Decentralized finance has opened up completely new opportunities for investors. The passive income potential of DeFi is currently unlimited. In this segment of the cryptocurrency market, new protocols and platforms are regularly launched, various opportunities are available for exchanging digital assets and generating passive income. To make money on DeFi, you need to familiarize yourself with all the tools. It is also important to keep track of project and product updates, because this segment of the crypto market is developing rapidly.
Types of DeFi projects
The easiest way to earn passive income through decentralized finance is to deposit your cryptocurrency in a protocol that will pay APY (annual percentage income) for it. This is almost identical to how an investor would deposit cash into a traditional bank account.
Deposits on any DeFi platform are only accepted in cryptocurrencies. Fiat money for decentralized finance does not exist. The first step for a beginner DeFi investor is to buy digital coins and tokens. The vast majority of decentralized finance projects run on the Ethereum blockchain, bitcoins (BTC) are usually accepted in a modified state (for example, wBTC, or wrapped bitcoin). Here are some decentralized finance tools that investors can capitalize on.
Lending is a popular DeFi direction. Users lend their digital assets to the platform, securing them in a smart contract. Further, borrowers can get a loan in these cryptocurrencies by paying interest to the site. Smart contracts distribute income between creditors in proportion to how many coins (tokens) each of them fixes in the protocol. Users can withdraw their assets at any time. Landing protocols offer a higher annual percentage return on APY than traditional bank deposits. For example, Compound Finance offers up to about 6.5% per annum in digital assets.
Another benefit is the reduced risk of default. To take out a loan, borrowers must block the collateral.
For example, an AAA investor has 5 BTC. He exchanges them for 5 wBTC and then deposits them into the DeFi protocol to receive APY. He can then take out a secured loan of up to 75% of the value of his Bitcoin (about 3.75 BTC) for another coin or token offering a higher yield. The investor then takes out a loan and earns from it. In essence, the user added 75% of the value to their BTC in order to receive income. It also continues to benefit from capital gains in the underlying asset (HODL strategy).
Staking. This tool includes the process of fixing digital assets in a smart contract. Many DeFi platforms also use staking as a means to open a savings account on the blockchain. As in traditional finance, the user’s balance will earn interest on the deposit, usually in the form of tokens of the same type or in a different unit on the same block chain.
Staking is possible in networks based on Proof-of-Stake algorithms. The more coins and tokens a user holds, the more important his vote is.
But for many DeFi cryptocurrencies (mostly on Ethereum, which is not yet a Proof-of-Stake blockchain), staking is simply a way to encourage users to lock up their assets for the long term. The income from the network is divided among the contributors.
Most DEX decentralized exchanges with an automatic market making (AMM) model offer options to allocate capital in native tokens. Uniswap has UNI, Pancakeswap has CAKE, Plasma.Finance has PPAY, just to name a few. Such tokens usually earn a share of the income generated by all products and services of the platform (for example, fees from swaps in liquidity pools).