What is DeFi and Passive Income?

Passive income is the money you earn with something that only requires little effort.

One of the amazing things about crypto holders is that they can have an opportunity to earn passive income. They can effortlessly earn profit simply by understanding the leverage of existing crypto capital. Even if the prices are dropping you’ll still keep on generating income. DeFi attracts the attention of many traditional traders.

Examples of Passive Income

-Rental Property

-Limited Partnership

-Enterprise

Aside from these, there are a number of ways where investors are making passive income with cryptocurrencies.

Major Means of Generating Passive Income

1. Staking

Staking crypto is one of the best ways to earn passive income in exchange for protection of the network or system and processing of transactions. Crypto holders are rewarded with newly generated cryptocurrency.

2. Become a liquidity provider

These can generate and produce very awesome and positive returns and income for any person even with a small amount. By extending the supply of liquidity and taking out crypto loans there will be a huge possibility to earn yield especially when you ensure that the pools can fit in with the needs of holders and users. With this, liquidity providers’ investments can be rewarded with tokens.

3. Yield Farming

Yield farmers can both borrow crypto and acquire passive income. Yield farming is one of the ways to generate more crypto and resources using other cryptos. Yield farming is also a process of securing cryptocurrency and gaining more regards and tokens. This yield farming system also involves lending crypto resources to others but with the protection of smart contracts. Smart contracts play a very significant role in keeping the resources you lent safely.

These are the types of returns that can be earned in Yield Farming:

  • Capital Growth- Capital growth during a staking period is a passive income source. Investors are more likely to make a loss with a capital growth strategy and can take advantage of a negative gearing tax benefit.
  • Token Rewards- These tokens can be secured into yield farms, which essential Decentralized Finance protocols reward you more of the same and different tokens. Funding on the DeFi platform can be done with a large variety of coins and tokens. You may choose to trade tokens with stablecoin so you can earn more interest.
  • Transaction Fees

Incentives can be a percentage of transaction fees, interest from lenders, or a governance token. Interest payments will be larger based on the higher balance. Its computations are not merged or combined with account fees, only in compounding periods. To make the deal worth it, liquidity providers collect transaction fees, giving them a steady stream of income in exchange for the liquidity they supply.

4. Lending

The interest or income that is acquired from the lending will be gathered by automation. There are more maintenance fees required by users to generate income on well-known cryptocurrencies. Both lending and borrowing procedures are governed by smart contracts so there is no risk that the borrowers might have backlogs in repaying their debt. Decentralized Finance loans are considered as collateralized loans. Lenders feature their resources to generate and acquire interest and then borrowers pay interest after using those assets. There are many parties that are continuously lending and borrowing with the absence of interacting with each other. The lender releases the collateral that acts as the security.

Lender protocol structures are one of the best ways to earn fixed or higher income in crypto assets with the absence of taking risks. But everyone who wants to do it must learn how to protect themselves and their assets and get the most from the investments.

5. Interest Bearing Crypto Accounts

Cryptocurrency interest accounts enable you to receive passive income in the form of regular interest payments.

Do’s and Don’ts to remember to generate passive income

Do’s

  • Research and identify protocols that are likely to exist for the longer term.
  • Focus on one income stream at a time. Passive income earnings do free up your time to do more stuff but in order to gain true financial freedom.
  • Check progress regularly. Passive income stream should generate more and consistent income. Keep an eye on your different income streams to see which are doing well

Don’ts

  • Investing in unaudited protocols when you are not aware about the risks and possible loss.
  • Invest money that you cannot afford to lose. Not all investments are only connected to money back or high returns, you also have risks to take. Yield farming is not easy. If you want your money to be safe and you want to gain more crypto you need to be an advanced user because if you don’t know what you are doing, you’ll likely lose your investment and resources.
  • Rely on one source. If one stream doesn’t work with your plans, you should consider shifting to another system to make a difference.

Pros and Cons

Pros:

  • Passive income streams diversify your income. After you established everything you don’t need to work too much to earn money. Lending platforms have business models with either three or four parties involved in the lending process, which means they can carry very different risks that can be managed with diversification.
  • It accelerates your path to financial freedom. Passive income will help you reduce stress. Passive income earnings do free up your time to do more stuff, but in order to gain true financial freedom.
  • Unlimited income ceiling. Unlike traditional jobs, there will be no limit of money to receive each month.

Cons:

  • Upfront capital requirement.
  • Significant time requirement.

Conclusion

These days, many are obsessed with building a passive income stream. Who wouldn’t be obsessed with making more money? DeFi is looking to take it one step further. Passive income is one of the best ways to invest your resources and ensure you get paid for months or years to come. This stream also helps diversify your income and eventually it will take less time to manage it. Passive income is the key element as the DeFi world innovates to even greater automation. Decentralized finance industry grows larger and more sophisticated day by day.