How to make money with DeFi:?

Passive income

DeFi opens up more and more opportunities for passive income. Some of them are more complex, and some, on the contrary, are very simple and accessible even for beginners. We offer to consider the main ways to earn money on today’s decentralized assets.

We will tell you about such methods of earning money on DeFi

• profitable farming;
• investing in DeFi tokens;
• staking;
• P2P lending;
• supply of liquidity;
• leverage on DEX.

It has its pros, cons and features.

Earnings on profitable farming

Thanks to the emergence of various decentralized financial protocols, the topic of yield farming has experienced a real explosion in recent months.

At its core, this is a process in which the user receives native and control tokens of a particular protocol as a reward for acting in it (liquidity supplies, deposits, loans, trading). Thanks to the Compound protocol, this concept gained popularity, which began distributing COMP tokens to users who deposited funds on the platform or took out decentralized loans. Thus, the project encourages users to perform certain operations.

The majority of cryptocurrency protocols are based on decentralization. For example, if bitcoin or ether has been achieved by mining, projects based on Ethereum reach decentralization by transferring control to protocol users using tokens. 

It is precisely what the developers of Compound did. They issued COMP tokens, which give users the right to control the protocol. COMP is distributed in proportion to user activity and represents this additional bonus only for using Compound. Immediately after the release, the token increased significantly in price. The community quickly realized that using the platform could bring benefits. This phenomenon was called profitable farming. It also led to a sharp influx of capital into Compound — in a week in mid-June, it added almost half a billion dollars to the protocol.

Other sites that provide an opportunity to engage in profitable farming

• Curve. Provides an opportunity to earn income in CRV tokens by depositing collateral in any of the seven available liquidity pools. There is also a pool that works with tokenized bitcoin-the Ren Protocol. sUSD and sBTC pools allow you to receive additional incentives in the form of SNX and REN;
• Balancer. Allows you to earn BAL management tokens by depositing funds into liquidity pools. The site has a table to see which pool is the most profitable and what volumes and commissions are. Pools can be either private or shared. Some pools help mitigate volatility risks, such as DAI/USDC, sBTC/WBTC, or Seth/WETH.

Advantages and disadvantages

Pros

• You can get an excellent additional income;
• Many of the “bonus” tokens are very promising and can grow in price;
• The right to participate in the decentralized management of protocols.

Cons

• Technical risks of smart contracts;
• Risks associated with volatility and volatility of income;
• Binding to the use of specific protocols.

Earn money by investing in DeFi tokens

Another way to make money on decentralized assets is to play on price growth. The peculiarity of investing in DeFi tokens is that a few hours after the issue, the token can rise by hundreds or thousands of per cent and rapidly fall in price or continue to increase. Therefore, such an investment is currently in great demand.

The most striking example is the YFI token of the Yearn Finance platform increased by 130 000% from July to September 2020.

Now it continues to be highly volatile, fluctuating in the range of +/- $3000 daily, giving many market speculation opportunities. There are other similar examples – UMA (UMA), Unitrade (TRADE), and Ocean Protocol (OCEAN) tokens.

Thus, you can increase your investment thousands of times by purchasing a promising DeFi token for a small amount. But no one cancelled the risks either. Not every project expects steady growth, especially since now there are more and more such projects; many of them are deliberately fraudulent.

To choose a token with good potential, you can pay attention to a couple of criteria

• Product availability. The project should have some functional platform or application.
• Limited issue. The lower the total volume of coins, the higher the probability of their price rising. For example, the case of the YFI mentioned above is only 30 000;
• Adding to exchanges. As a rule, tokens skyrocket immediately after listing on exchanges – this convinces users that the project is not fraudulent.

However, it is best to buy DeFi tokens at their appearance on small sites since after listing on Binance or other market leaders, the price usually stabilizes or gradually decreases. On the other hand, small exchanges do not strictly monitor the quality of coins added to the listing.  

Advantages and disadvantages

Pros

• The chance of quick and high earnings;
• Interaction with new high-tech projects.

Cons

• High risks;
• It’s not so easy to find a good token;
• The decision must be made immediately, as the course can quickly take off or collapse.

Earn money on staking

Staking is a traditional method of passive earnings on cryptocurrency, which has been relevant for several years. However, it is attracting particular attention because Ethereum soon plans to switch to the proof-of-stake protocol. And among the top 30 other major currencies by market capitalization, several blockchains already support staking rewards.

The essence of staking is that assets are not moved but are blocked directly on the user’s wallet. Individual participants’ bets form a single staking pool. It provides operational support for the network and reduces the number of coins in circulation, preventing inflation and depreciation of the exchange rate.

Different coins offer different returns, and you can find options with returns starting from 20% per annum. So it is much more attractive than traditional bank and crypto lending bets. But there are also risks, mainly related to price volatility. And since the reward is paid in the same blocked coins, this further increases the risk of a market crash.

Coins with a large market capitalization and low volatility are safer to bet on. In contrast, those with a small capitalization are riskier, but the expected income can also be significantly higher.

Advantages and disadvantages

Pros

• An old and proven method. It is often compared to dividends on shares;
• It is safe enough if you choose coins with a good reputation;
• Good profitability;
• Staking counteracts inflation.

Cons

• Interest rates reduce market liquidity; 
• A drop in the exchange rate can eliminate potential profit;
• Not all PoS coins are compatible with the methods of the DeFi ecosystem.

Earnings on P2P crediting (landing)

Lending in DeFi plays the same role as any traditional bank that provides loans to users or businesses. However, the sphere of decentralized assets offers much more exciting opportunities for earning money. P2P lending platforms offer loans to anyone without checking their credit history and without an identity card. The only condition is a deposit.

On the other hand, participants with a new cryptocurrency can give it to borrowers at an interest rate. At the same time, a particular automatic liquidation procedure ensures that the lender will return its funds with interest even in a drop in the value of cryptocurrencies or non-repayment of the loan by the borrower. 

According to the research company Messari, P2P lending in DeFi is the most effective direction regarding ROI (return on investment).

Examples of platforms where you can transfer funds at interest

• Maker. The minimum deposit for the borrower is 150% of the loan amount. You can only borrow the DAI token. ETH and BAT are accepted as collateral. 0x (ZRX), DigixDAO (DGD), Golem (GNT), Omise Go (OMG), and Augur (REP) will also be added soon;
• Aave. The minimum deposit for the borrower is 133% of the loan amount. The protocol supports 16 coins, of which 13 can be used as collateral. There are such assets as TUSD, DAI, USDC, BUSD, WBTC, ETH, etc.

Advantages and disadvantages

Pros

• A large selection of supported protocols and assets;
• High-interest rates are offered on some assets;
• Low risks, thanks to well-thought-out procedures for liquidating collateral.

Cons

• Profits are unpredictable, as interest rates are constantly adjusted based on the state of the market;
• Technical risks of smart contracts.

Earnings on the supply of liquidity

Many DeFi protocols work based on so-called liquidity pools – these are pools of tokens locked in a smart contract. They facilitate trading by providing liquidity and are widely used by next-generation decentralized exchanges. This mechanic became popular after the launch of Uniswap.

Trading is based on an order book in classic crypto exchanges like Coinbase or Binance. Traditional stock exchanges work in the same way. Sellers try to sell the asset at the highest possible price, and buyers try to buy at the lowest possible price. The transaction took place when the buyer and seller agreed on the price.

In decentralized finance, trading is reproduced differently. Each liquidity pool contains two tokens and creates a market for that pair. For example, the famous liquidity pool on Uniswap is DAI/ETH.

Directly for earnings, there must always be assets in the pools. Therefore, platforms encourage users to deposit funds. The Liquidity Provider (LP) receives unique tokens, called LP tokens, in proportion to the amount of liquidity provided to the pool. LPS receive a certain percentage of the commission on each transaction in the pool where they have deposited funds

Advantages and disadvantages

Pros

• A large selection of platforms and assets;
• A relatively simple operation, accessible for beginners.

Cons

• Profitability depends on the trading volume on a particular platform;
• Liquidity needs to be added regularly; otherwise, the income will decrease over time.

Earnings on leverage on DEX

Margin trading (trading with leverage) is a method of using borrowed funds, which you can use for exchange amounts many times larger than the user has. In DeFi, margin traders borrow cryptocurrencies from decentralized credit protocols running on smart contracts.

Those who wish can earn money on this – give away their new cryptocurrency at a percentage – for example, getting 5-20% from lending to margin traders.

Examples of DeFi platforms that offer this earning opportunity

• dYdX is one of the largest margin trading platforms in DeFi, focusing mainly on experienced traders. The platform supports ETH-DAY, ETH-USED and DAI-USD pairs and offers transactions with leverage up to 5x. At the moment, over $1.2 billion is blocked in its smart contracts;    
• Fulcrum is another not custodial trading platform built on the Kyber network and the bZx protocol and supports LINK, ZRX, WBTC, ETH, DAI, REP and KNC tokens. When a user opens a position, the smart contract takes a loan on his behalf through bZx and then exchanges it for the selected token. Fulcrum allows clients to open long or short positions with up to 4x leverage. 

Advantages and disadvantages

Pros

• In margin trading, automatic liquidation is always used if the trader trades at a loss so that the lender does not lose its investments;
• Transparency and anonymity of all operations, resistance to censorship.

Cons

• Low-interest rates;
• The risk of the vulnerability of the used platform.

Conclusion

For choosing a suitable way by earnings on DeFi assets, it is best to try everything – fortunately, the threshold for entering them is minimal. The protocols work even with minor amounts.   

And thanks to their transparency, you can monitor the market’s state and your assets to avoid missing the right moment for depositing or withdrawing funds.

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