Disclaimer: The Industry Talk section features insights from crypto industry players and is not part of Cryptonews.com editorial content.
Leading up to 2020, the markets were in near-perfect conditions. All-time highs, a tech boom, and stocks that only seemed to go up. It’s safe to say things have changed a bit since then. After a global pandemic, record-breaking inflation in countries around the world, and more collapses than we can count, we are definitely in a bear market.
As traditional financial investors fail, more users than ever have started looking into alternative investment methods. One that is growing in popularity and lucrative is the world of decentralized finance (DeFi). However, with the cryptocurrency also experiencing an historic crash, falling from a $3 trillion total market value to just $1 trillion, investing in assets doesn’t seem like the best route.
The fear generated by a bear market has currently made the traditional mechanism of investing in an asset and waiting for it to rise quite difficult. While a few years ago there was a very good chance that a stock or asset would rise in price, that is no longer the case.
Luckily, the world of DeFi has a number of solutions with industry-wide methods that users are adopting to earn passive income from their assets. When you can’t sell without accepting a total loss, these set-it-and-forget-it investing opportunities have become incredibly popular. In this article, we will cover the three most important ones, namely lending, staking and liquidity providers.
Let’s get straight to that.
How to Use Lending to Generate Passive Income Inside DeFi
A large number of leading cryptocurrency and DeFi exchange platforms offer loans to their viewers. These crypto loans allow users to borrow large sums of cryptocurrency and then recycle that money into investments or liquidity pools (more on that later!).
In order to operate this service on a large scale, the platform must have a huge capital reserve. Of course, they must actually own anything they lend, which means companies have two choices:
Buy Crypto – A DeFi exchange could buy an enormous crypto reserve, costing the company a huge amount of money.
Receive loans from others – A DeFi exchange could collect a series of smaller loans from individual investors, creating a large reserve while only having to pay interest.
In order not to have to pay a large sum at once, these exchanges almost always choose the latter option. If you have cryptocurrency in your account, you can lend it to these exchanges and receive an ongoing interest fee. This capital is paid to you on a regular basis, creating a stream of passive income.
Let’s take one of the leading DeFi exchanges, Cake DeFi, as an example. This platform accepts lending services and is constantly taking orders for some of the largest cryptos and stablecoins in the world. For example, users can borrow Cake DeFi BTC and receive a fixed APY for their loan.
A user could offer any amount of BTC and earn a return of 5% or more, generating a stream of passive income. Users who don’t want to sell their BTC or ETH at a loss due to the current crypto downturn can lend their coins to a service like Cake DeFi for continuous passive returns.
While not the most exciting APY available, this is a safe and consistent way to beat the bear market with DeFi.
How to use staking to generate passive income within DeFi
Another fantastic way to generate passive income with DeFi is through a mechanism known as staking. In the world of cryptocurrency using blockchain, there are a few methods to validate a transaction. All transactions must be stored in a block of data to ensure they are permanently listed on the blockchain.
With earlier cryptocurrencies like Bitcoin, their transaction validation system is known as Proof of Work (PoW). PoW requires computers to perform incredibly complicated mathematical transactions, which consumes a lot of energy. Other blockchain ecosystems use the greener (and more efficient) Proof of Stake (Pos).
In the PoS model, users are randomly selected to validate a block of information. This random system relies on these users being willing and available, with their funds qualifying them to become a validator. In order to create enough potential users for this system to operate effectively, blockchain ecosystems ask users to stake their currency in a project.
This involves a user locking their funds within a PoS system, even indefinitely if they wish. For providing this service, users are continuously rewarded with total APY depending on the project they are involved in. If we look at some top opportunities in Cake DeFi, we can see that the APY rewards for staking range from 5% to 19.7%.
In some famous projects, this APY has been pushed even higher, as blockchains are in dire need of people to stake their funds to help with lightning-fast validation. If you have a cryptocurrency that you think you will not sell for a long time, staking can be a fantastic opportunity. Especially since there is no set period of time in which users can invest their money, this can be a great way to weather the bear market until things take a turn for the better.
How to provide liquidity to generate passive income within DeFi
Finally, we come to one of the most popular methods investors in the DeFi space use to generate passive income – providing liquidity. Providing liquidity and staking are often confused as both do similar things with your cryptocurrency. When staking, you may lock your funds indefinitely and help support projects you love that offer a high APY.
Providing liquidity, on the other hand, is all about locking your funds in a pool that collects cryptocurrency. A liquidity pool collects cryptocurrency pairs within smart contracts. When these pools have plenty of liquidity, automated market makers can operate, allowing crypto exchanges to create a fair market by continually buying, selling, and swapping within the pair.
Companies looking to increase the circulation of their cryptocurrency often participate in these liquidity pools and use them to generate liquidity for their new token. Users who lock their cryptocurrency in these pools are rewarded with a fixed rate of return. The longer they commit to staying in a liquidity pool (often a month, two months, three months, six months, or a full year), the better the APY return.
The key difference between liquidity pools and staking is that the former’s users participate in the DeFi protocols while the latter reside within blockchain networks as validators. While both have fixed APY returns, liquidity mining is often the preferred method as it is more stable.
On Cake DeFi, users can browse many different pairs that are currently active. By selecting one of these pairs, investors can then enter their cryptocurrency into these liquidity pools. The APY yield is very impressive with this tactic, with some of the liquidity mining projects available offering over 21% APR.
For users who want to sit back and watch their funds accumulate, liquidity pools are a great position to look at, even by this sheer market.
Final Thoughts
The traditional method of buying low and selling high sounds perfect — until a recession, a global pandemic, and global financial failures send markets reeling. Traditional financial investing methods just don’t work in bear markets. To avoid the worst of these crashes, more and more people are turning to the world of DeFi.
With the sheer range of different ways users can do with their capital, investing in the world of DeFi is an exciting new frontier. Ultimately, diversity is key to investing, making the move to DeFi an attractive leap for any investor. Whether you are a crypto expert or just starting out in this industry, we encourage you to take a look into the world of passive income with DeFi.
Learn Crypto Trading, Yield Farms, Income strategies and more at CrytoAnswers
https://nov.link/cryptoanswers
Comments are closed.