ll make.
Providing liquidity may not always guarantee a profit. Users sometimes lose money through impermanent loss when the price of one of the pooled tokens fluctuates. However, there are ways to mitigate this by choosing highly liquid pools that contain less volatile assets.
3. Yield Farming
Yield farming also allows you to earn more income and provide liquidity. Liquidity providers receive a specific token representing their share in a pool when they provide liquidity to pools. They receive their stake and a percentage of fees earned when redeeming their tokens.
Some DeFi platforms have “farms” where you can lock your tokens and still earn more of the tokens. This acts like staking, only that it’s available on pooled tokens requiring yield farmers to become liquidity providers.
Lending is the most recognized DeFi activity, perhaps because most early DeFi platforms specialized in lending protocols. Users lend their digital assets by locking them into smart contracts where borrowers may access them in the form of loans and pay them back with interest to the platform. Once the borrower has paid back, the smart contract distributes the interest to lenders proportionate to the amount of digital asset they locked in.
Lending is attractive because you can stake your tokens and lock them for lending and then un-stake them back: their high APYs relative to traditional interest-bearing accounts with banks. There is also a reduced risk of default since borrowers lock up collateral in a smart contract that enforces interest from the collateral if borrowers do not pay the interest owed.
These methods allow crypto enthusiasts to use their digital assets to earn passive income. They provide an essential service to the crypto markets by providing much-needed capital and liquidity and, in return, earn incentives — all without intermediaries. It’s never been easier to generate a steady income, whichever way the market moves.