Decentralised Finance is a successful integration of blockchain technology into financial services. The thing about decentralized finance is the freedom it brings for anyone to earn and work with money, a freedom that was stifled by traditional finances.
With DeFi, you can earn massively with passive income thanks to the many opportunities available in the ever-evolving platform.
The DeFi platform is giving individuals and businesses the opportunity to leverage smart contract functionalities by automating the terms of their interactions and investments. For instance, DeFi can help participants profit by leveraging existing crypto capital. You can also leverage yield farming, staking lending to earn residual income.
Aside from this method, there are also more ways than one to make passive income with DeFi, some of which are:
1. DeFi Yield Farming (Liquidity Mining)
This method involves earning more crypto coins with existing coin assets. The strategy requires investors to delegate their crypto assets in a smart contract or liquidity pool. The pool will use the invested cryptocurrencies to create liquidity that DeFi protocols can use; the reward from this transaction is given to the user as a reward.
The way yield farming works, it is programmed to create high yield or return, however, it is very risky.
2. DeFi Staking
Staking in DeFi is similar to yield farming. However, in this case, users are allowed to earn rewards by locking their token for a long period of time or depending on the time specified by the operator.
When it comes to blockchain, there is often a minimum amount of token you must have to be called a validator. In the case of the Ethereum blockchain, it is 32 ETH.
A user’s earning power is also determined by two factors – the network’s reward plan and staking duration. Aside from the monetary benefit that comes with staking, it also goes ahead to secure blockchain projects and improve their performance.
3. DeFi Lending
Lending is a term used for a lot of things that involve blockchain.
When it comes to DeFi lending, the investor can interact with the borrowers through smart contracts. The DeFi platform allows investors to enlist their crypto tokens, which are loaned by borrowers and repaid after a set period with interest.
The idea of smart contracts is to eliminate the risk of borrowing from traditional financial institutions and remove the clause for collateral. However, some DeFi lending platforms conduct background checks to authenticate the individual to reduce fraud cases.
Major Differences Between Defi Lending, Staking and Yield Farming
DeFi lending, staking, and yield farming all require proof of stake.
The yield farming has the highest profit margin, while DeFi lending and staking have a considerate profit margin.
Yield farming is very risky. Staking is the least risky because many factors guide transactions. However, lending is moderately tricky because there might be fraud cases.
Yield farming is primarily long-term, while lending and staking are often determined by the users or fixed.
Risks of DeFi Incomes
Every form of investment comes with its risks and flaws. When it comes to DeFi, the biggest risks are scams, over-promised smart contracts, and hacking attacks.
Also, DeFi earnings are often based on the number of tokens earned, but with the volatility of cryptocurrency, there might be losses on the part of the investor.
If you are delving into lending or any DeFi investment method, make sure to trust the service providers because of fraud and scams.
Tracking Your Portfolio
DeFi provides several methods of earning money; this means you can not afford not to track your income. But, it can be not easy, especially when you have multiple portfolios across several platforms.
You should employ portfolio trackers to help you connect your wallets and protocols and have a comprehensive view of your portfolio in a single dashboard. For instance, tracker/aggregators like yield aggregators can help maximize efficiency by optimizing methods used for obtaining profits. You can also look for trackers that can help you make multiple wallet connections, cross-chain integrations, etc.
The crypto community is super excited about DeFi and its possibilities. DeFi is a legitimate way to make money passively. The platform has opened up interesting ways to make passive income and change the way we value crypto assets.
When you think about how to make passive income, the most common advice is to lock your assets in a DeFi protocol but your returns depend largely on the asset you select.
You can also select staking, which gives you additional rewards. Whichever method you choose, you are presented with new possibilities.
However, you must have enough information on whichever method you choose to save yourself from scammers, fraud, and other unhealthy experiences.