April 2, 2021

How Decentralized Finance (DeFi) Can Be A Source of Passive Income

It is almost impossible to navigate through the crypto space without having to either learn about or invest in new trends.

Decentralized finance (DeFi) happens to be one of the latest trends.

This trend unlike any other seeks to enable the lending and borrowing of crypto assets for interest. The aim of these protocols or platforms is primarily to enable the availability of crypto assets to the general public without having to go through brokers or banks.

The launch of various DeFi platforms has opened up a ton of opportunities for investors and enthusiasts alike. Passive income, undisputedly, happens to be one of these opportunities.

Yes, DeFi has proven to be a perfect source of passive income.

You're probably wondering how you can get started, aren't you? We'll tell you

Liquidity Provider

 As mentioned earlier, a ton of DeFi platforms have been launched. Fortunately, a few of them like SushiSwap and UniSwap enable you to earn passive income.

On these protocols, funds are collected in what is called a liquidity pool. Liquidity providers, that is, those that stake their tokens on the platform’s smart contract earn as much as 0.3% from each token pair swap executed. The more trades this pool executes, the more rewards they earn.

With the crypto market being a volatile one, there's every possibility the value of these tokens may either appreciate or depreciate. If the former happens, you stand to earn more. However, the latter signifies a loss. 

Yield Farming

Yet another nascent trend in the crypto space, yield farming has become a perfect passive income source for literally everyone.

Generally, yield farming is the locking up of funds into a liquidity pool to earn interest each time users borrow crypto assets. In addition to earning interest for your assets pooled, you get to earn more in the form of transaction fees.

There are over a dozen yield farming protocols to pick from — Uniswap, Aave, and Compound to mention a few.

Like all crypto investments, yield farming is quite risky. Due diligence and careful market assessment is required before locking assets.

Lending Funds

The idea behind DeFis is to make crypto assets available to the general public, thus, eliminating the middleman. Lending happens to be one of the few ways.

In a decentralized finance platform, users lock-up funds or assets in a smart contract which is an agreement that releases assets when certain predetermined conditions or parameters are met by the parties involved.

As a form of passive income, investors can lock up assets in a small contract, then lend these assets to those in need, albeit for interest.

Built on a transparent layer, blockchain technology, and reliant on smart contracts, the risk of a borrower refusing to pay back the debt is eliminated.

DeFi has opened up a lot of money-making opportunities for investors and enthusiasts alike. While this is profitable, due diligence and thorough market research as mentioned are advised.

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Jack Evans

About the author

I became a crypto asset owner in 2014, when the industry was in its infancy. Before that, I was working in the classic US and European stock markets. Since then, I have gained extensive experience in both cryptocurrency investing and day trading. I am happy to share with readers my experience with crypto exchanges, DeFi and NFT instruments. 

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