Things that you need to know about passive income with DeFi
Passive income and DeFi
After much controversy about the applicability of blockchain technology to real life instead of just creating a new currency, the online community has found a new potential for its development, which is Decentralised Finance (Defi). So what is Defi technology, how can it help with passive income? and why is it receiving so much attention?
Our post will help you find the answers to those questions and show you how to earn crypto passive income with DeFi. Without further ado, let’s dive in.
What is DeFi?
DeFi stands for Decentralised Finance. This is a term used to refer to financial applications built on the Blockchain platform.
DeFi guarantees the following characteristics:
- Permissionless (rough translation: without permission): open to everyone, for any area.
- Transparency: all activities are public.
- Trustless: does not depend on the beliefs of the parties involved.
Benefits of Defi
With DeFi, anyone anywhere can borrow, lend, deposit or trade blockchain-based assets using a digital wallet, which they can easily download without having to Register with your bank or broker. If they wish, they can use even more advanced financial operations – leveraged trading, derivatives, synthetic assets, underwriting, market-making – while always retaining complete control for their property.
An example of Defi: You can use dollars to buy a stablecoin (a digital currency that simulates the value of a currency) on a decentralized exchange and transfer the stablecoins to a lending exchange to earn interest.
DeFi protocols adhere to the same key criteria – in particular permission lessness and transparency – like the values found in Ethereum, the open-source decentralized software platform that forms the infrastructure. layer for most other decentralized applications.
Permissionless: for both end-consumers and developers: DeFi applications can serve anyone in the world with an internet connection, regardless of ethnicity, gender, age, wealth or Political parties. In addition, any developer team can build on these platforms with confidence, knowing that no authority has the power to revoke their future access.
Transparency refers to the inherently verifiable nature of DeFi platforms: Since the software is always available from source or open-source, all underlying code is available for review and all associated capital is available. opened for inspection. All transactions are recorded on a blockchain, allowing for easy review of specific transactions or building data discovery businesses for investment (or even investigative) purposes.
DeFi’s risk
Defi risks, of course, also include all blockchain risks such as:
Security issues
Let’s say you have a betting contract with your friends on a match between team A and B. Agree that the contract is very confidential, but input and output can be manipulated. fake. For example, the input of the contract is the user’s wallet, the match result information must be obtained from some source (for example, from website X) and this website is hacked and edited.
Immutability: Risk if the wrong contract
Not being able to change a transaction or a contract can often cost you money. For example, if you enter the wrong or wrong recipient information, the information in the contract you can no longer refund the transaction. (Bitcoin has a program that checks the recipient’s address to make sure you don’t type it wrong. However, human errors often happen, as we send to A, but enter the wrong name B. With banks, they can cancel transactions, but with cryptocurrencies, transactions can never be cancelled – human error is very common in transactions)
Not recognized and protected by law
This is probably the biggest risk if you invest in cryptocurrencies. Regardless of who you deal with and with how much money. If you encounter a scam, you are not protected by law
What is passive income in cryptocurrency?
Cryptocurrency is a hugely profitable field at the moment. Anyone who participates in the cryptocurrency market wants the currency they are holding to increase in value, so there will be a number of people who choose to hold money for a period of time and expect that coin to be appreciated. These people are called HODLER, however, HODL alone does not make a profit. Therefore, the following article will introduce 3 ways to help create more passive income from cryptocurrencies:
Centralised lending
These are basically lending services that provide deposits and loans on a centralized platform. The person with a certain amount of idle money will lend crypto by sending money to these services and receive interest on those funds.
These services will hold your cryptocurrency and lend it to you to generate interest. Daily, interest will be deposited into your account.
Of course, the main difference here is that all these crypto loans are very collateral heavy. That means that the amount that the borrower can borrow is always less than the value of the total amount of cryptocurrencies loaned.
Unlike a term deposit in a bank account, with most lending platforms you have access to your funds at any time.
Decentralised lending
In DeFi Lending, you have a set of smart contracts. These smart contracts will adjust interest rates based on supply and demand.
Of course, the important thing to understand about DeFi is that you are always in full control of your keys. No platform can restrict you from earning interest and no KYC (Know Your Customer) policy.
All you need is a Web 3.0 wallet that can connect to lending dApps and you can start earning interest.
Liquidity mining and yield farming
Liquidity mining is the activity of providing liquidity to a protocol, and then the protocol is used to facilitate decentralized transactions of various crypto assets.
You can deposit USDC & ETH into the USDC-ETH Pool and then you will receive what is called a “Liquidity Provider” or LP (Liquidity Provider) tokens. These tokens then represent your “stake” in the pool.
These fees vary based on the volume of transactions that are going through the pools. Another thing that you must consider when providing liquidity to AMMs like this is the risk of losing money.
Yield Farming can be quite complicated. However, there will be protocols and platforms that allow you to automate it.
Conclusion
It can be seen that Decentralised Finance is the key to opening up a more open and transparent financial system for users. However, DeFi still has a long way to go. Fixing existing vulnerabilities such as liquidity or security is essential for the dApp ecosystem to have a larger user community.
