Earning passive income through DeFi is possible through different ways, but most of the means boil down to depositing cryptocurrencies into a protocol or platform to earn returns.
Decentralized financial platforms work without the help of centralized authorities, meaning that users either interact with one another or smart contracts. This has made DeFi protocols to suffer from illiquidity.
For DeFi platforms to work effectively, they need average users to deposit cryptocurrencies into pools which are then utilized in lending, trading, insurance and much more.
Those that deposit tokens are then rewarded with an APY (annual percentage yield) for it. Depositing tokens into a liquidity pool or a DeFi protocol can be likened to depositing money into a savings account, where the client is rewarded.
The major difference is in the type of reward that is given to users. The APY that comes from this is usually high in DeFi protocols than in traditional banks. Sometimes, the APY may come in the form of a percentage of the transaction fees, new tokens or both.
People can earn passive income from DeFi by staking, injecting liquidity into a pool, or depositing in an centralized exchange account.
The staking activity is important for proof of stake networks. Users have to delegate their tokens to the network as a way of safeguarding it and ensuring that transactions are verified. For staking, users are given a percentage of rewards from Validators.
Users can decide to inject liquidity into a pool that can be utilized in lending, insurance, Decentralized Exchange and so on. Usually, users are rewarded with new tokens or a percentage of transaction fees.
Passive income can also be earned by depositing funds into a centralized account, where users are rewarded with an APY. The aforementioned are popular ways of earning passive income through Decentralized Finance.