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Lending was forever in the list of earning passive income. And now this applies to the DeFi Ecosystem as well. The DeFi ecosystem is huge. It is large. There is a new feature of technology making it to the DeFi Space every day. The opportunities of making passive income in the DeFi space are huge. The element of passive income makes the DeFi space more exciting.
Depositing cryptocurrencies in DeFi Liquidity for an APY (Annual Percentage Yield)
The simplest approach to earning a passive income through DeFi is to deposit your cryptocurrency onto a platform or protocol, which will pay you an APY for it. Depositing on a DeFi platform can be done using different types of coins and tokens; however, you cannot deposit fiat directly it should be converted to one of the accepted cryptocurrencies, but not fiat (traditional currency). First step will be to buy some cryptocurrency using a fiat and to on-ramp (i.e., buying crypto with cash) in to the cryptocurrency space. These cryptocurrencies can be used as the kickstart element to work in the DeFi Space.
Select Token and Protocol which provides Good Returns (APY)
Most of the users tend to invest stable coins like DAI or USDT in liquidity pools. Different tokens have different APY and therefore return should be assessed accordingly.
Earn tokens and Rewards from Yield Farming
What is a Liquidity Pool? Liquidity pools are where the money from different investors also known as liquidity providers are pooled together. Liquidity pools are managed using smart contracts on Ethereum’s blockchain to provide liquidity for decentralized exchanges. Liquidity providers use their Ethereum wallet to send tokens to a liquidity pool, where investors’ funds are aggregated to provide for liquidity on DEXes. For instance, Uniswap charges a flat 0.3% transaction fee for every swap. This fee is distributed proportionally to each investor in the liquidity pool.
What is a Liquidity Provider? Liquidity providers are investors who stake their cryptocurrency tokens on DEXs to earn transaction fees. The process of staking is known as liquidity mining or market making. The transaction fees are often denominated in terms of interest rates. The interest rates differ based on the amount of liquidity available and the number of transactions that happen in the liquidity pool.
When you are a Liquidity Provider in a DEX like Uniswap, you will be getting tokens which will represent your share in the pool. These tokens will be locked into yield farms, which are particularly DeFi protocols which will provide you with rewards of the same token or will make use of a different token. Thus, when the pooled assets are earning a share of all fees in Uniswap, users also have the opportunity to earn LP tokens.
Gain with borrowing and lending Another route to passive DeFi income consists of borrowing a token or coin from a platform which can be further reinvested to earn rewards. This is very risky though. For instance, if you are a Bitcoin holder, you can first swap $1,000 of BTC for wBTC and then deposit that into a DeFi protocol for an APY of 0.5%.
Several lending platforms pay users an APY for locking their assets into a smart contract. These tokens are then used by borrowers to pay interest, which is the portion that gets returned to the lender. Compound Finance, for example, currently offers an APY of 8.19% for lending DAI.
Further, there are several other DeFi services which are being widely used some of them are:
Compound: Short-Term Lending & Borrowing of Ethereum-based Crypto-assets
Dharma: Peer-to-Peer Lending and Borrowing Marketplace
CHAI: An Interest-Bearing Meta-Stable Coin (Dai + Interest + Spendable + Gas-less)
Uniswap: Automated Market Maker Earning Transaction Fees for Liquidity Provision of Assets
Nuo Network: Another Peer-to-Peer Lending Platform
Aave: Non-Custodial Open-Source Protocol for Earning Interests on Deposits and Borrowing Assets
