Passively Secure the Bag!! The Defi Way: How to Make Passive Income in Cryptocurrency


Possibly the best thing about the cryptocurrency space is ownership and the ability to turn your active income into passive income. Active income is when you go to your 9-5 and get a check for services rendered, also known as earned income. Passive income is when your money makes money without active energy. Examples of passive income is putting your money in an instrument that can earn you compound interest or return on investment. On centralized platforms and decentralized platforms one can make passive income. I would like to discuss more decentralized ways to make money, decentralized finance or DeFi has changed the way people make money passively.

Ethereum’s Impact on DeFi and Smart Contracts

On the Ethereum blockchain, DeFi applications and websites, are king. Due to Ethereum being the first blockchain to do smart contracts. Smart contracts have programmable information placed that executes a transaction or event when all conditions are met. Basically, it is like a traditional contract without third party involvement, because the blockchain takes care of that (Need a refresher on blockchain technology information, check out “What the H*** are NFTs”).  Ethereum is still one of the most utilized blockchains for DeFi, but due to issues with gas fees and validation, other blockchains were made that promise lower gas fees and better systems to validate transactions/smart contracts. Just a heads up Ethereum has been working on a better system to offset these issues as we speak or write.

Defi vs TradFi

Now that the basic information is out the way, how are people really making money in Defi? Literally you become your own bank in the sense without needing the building and security guard. Everything that the bank does in traditional finance or TradFi, you can do through decentralized applications. Literally all you need to do is connect your wallet or hard wallet to the application and start making money and deposit some cryptocurrency or digital assets. Just to be clear making money through DeFi takes time, you can’t expect to become a millionaire overnight, even though, stranger things have happened in this space. You want to utilize DeFi to grow your crypto portfolio like stocks or retirement account.

STAKING

One of the easiest strategies is staking your cryptocurrency. During development phases of decentralized financial services or blockchains (i.e., ETH 2.0 name is different now, but you get me) you can lock up your current tokens for a predicted annual percentage year or APY. APY is how much money you can earn in interest if you lock up your tokens for a year. Staking helps with maintenance of the blockchain or proof-of-stake (POS) systems. If you plan on holding on to certain assets for the long-term you might as well gain a more competitive interest rate, than TradFi.

Yield Farming

Yield farming provides liquidity to decentralized exchanges or DEX. So, when someone wants to swap a digital asset, they must pay a fee for the transaction. The person that provides the liquidity for this trade gets paid a portion of the fees. These people who provide liquidity are called liquidity providers or LPs. The liquidity on DEX utilizes what is called an automated market maker or AMM, which is like the order book on a normal exchange for buying and selling assets, except it’s a smart contract the determines the price to buy and sell your digital assets in the liquidity pool.

The LPs provide the liquidity to the pool (a pile of funds) and receives a fee, attracting more liquidity to the pools decrease the slippage. Slippage is determining the price at which your order is filled and is determined by the liquidity of the token. A big risk in yield farming is impermanent loss which means the price ratio of the tokens deposited in the pool are larger than expected. Larger fluctuations in prices of the tokens, mean larger loss. Despite the potential for gains with yield farming, it can sometimes be better to just HODL (HOLD) your tokens, to prevent any loss.

Defi Lending and Lending Protocol

Defi lending applications allows one to lend (or borrow) their crypto to someone else and earn interest on the loan. Just how you would do in the banks or when trading on stock exchanges, you would due a margin for more capital. This allows for margin trading options for digital assets. The benefits of lending are easy accessibility to capital, smart contracts manage the loan (no middleman), simple passive income. Disadvantages are the risk in borrowing to your crypto portfolio, hacking of smart contracts, unexpected prices of the cryptocurrency market or volatility. Please learn all you can when lending it can be risky but rewarding.

DeFi Funds

Doing a simple google search on “DeFi funds”, will allow those who are still a bit nervous about investing in decentralized applications to gain passive income in a familiar way. One would invest in the funds and allow the Index fund to be managed, it is not really decentralized but more centralized since some of these index funds are publicly traded in stock exchanges. Even so you still will be able to build diversification in your cryptocurrency portfolio and potentially lower risk.

TIPS

When utilizing DeFi do your research before participating, try to understand as much as you can about each platform you choose to use. If you don’t have the capital to lend, yield farm, or invest in DeFi Funds than take the time to grow your crypto capital by investing in ETH, stable coins, and DeFi coins.  The reasoning behind this is because these digital assets are commonly used on DeFi applications. Also utilize and invest in wrapping tokens, its more complex than this but wrapping in a nutshell allows you to use a native token and transfer that token to any blockchain without having to exchange the token. For example, you want to utilize Bitcoin on the Ethereum blockchain, but do not want to swap because of gas fees or whatever reason, then you would just buy wrap Bitcoin (WBTC) and now you can use that asset on the Ethereum blockchain. Lastly, one can continue to utilize centralize systems that invest in cryptocurrency, until comfortable with decentralized concepts.

Conclusion

Investing in DeFi can have great return on investment but like with anything can be speculative and pose extreme risk. One cannot deny the importance of this new way to passively gain money, leverage and lend like traditional banking systems without all the hassle. I personally love staking my long-term and even short-term digital assets due to the potential APY, but even that is not guaranteed to give you those returns, and you could potentially lose all the tokens you stake. So, nothing is risk free. The goal here is once you are comfortable and want your digital assets to work for you, you can grow your nest egg. I hope this provided you more insight on DeFi. All The Best, #WAGMI (We are all going to make it)

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TheeCryptoDoc
TheeCryptoDoc

Tech Junky, NFT Enthusiast, Entrepreneur, Crypto Educator, Dentist, Husband, Father of One.


Web 3.0, Connecting To All Things Crypto
Web 3.0, Connecting To All Things Crypto

The invention of cryptocurrency has allowed new innovations such as decentralized app (dapps), Defi, smart contracts, NFTs (non-fungible tokens), staking, exchanges, liquidity pools and more. So what does all this mean, and what is Web 3.0? To understand this one must understand the evolution of Web 3.0. In the beginning was Web 1.0 the invention, information could be shared. Web 2.0 the social age, think Facebook, Instagram, Snapchat and TikTok. Web 3.0 can be described in one word ownership or connect.

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