Besides trading, there are other methods to earn from cryptocurrencies. Thanks to the growth and development in the DeFi space. It consists of several different apps and services that offer different financial services but are not owned by a central authority like banks. DeFi also allows crypto investors to earn passive income from their crypto. We will discuss all 3 ways to earn passive income from cryptocurrency and which one will work best for you.
Disclaimer: This article is for educational purposes only. Information is provided according to reliable sources and industry trends. The value and position of cryptocurrency in the market is subject to change. Please research and verify your background before investing.
Ways to earn passive income with crypto
There are 3 methods to earn passive income from cryptocurrency other than trading or holding cryptocurrencies. All 3 require prior knowledge and you should do your research before investing. We’ll take a look Mark out, loanAnd yield farming. How they work, what you should know about them and the risks associated with them.
1. Staking
Staking refers to locking your coins on a crypto exchange for a period of time in order to earn interest-based rewards. Think of it like a fixed deposit, where you lock your money for a set period of time and earn interest on it. The exchange uses your coins to validate transactions on the blockchain. In return, the exchange receives a reward that it distributes appropriately among investors.
Staking is not supported by every type of crypto like Bitcoin or Ethereum. coins like theses, polygon, theta, Ethereum 2.0 (Not released at the moment, but you can still use it) and Cardano support stakeout. Binance exchange allowed staking.
staking pool
At the staking pool, a group of people collect and invest crypto for staking. The interest earned is then divided among the members of the group for their investment. Here the rewards can be very high, but these staking pools are not reliable like exchanges. you can be Rug-pull scam and you can lose all your cryptos.
Things to know about staking
- You can wager a small number of your funds
- Limited crypto support staking
- Exchanges charge a small fee for staking
- Not all exchanges support staking
Risks in staking
Staking is a minimal risk method as you earn in the units of the crypto, not its value. . Any risk involved is mainly due to errors in the smart contract.
2. Lending
With lending, you deliver crypto to a crypto exchange platform for a set period of time at a fixed rate. This crypto is lent to the borrowers who have to pay interest on their borrowed amount. You will be rewarded with other tokens representing your initial deposit + interest at the current market value. You can sell, HODL, or exchange these tokens for another cryptocurrency.
exchange like binance, CoinDCXand BlockFi support lending and borrowing and offer different percentages of interest 5% to 13% that you can earn with your crypto.
DeFi vs. CeFi lending
DeFi uses smart contracts Automated Market Makers (AMM) to facilitate lending on decentralized platforms. Protocols like Compound and AAVE create a market for specific cryptos such as ether, DAI, chain linkor Wrapped Bitcoin to lend and to borrow. It eliminates any middleman in the process and allows lenders and borrowers to interact directly.
CeFi or Centralized Finance includes centralized exchanges such as binance, CoinDCX, And BlockFi who hold your crypto to be loaned out by market makers, hedge funds and other users of their exchange. These exchanges accept lending in various coins, even bitcoin, for liquidity purposes, and they have an easy-to-use interface that requires no learning curve. They are trusted options if you are new to lending.
Related Article | What are decentralized crypto exchanges? Know the pros and cons here
Things to know about lending
- You can choose a fixed term and interest based on the deposit
- Rewards a Native Exchange Token
- Not all cryptocurrencies are supported
- CeFi allows you to use crypto in your exchanges
Lending risks
Lending involves minimal risk, but be sure to check out which exchange can give you the best interest rates on your crypto. The main risk is lending to a scam or rug pull exchange or smart contract bugs, which are rare.
Also read: 5 Best Metaverse Coins to Invest in India (2022)
3. Yield farming
Yield farming, also called token farming is a new concept. It prioritizes maximizing your return on investment using various methods such as: liquidity poolLending, staking and leveraged lending. We’ve already talked about staking and lending, so we’ll talk about the other two.
liquidity pool
In a liquidity pool, together with a large group of people, you can borrow 2 equal funds for exchange. That makes you one Liquidity Provider. The exchange uses the funds in the pool to pay transaction fees and hold the price even after a large order. In return, the exchange distributes the fees it has earned from multiple transactions to the liquidity providers, respectively.
Automated market makers and smart contracts are used for liquidity pools. Exchanges like Uniswap are paid 0.3% fees. This multiplied by a large number of transactions throughout the day can result in huge returns. Uniswap And pancake swap are 2 of the best-known exchanges for it.
leveraged lending
We will understand it with an example. You borrow 1000 rupees worth BAT (Basic Attention Token) which has a high interest rate on loans. Then you borrow DAI Use your borrowed BAT as security or pledge. You can only rent there 50-60% of your security, get 600 rupees worth of DAI. You then go to an exchange and use that DAI to buy more BAT and you lend that BAT again for interest. And follow the same process until you can’t do it anymore.
This is called leveraged lending and has very high risk for high reward. You have to be daily active and a veteran of the crypto market to pull it off. Usually only recommended for crypto veterans.
Interesting facts about yield farming
- There is a high risk
- It is not recommended for new crypto investors
- Actively review the crypto market
- Must plan how and where to invest
Risks in yield farming
Yield farming, especially leveraged lending and liquidity pools, involves many risks. Crypto volatility can drastically affect leveraged lending, while fraud and carpet-pulling in the liquidity pool can cause you to lose all of your crypto.
Also read | Crypto Regulation Bill 2021 in India: 5 Points You Should Know
Wrap up
These were the top ways to earn passive income from cryptocurrency. All of these concepts come with a potential risk, so we emphasize that you take the right precautions before investing your cryptocurrency. These can earn you more profits than just holding crypto. We hope we helped you understand the 3 best ways you can earn passive income from cryptocurrency.
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