For those who believe that making money in cryptocurrencies is only possible through frantic, regular trading, prepare to be proven wrong! If constantly looking out for the endlessly changing crypto coin prices to make a profit isn’t your thing, you can always opt for yield farming or staking to generate a solid passive income stream. Here’s an introduction to get you started.
What is yield farming?
Remember the standard interest you get on your deposits in your thrift account? When you entrust your savings to the bank, you are essentially lending that money to your bank. In return, the bank pays you back interest on your savings. You can also withdraw funds from the account at any time without any restrictions.
In the field of decentralized finance (DeFi), the system is no different, with the exception of the interest rates offered. While savings account interest rates offered by banks can range from 3.5% to 7%, returns in the crypto space are much higher. Sometimes up to 2000%!
Basically, what happens here is that you make the cryptocurrencies you hold available to a Liquidity Provider (LP). This is a kind of marketplace. Here, decentralized applications (dApps) lend or borrow available tokens. And since they are based on smart contracts, there are no middlemen involved.
Once all of these tokens are consolidated into a liquidity fund for these dApps to use, anyone who contributed will receive either fees or interest as compensation. Currently, much of the returns are happening on the Ethereum network, with lenders just trying to make the most of wild crypto price swings. That makes it risky, but also profitable in the short term.
That’s why the real kicker, says Raj Kapoor, chief advisor at crypto consulting firm Acryptoverse, is when “a coin appreciates in value rapidly.” Let’s say you bought coin A for yield farming purposes. Favorable market developments cause the demand for A to skyrocket. You can now earn higher interest income by allocating A to liquidity pools that offer solid returns.
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However, remember that your calculation of net returns should include deductions for the high transaction and gas fees you have to pay as a result of this frequent activity. However, you are free to withdraw your tokens at any time.
“The recent 30% tax on crypto transactions is driving enthusiasts towards yield farming. This is because the system is familiar to most investors and like the traditional credit system attracts more investors. It’s a great way to generate passive income,” notes Kapoor.
What is staking?
The same bank that offers you a savings account also offers you the option of opening a fixed term deposit (FD), right? Viewed as a financial instrument of yesteryear, the idea of an FD is simple. You deposit your money in the bank for a set period of time. During this time, your money is blocked, meaning you cannot withdraw it without penalty.
At the end of the FD period you will get your money back. Here, too, the interest rates are higher than with savings accounts. Unlike savings account interest rates, FDs traditionally offer interest rates around 4-5%. Therefore, you end up earning a little more.
Staking is almost like the fixed deposit of the DeFi space. It is ideal for beginners as it does not require significant capital to start with. In addition, there are no major transaction or maintenance costs. Your returns are not solely dependent on short-term market fluctuations and volatility, which helps you weather rough market periods with relative ease.
But it’s a long-term wait for returns, so it’s wise not to expect immediate profits.
But how do you choose the best returns and platforms? Tarusha Mittal, COO and co-founder of yield farming and staking platforms like oropocket.com, OpenDeFi and Unifarm has some solid advice on this.
“In this area there are no reasonable return expectation numbers. That’s because crypto is in its infancy. And any technology that is still in its infancy is very dynamic and constantly changing. There are certain users who have achieved 17%, 100% or even 2000% returns. But essentially it depends on how long the person has been staking. I would suggest starting your journey with only highly respected and established names. It is important to do your own due diligence to see if the platform has been properly audited or not. Chase not just wild returns but platform credibility,” she underwrites.
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