Decentralized Finance or DeFi for short is a term used to describe all the financial tradings, transfers, and services you perform on the immutable Blockchain. Basically, this term is a fancy way of saying that no one in particular controls it. This allows you to control all your money, and move it whenever you want it without waiting on anyone to approve it (A bank for example). So, is it easy to make money from DeFi?
From the outside view, many people find opportunities to make massive PASSIVE INCOME from DeFi. And without a doubt, this is an exciting prospect! However, let me tell you this. It is not as easy as it sounds. Especially since the Crypto and NFT markets are missing their bull run for some time now (Since 2022, but who’s counting?).
Let me give you my totally unsolicited NOT financial advisor-level advice on how you can make money with DeFi with a somewhat steady hand! These are the least RISKY ways possible!
So, are you ready to generate passive income?
DeFi ≠ Buying/Selling
Contrary to popular belief… In order to make money from crypto, you don’t necessarily need to buy something, wait for Elon Musk to intentionally or unintentionally promote it on Crypto Twitter, and then sell for profit!
This course of action is not always the best, since most investors end up losing money instead of making more!
Do you want to learn how to make money from crypto regardless of whether the whole market dips in the next few hours? I think I heard a yes…
Top Methods To Make Money Through DeFi
Yield Farming (Lending) in a DeFi Protocol
It’s a way of earning yield on your idle capital just like the interest you earn when you deposit money in the bank. Except you get more of the interest coz there’s no bank taking a cut.
By lending other people your cryptocurrency on a DeFi protocol you can gain an API (Annual Percentage Yield). Let me explain.
First, you have to deposit your tokens into a DECENTRALIZED account or in other words GIVE YOUR MONEY TO THE POOL.
Next, users borrow these tokens and pay interest on their crypto loans. Finally, some of the proceeds go to the liquidity providers. And YOU can get a return on your investment!
And this continues. Whenever someone borrows money from this pool, they pay a fee, and part of that fee gets deposited into your account.
And this differs from giving your money to a CENTRALIZED company like ‘BlockFi’ for example. In this case, you are not completely in control of your assets.
Why? When you give them your crypto, they have to approve your transaction PLUS a waiting period before which you aren’t allowed to withdraw your money! Not to mention the interest rate…
How is lending money to people online this way considered safe?
Well, lending protocols deal with this by utilizing a method called ‘over-collateralization’. Here, the borrower has to put a number of assets or amount of money ON ACCOUNT before borrowing.
For example, if the borrower has 1000$ worth of Ethereum, they put that directly on the decentralized lending platform. The said platform will then allow this person to borrow a percentage of that money (about 70%) in any form they want.
By this, the lender is confident of the borrower’s ability to pay back their assets. Since originally the decentralized platform has their money/assets on the account.
Make Money Through DeFi Liquidity Mining
In this investment process, participants provide their crypto assets (trading pairs like ETH/USDT) into the liquidity pool of DeFi protocols for crypto trading (not for crypto lending and borrowing). In exchange for the trading pair, the liquidity mining protocol provides users with a Liquidity Provider Token (LP) which is needed for the final redemption.
As long as the tokens provided by the user remain in the liquidity pool, the protocol rewards them with native tokens (or governance tokens, GOV) “mined” at each block, in addition to the LP they received earlier.
The reward percentage is based on their share of the total pool liquidity. These newly minted tokens give liquidity miners access to the project’s governance and can also be exchanged for better rewards or other cryptocurrencies.
Provide Liquidity Through Stablecoins
Hypothetically those coins are expected to remain the same value quote-unquote no matter what. So, this is your safest option. Basically, the value of your first deposit will remain stable (Neither appreciate nor depreciate).
So, how do you make money in this DeFi scenario? Here, you can deposit Tether, USDT, or USD (All Stablecoins) and let people trade them back and forth for a small fee that YOU will earn. So, even if the whole crypto market crashes or tanks, you will still have your initial deposit safe and sound.
Staking Your Tokens
Staking means locking up your tokens into a smart contract (Proof-of-Stake protocol) in order to earn more of the same token. In general, the token is usually the native asset of the blockchain, such as ETH in the case of Ethereum.
Basically, Stakers are incentivized to lock up their assets for an extended period of time. As a result, they make money with this DeFi route when the blockchain rewards them for contributing to the network’s security and decentralization.
Risks of Making Money Using DeFi
Smart Contract and Composability Risk
Generally, smart contracts are the most vulnerable points for cyber-attack and technology failures. Any bug in a contract’s code can cause disaster for a protocol and potentially affect other integrated applications.
Attackers have exploited bugs to drain funds from protocols, often making use of flash loans to maximize their returns. So, look up what you’re signing carefully in order to mitigate potential risks to blockchain-based business ventures!
This happens when a liquidation pool fails to cover its margin requirements and goes into loss. As a result, it loses its leveraged position or goes bankrupt for lack of a better word along with its investors.
Beware this type of scam where a cryptocurrency or project owner manages to create hype around a project to attract investor money, only to suddenly shut down or disappear, taking investor assets with them. Read more on scams right here!
Making money through DeFi liquidity pools is not all that easy. Impermanent loss is a risk that occurs when participating in such a pool. It happens when the price of your deposited assets changes (aka they lose value) from the time you deposited them.
High Volatility in The Market
When the price of a coin or an asset fluctuates rapidly in a short period, hitting new highs and lows. That’s some risky business.
Final Words on Making Money From DeFi
The reason we love DeFi is that it always provides us with multiple opportunities to make money. And who doesn’t want that? But, here’s my advice to you. Any investor is advised to practice patience. You should never expect quick gains! And listen, don’t let FOMO get the best of you.
In case of any bad or failed investment, accept the L and learn from it. Don’t dwell too hard on the past! One key point, you must make connections on Crypto Twitter! Listen to everyone, read all sorts of tweets and alpha calls but EVIDENTLY make your own choices!
Learn how to analyze and process info to choose for yourself and if your gut instinct tells you no, don’t even trade. It’s your responsibility at the end of the day.
May the odds be ever in your favor and happy investing!