The crypto markets have grown into a thriving ecosystem of speculators, investors, traders, liquidators, market makers, and many other roles that are specialized for specific niches, such as those of prediction market outcome reporters, participants in decentralized governance, debt underwriters, transaction validators, and others.

A new user may use decentralized finance for a variety of reasons. But, it would be challenging to overlook the most alluring one—the fact that it provides a global opportunity for anyone with digital assets, a computer, and the internet to generate passive income.

Cryptocurrency owners around the world are earning APYs (annual percentage yields) that are higher than traditional bank savings rates by investing their cryptocurrency assets in relatively safe, decentralized protocols.

DeFi is not a get-rich-quick scheme. It does require some patience and caution in order to avoid fraudulent protocols. DeFi is considered to be a safe way to earn cryptocurrency because users retain control over the funds they commit to it. This eliminates the stress and anxiety associated with cryptocurrency trading volatility.

This article comprehensively explores four methods you can use to make money with DeFi. It also provides some examples to provide a clear picture of what the methods involve.

Methods for Earning Passive Income With DeFi

Staking

Staking is similar to having a savings account at a traditional bank. This is a process in which consumers lock funds into smart contracts in exchange for a higher return than the same token.

This method originated from networks using Proof-of-Stake algorithms. Due to this algorithm, users lock their stakes on the platform for an extended period and are rewarded with tokens in exchange for their trust. Users with the largest stakes would also be able to approve transactions on the site.

While the minimum stake amount for Ethereum 2.0 is 32 ETH, some platforms have a pooling feature that allows for lower deposits.

Some protocols that you can stake on DeFi include:

PancakeSwap

PancakeSwap is a popular platform for staking CAKE currencies. When you stake, you can decide whether you want to be rewarded with CAKE or other cryptocurrencies—the annual returns on this platform range between 30 and 42%.

BitDAO

BitDAO is one of the biggest DeFi protocols aiming to tokenize the economy. The decentralized exchange has a proprietary token called BIT. The prize pool contains approximately 1.5 million BITs when tokens are staked, with an average annual return of about 15%.

ByFi

Bybit is a popular global trading platform for cryptocurrency derivatives. Recently, Bybit has made its foray into decentralized finance (DeFi) with ByFi, its dedicated DeFi platform.

For newcomers and those concerned about price drops while staking, it is recommended to start staking with stablecoins. The annual rate for USDT staking on ByFi is typically around 3.5%.

Lending

Lending is arguably the most well-known DeFi practice in the market due to early DeFi platforms like MakerDAO‘s focus on lending protocols. It’s a simple concept: you lock your digital assets in a smart contract to lend them to a platform. Borrowers can then use these resources as loans and pay interest to the platform. Smart contracts distribute accrued interest to lenders in proportion to the amount they lock-in.

This method is appealing due to its ease of use and high APYs compared to traditional interest-bearing bank accounts. For example, Compound Finance has an APY slightly higher than 8.1%. Borrowers must put up collateral in order to obtain assets. Smart contracts bind the collateral to ensure that the interest is paid.

Yield Farming

Yield farming provides liquidity as well as a dependable tool for passive income in DeFi. Users can provide liquidity in exchange for LP tokens by locking assets within a DeFi system.

You can keep the LP tokens and exchange them for a return on your initial investment and other associated benefits. However, if you opt for “yield farming,” you will discover an excellent way to generate passive income. With yield farms, which are DeFi protocols, you can lock your LP tokens and get rewards in the same token or other tokens.

The connections between yield farming, staking, and the techniques of providing liquidity are apparent. However, only LP tokens support yield farming. So, to engage in yield farming and generate passive income via DeFi, you must first establish yourself as a liquidity provider. Another important aspect of yield farming is conducting adequate research on the best DeFi platform.

Any anomalies in the platform can be found with the use of “due diligence” techniques. Furthermore, you can protect yourself from “rug pull” schemes when developers use LP tokens to withdraw liquidity from liquidity pools on DEXs.

Given the risks associated with DeFi activities, selecting platforms with a good reputation for yield farming is crucial. You should also be aware that a third party can audit the yield farming protocol’s smart contracts.

Providing Liquidity

Providing liquidity is a tried-and-true method of generating significant amounts of passive income in DeFi. Some well-known decentralized exchanges, such as Uniswap and Yearn Finance, have succeeded with using Automated Market Maker (AMM) protocols.

Order books, which were used in conventional exchanges, are not used by DEXs. In contrast, DEXs generate liquidity pools made up of token pairings with evenly spaced values. DEXs are an excellent place to trade because token pairs have the same value.

You may wonder how to generate passive income in DeFi by providing liquidity. You will receive LP (liquidity provider) tokens after the assets have been locked in a liquidity pool. The LP tokens represent a user’s share of the total liquidity pool. Using their LP tokens, investors can recover their stake as well as the money they made from swaps in the trading pairs.

When it comes to “how to earn passive income with DeFi,” liquidity providers can find a customizable solution in the swap commission or fee share.

The platform determines how much of a swap charge should be paid to each investor based on their share of the liquidity pool. APYs for liquidity providers on DeFi platforms may be significantly higher but at significant risk. Being a liquidity provider increases the risk of temporary loss, so you should exercise caution.

Risks Associated With Making Money With DeFi

The capabilities of DeFi, which can increase returns by up to 15 times using leverage and derivatives, are far greater than what we have just touched on. However, there are risks associated with these activities, and those who engage in multi-layered liquidity mining may be particularly vulnerable.

Users who hold assets on multiple platforms are exposed to several risks, including the risk of losses due to smart contract vulnerabilities (also known as flash loan hacks) and high transaction costs (commonly known as “gas fees”) during periods of Ethereum network congestion. These costs may consume a sizable portion of returns.

Permanent loss, which occurs when the value of your assets shifts against you after depositing them with a system, can also be a significant issue.

There may also be an opportunity cost to having your cryptocurrency trapped in a protocol that does not pay enough interest because it frequently changes and falls as more people join.

How Much Can You Make With DeFi?

There is no definitive answer to this question because the interest rates, costs, and APY amounts differ for each investment strategy. However, the additional passive income you generate could be substantial.

How Do DeFi Projects Generate Income?

The DeFi project team makes money by owning a significant portion of the tokens they initially distributed, as well as through transaction fees and yield farming provided by the service.

Is DeFi the Future?

It is safe to say that DeFi is poised to transform global financial systems.

This argument makes sense given DeFi’s propensity to solve everyday financial problems. DeFi allows users to retain custody of their assets, unlike traditional financial institutions. This is a highly advanced, decentralized method of operation.

In Conclusion,

Making your money work for you by engaging in activities on DeFi platforms is a great way to earn passive income.
With so many promising strategies available, including yield farming, staking, acting as a liquidity provider, and crypto lending, it’s easy to generate passive income. Your assets will generate different types of returns depending on the technique you’ve chosen. For example, if you provide liquidity to a platform, you will earn LP tokens.
Early investors in some digital crypto-assets and tokens who are also storing them benefit the most from DeFi lending protocols.
The markets and financial technologies evolve as time passes and liquidity increases. Hence, it is critical to recognize that DeFi in its current form is just the beginning. The primary goal of these early DeFi protocols is to boost market liquidity, which is necessary for any market to perform well.
A user must have extensive knowledge of the DeFi space, a sizable amount of financial resources, be able to capitalize on high-value opportunities, and be resilient to losses to fully engage in earning a passive income through DeFi.

Disclaimer: This article is intended solely for informational purposes and should not be considered trading or investment advice. Nothing herein should be construed as financial, legal, or tax advice. Trading or investing in cryptocurrencies carries a considerable risk of financial loss. Always conduct due diligence.

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