Key Takeaways:
Passive income in DeFi can be earned through yield farming, staking, lending and borrowing on platforms like Aave, Yearn.finance, or Compound, and investing in liquidity pools or index funds.
Risks in DeFi-based passive income include smart contract vulnerabilities, regulatory risks, liquidity risks (where there may not be enough funds to withdraw), impermanent loss in liquidity pools, and highly volatile asset prices.
Yield farming involves providing liquidity to a DeFi protocol for rewards, often in multiple tokens, whereas staking involves locking up a cryptocurrency to support network operations like block validation, and lending refers to providing your crypto for others to borrow, in return for interest.
Investors should watch DeFi platforms and protocols such as Aave, Compound, Uniswap, Yearn.finance, and SushiSwap, as they offer various profitable opportunities like yield farming, staking, and lending.
Investors can use DeFi portfolio trackers or aggregators like Zapper.fi or DeBank, which provide an overview of all their DeFi assets and positions, track earnings, and help manage investments across different platforms.
Decentralized finance (DeFi) is a new way of doing finance using blockchain technology. It allows people to make financial transactions without the need for a middleman like a bank. DeFi applications are built on decentralized blockchains, which allow secure peer-to-peer transactions without paying a commission to the bank. In this article, we will explore the various options available for DeFi-based passive income.
DeFi Yield Farming (Liquidity Mining):
Yield farming or liquidity mining in DeFi is the process of earning more cryptocurrencies using existing crypto assets. As an investment strategy, yield farming requires people to invest their crypto assets in a smart contract-based liquidity pool. The pool reuses the investedcryptocurrencies to provide liquidity in DeFi protocols and distributes a part of the procured fees to the user as rewards. DeFi yield farms support the use of ERC-20 tokens such as Ether (ETH) for investments and rewards. Yield farming is programmed to earnthe highest yield or return possible and tends to be one of the riskier investments in the world of DeFi-based passive income.
DeFi Staking:
Staking in DeFi is similar to yield farming and works as an incentive for people to hold their crypto for a longer period. People need to lock up their crypto holdings to become validators on the blockchain. In staking, people can earn rewards by locking up their tokens for a fixed amount of time, depending on the plans offered by the operator. Every blockchain will require a minimum amount of tokens before it can add a user as a validator, which in the case of the Ethereum blockchain is 32 ETH.
DeFi Lending:
DeFi lending platforms allow people to lend their crypto tokens to borrowers and earn interest. Smart contracts help in eliminating the risks associated with lending in traditional finance and eradicate the collateral requirements. However, most lending applications do not require background checks that are essential to mitigate credit and fraud risks.
Differences between DeFi Alternatives for Passive Income: Yield Farming / Liquidity Mining vs. Staking vs. Lending
Yield farming, staking, and lending are the three most popular DeFi-based passive income options. Yield farming is the riskiest of the three, but it also offers the highest returns. Staking is less risky than yield farming, but it still carries some risk. Lending is the least risky of the three, but it also offers the lowest returns.
Yield farming involves investing crypto assets in a smart contract-based liquidity pool. The pool reuses the invested cryptocurrencies to provide liquidity in DeFi protocols and distributes a part of the procured fees to the user as rewards. Yield farming is programmed to earn the highest yield or return possible and tends to be one of the riskier investments in the world of DeFi-based passive income.
Staking involves locking up crypto holdings to become validators on the blockchain. People can earn rewards by locking up their tokens for a fixed amount of time, depending on the plans offered by the operator. Every blockchain will require a minimum amount of tokens before it can add a user as a validator, which in the case of the Ethereum blockchain is 32 ETH.
Lending involves lending crypto tokens to borrowers and earning interest. Smart contracts help in eliminating the risks associated with lending in traditional finance and eradicate the collateral requirements. However, most lending applications do not require background checks that are essential to mitigate credit and fraud risks.
Profitable platforms and protocols
Below are some examples of platforms and protocols to keep an eye on.
DEX exchange. You can exchange tokens on it. Liquidity providers are required to deposit the cryptocurrency that will be used in trading. The rewards are in the form of a commission from transactions carried out on the exchange.
This is the protocol used to issue synthetic assets. Any user can lock SNX - Synthetix Network Token or ETH. After providing liquidity. The synthetic assets are emitted.
DeFi exchange protocol that specializes in stablecoin swaps. The service provides exchange operations with a minimum possibility of slippage. It is popular in farming due to its increased level of stability.
It is a decentralized lending platform. The DAI is a stablecoin emitted for use on the platform. It is algorithmically linked to the value of the US dollar.
Several collateral assets can be locked here:
· WBTC
· USDC
· BAT
· ETH
· And others.
DAI is generated as debt on locked digital assets. Gradually, users who provide liquidity receive interest. They are called the stability commission.
DeFi protocol built for lending and borrowing. Interest rates are adjusted periodically. Their significance depends on the current market situation. The reward accrual process starts immediately after the tokens are deposited.
Risks of DeFi-based Passive Incomes:
DeFi-based earning avenues come with varying degrees of risks, including scams, hacking attacks, and flawed or over-promised smart contracts. The price volatility of cryptocurrencies might result in a loss in terms of profit during a bear market. In addition, the risk in DeFi investment strategy can also depend on the intent of the pool owners. Hence, it is important to check the credibility of the service providers based on historical payouts.
Tracking Your Portfolios:
Many DeFi traders now use portfolio trackers or aggregators, which allow you to evaluate and manage your whole portfolio from a single dashboard. Yield aggregator maximizes efficiency by optimizing the methods for obtaining profit. Other aggregators even provide cross-chain integrations and multiple wallet connections, allowing you to access chart views that analyze multiple aggregators' data in real-time.
DeFi offers new ways for people to earn passive income. However, it is important to be aware of the risks associated with DeFi-based passive income, including scams, hacking attacks, and flawed smart contracts. Make sure to check the credibility of the service providers based on historical payouts. Yield farming is the riskiest of the three, but it also offers the highest returns. Staking is less risky than yield farming, but it still carries some risk. Lending is the least risky of the three, but it also offers the lowest returns.
Pend Hub, based in Egypt, is a leader in the DeFi landscape in Egypt. The company offers comprehensive guidance for investors seeking to harness the power of decentralized finance. Leveraging various DeFi strategies like yield farming, staking, and lending, it provides investors with a clear pathway to generate passive income. Utilizing popular platforms such as Aave, Uniswap, and Yearn.finance, Pend Hub ensures its clients have access to the most profitable opportunities in DeFi.
Moreover, the firm goes beyond mere advisory by offering robust portfolio management services. With the use of advanced portfolio trackers and aggregators like Zapper.fi or DeBank, Pend Hub presents a comprehensive view of an investor's DeFi assets and positions. The goal is to assist in tracking earnings effectively and managing investments across different platforms. This holistic approach to DeFi investing makes Pend Hub a go-to resource for anyone in the Middle East looking to navigate the complex and rapidly-evolving DeFi ecosystem.
Disclaimer: The content of this article is for informational purposes only and should not be construed as financial or investment advice. Always conduct your own research and consult with a qualified financial advisor before making any investment decisions.