How does the Defi platform make money?

Blockchain assets were not widely used in the early days of crypto. They could be stored or traded on exchanges. Defi, however, opened up new opportunities for crypto and maximising returns. This is even though assets may be left sitting in an account. You might have also heard the term "HODL," a popular crypto strategy to buy and hold tokens, regardless of their price swings.

Decentralized Finance allows users to explore passive income opportunities by putting their cryptocurrency (and other digital assets) to work on decentralized exchanges, liquidity pools, and lending protocols.

Crypto users can deposit their funds in a savings account and receive interest payments and other rewards. Cryptocurrency interest rates are often higher than traditional finance. It is a desirable proposition.

However, there are a few risks that you should consider, such as wild market swings and 'rug pulls' or the bankruptcy of cryptocurrency platforms. However, passive income can be a beautiful investment strategy during the crypto winter. You can do it in many ways, including by lending your assets or staking them. This guide will help you navigate your way.

What is Defi?

Let's begin with the basics. Decentralised finance is a term that many need to become familiar with. Defi staking development services run on a decentralised network without the need for a central authority. In this context, market participants can interact with each other via peer-to-peer (P2P).

Defi is a new alternative to traditional financial systems run by central banks, credit unions, and governments. Defi protocols support operations such as payments and loans, executed using smart contracts. These are self-executing computer programs. The technology allows for a global financial system that is less bureaucratic, transparent, safer, and more accessible for everyone.

What are the advantages of Defi?

Defi, similar to cryptocurrencies, is being promoted as an alternative platform to fiat-based ones. Financial operations such as lending, borrowing, and Defi staking can all be performed without the intervention of an intermediary. Smart contracts can also address system inefficiencies, reduce costs, and often minimise the default risk of debtors. Defi is a way to open up new financial opportunities for users around the globe by challenging the fiat currency monopoly.

How does Defi passive income work?

Decentralized finance is one of the most popular uses of blockchain technology. Defi is a great way to earn passive income if you are open to exploring the world of cryptocurrency but have not yet been ready to invest in large amounts, especially in this current market.

There are many options for getting started. You can stake digital assets, become a liquidity provider, or even go yield farming. These terms may sound familiar to you in Latin. Don't be afraid. We will look at all the ways that Defi can generate passive income, one by one.

Method 1: Deposit crypto for an APY

Defi's easiest way to generate passive income is to earn interest by depositing tokens into an account. You might find it familiar as it is similar to having fiat savings and earning interest. These days, interest rates can be harmful or very low. Defi can offer significantly greater returns than high-street banks.

This is what Defi platforms refer to as "staking." Interest earned can come from any token staked or other pass supported on the blockchain. When you gamble with crypto assets, you become a network transaction validator (or node). Stakers are given financial incentives for continuing to do this work.

You can stake many different tokens and coins, but most Defi platforms are on the Ethereum blockchain. Bitcoin (BTC), however, is only sometimes accepted. This Defi method makes passive income possible for those looking to store their tokens in exchange for regular interest.

There are many platforms from which you can choose. Each supports different coins, stake periods, and, most importantly, interest rates.

Method 2: Defi Lending

Another way to make passive income with Defi is through lending. Many platforms offer this type of lending. Like the staking we just described, passive income can be earned from Defi lending by depositing tokens into an account. You might have already guessed that when you lend cryptocurrency to a platform, you let it lease it to other cryptocurrency wallet borrowers. You get interested in return. Smart contracts usually distribute accrued interest proportionally to the assets you have locked in.

Smart contracts control the borrowing and lending processes, which is another advantage of decentralised lending. This means that there is virtually no chance of a borrower defaulting. Your assets should be protected. Defi lending platforms allow you to withdraw crypto anytime and without incurring exit fees.

Method 3: Yield farming

Yield allows you to supercharge your cryptocurrency and store it in exchange for interest or other rewards. Users of a Defi platformhave the option to place their funds into a liquidity pool. These tokens can be locked in a smart contract within a Decentralized Application (Dapp). Users are paid a fee or interest to allow their assets to be used on the platform or for borrowing or selling.

Sounds familiar? Sure. You receive a fixed percentage of the interest earned. It is similar to depositing money into a bank account and letting it access it for loans. Yield farms are a way to ensure liquidity in the Defi ecosystem. People who lend tokens on Defi platforms to others are known as "yield farms" and often switch liquidity pools to maximize their returns.

It would help if you did your research on any investment platform. Not only has crypto coin seen extreme volatility, but also unscrupulous developers have been known to scam investors by abruptly exiting projects and running away with investor's funds ("rug pull").

Method 4: Become a Liquidity Provider

You can also become a liquidity provider (LP), a passive way to make money with your crypto tokens. But, unlike yield farming or the Defi staking platform, where your cryptocurrency can be used to confirm transactions or fund crypto loans, liquidity providers play a different role. They ensure that token swaps happen more efficiently and quickly on a Decentralized exchange (DEX).

Trade facilitators are also known as "liquidity providers." They are paid transaction fees for the trades that they facilitate. You don't need to be involved in any of these activities, but you can. Like other passive income options, a risk is involved, especially in this bear market. You can do your research before you commit your funds or opt to contribute assets that are held in highly liquid pools with safer crypto assets.

Method 5: Liquidity Mining

Liquidity mining is last on our list. Here, crypto asset holders lend their assets and receive a reward. The difference is that liquidity miners are rewarded in native tokens of the blockchain they use. They also have the chance to gain governance tokens, allowing them to maximize their involvement in a project. Providers are compensated based on the amount of liquidity they contributed to the pool.

What's the difference between liquidity mining, yield farming, and staking?

Staking allows you to earn rewards for holding specific cryptocurrency tokens. Blockchains based on the proof-of-stake algorithm have speakers who vouch for the authenticity of transactions by acting as node validators. This ensures that the platform is safe and liquid.

Yield farming is a service offered by decentralized exchanges (DEX). It aims to provide buyers and sellers with healthy levels of token liquidity. This is a passive income method that Defi offers. Users contribute to a pool of funds called a "liquidity pool" and are rewarded for allowing their funds to be used in other network operations.

Yield farming, however, is a strategy that aims to maximize yield. On the other hand, liquidity mining focuses on maintaining integrity and letting users contribute to shared liquidity pools.

Bottom line

There are many ways to make passive income with Defi. Each has its benefits and drawbacks. It is a sensible decision to opt for DeFi's passive income strategy, given the current state of the crypto market. Talk to us today as it is essential to research and consider all options. You should only invest what you can afford.