One of the loudest innovations in the blockchain space is the DeFi revolution.
This tech’s uniqueness comes from its permissionless quality, meaning that anyone with an internet connection and a supporting wallet can interact with them.
DeFi systems also don’t require trust in custody parties or middlemen agencies.
However, passive yields are the most widely recognized use cases in DeFi projects’ popularity. Let’s look through some of the types:
DeFi Yield Farming
Yield farming is one of the most novel ways sprung out of the use case basket of DeFi. This is a unique way of earning rewards with cryptocurrency through liquidity protocols.
The possibility of earning passive income can be achieved through this system of smart money managing coded protocols on the Ethereum blockchain layer. This way, the investors can put their HODL assets to work instead of keeping them idle.
It mostly refers to locking up your cryptocurrencies in a given protocol and getting rewards against them. In other words, it’s loaning your holdings against a future reward.
In a manner, yield farming can be compared with staking as well.
Moreover, one important concept to know here is liquidity pools. It’s a smart contract where some funds are contained. These pools are often provided with funds by HODLers and other market players locking their funds. Hence they are called Liquidity Providers (LPs).
LPs get a reward for depositing their funds in the pools. The rewards are generally derived from the fees generated by the underlying platform.
Most of the reward distribution is done via ERC-20 tokens. However, due to the increased development in the crypto space, cross-chain bridges are making the whole cryptosystem blockchain agnostic for reward systems in liquidity mining.
Staking is a process in which the crypto holders lock up their crypto assets to secure a Proof-of-stake network.
Individual users who lock up their crypto plants into a blockchain network as staked assets are called to contribute to the network.
For this contribution, users receive shares in platform-earned fees and governance tokens as a part of the rewards.
The blockchain network also randomly picks the validators who validate transactions to secure the blockchain network, but the chances are greatly enhanced for high-stake nodes.
Crypto Lending works by taking crypto from a user and forwarding the funds to another in return for a fee. However, the function of loan management differs on various platforms.
This method involves three parties: the lender, the borrower, and the defi platform. Most cases involve the borrower having to lock in collateral against borrowing funds. On the contrary, the smart contract platform mints stable coins or platform-specific cryptocurrencies for lending out funds from another user.
Some prime examples that allow lending and borrowing alike are Binance, Abracadabra, and Aave.
Earning passive income crypto is more about putting idle assets to use. While the ways of making impressive yields never fail to lure new and upcoming enthusiasts, they always need due diligence for the safety of one’s funds.
Intrinsically, the art of finding amazing opportunities in crypto boil down to understanding the working methods of the core functionality of the projects concerned. In failing to do so, the investors’ funds can be put into many un-mitigable risks resulting in huge volatility that can mean losing a major chunk of a user’s portfolio.
Any new opportunity that comes in the highlight, such as triple digits of APRs on yield farming projects, is the one you need to beware of the most as they mostly arrive with potentially dangerous complications.