Passive Income

With the growth of the crypto and decentralized finance (DeFi) industries, it’s opening up doors for investors keen to earn a passive income in different ways. For newcomers and veterans of the space, DeFi is providing an opportunity for crypto investors to earn annual percentage yields (APYs) that puts most bank savings to shame. Since DeFi kicked off in the summer of 2020, aided by the sale of Compound’s COMP token, there have been a number of ways for investors to generate passive income.

Lending platforms are a straightforward concept. Users lend their idle crypto assets to a platform, which are locked into a smart contract. In return, the lending platforms pay the crypto holders an APY. The locked assets are accessed by borrowers as loans, with interest paid back to the platform. With the aid of smart contracts governing the entire process, there is no risk to the crypto lender with the borrower defaulting on their loan. This means that those who wish to withdraw their crypto assets can do so at any time.

Staking, which originates from networks that run proof-of-stake (PoS) algorithms, is the process that involves a crypto holder locking, or staking, their assets in a smart contract. By keeping a user’s assets locked up for the long-term, they are able to earn more of the same token in return. For instance, if it’s on the Ethereum blockchain, it’ll be its native Ether token. Staking is a way for users to earn extra through incentives as they contribute to the network’s security and decentralization. By sharing the network revenue, network validators can ensure that the PoS blockchains are abiding by the rules and that the system isn’t being cheated.

Another popular method in DeFi for earning a passive income is through yield farming. Yield farming, which is also referred to as liquidity mining, allows crypto holders to generate extra rewards while providing liquidity to pools. Liquidity providers (LPs) receive an LP token denoting their pool share for supplying liquidity to a pool. The rewards generated for being a LP usually includes trading fees when trades happen in the pool. LP tokens can then be staked onto a protocol or project to earn additional rewards. These rewards are usually in the form of the project’s/protocol’s native token. These tokens can then be staked for even more rewards, making yield farming quite profitable and a good source of passive income. Yield farming is generally seen as riskier compared to staking/lending, but also rewards the farmer with higher APYs.