Turn Your Crypto Holdings into a Passive Income Generator
Decentralized finance (DeFi) is an ecosystem built on the blockchain that provides financial DApps and smart contracts that have the potential of revolutionizing the conventional financial system (Centralized Finance) by replacing those centralized services with trustless protocols.
The spectacular attribute of DeFi is the absence of a middleman which in turn translates into low transaction fees, full access and total control of funds by users. As well as free access to these decentralized applications (DApps) irrespective of location where a user lives. What was mere imagination some years ago is now a reality as we now have decentralized exchanges, lending platforms, tokenization platforms, prediction markets, payment platforms.
DeFi presents opportunities that will transform centralized financial models. On DeFi platforms, there will be better interest rates, capital protection, and more investment options.
In this article, we will take a look at ways one can leverage on DeFi services to transform Cryptocurrency holdings into passive income generators.
Yield Farming and Liquidity Mining
Isn’t it better to earn money with your crypto holdings instead of leaving them idle in your wallet?
Yield farming makes that possible.
In yield farming, people lock their cryptocurrencies and receive rewards according to the quantity of coins locked.
What exactly is the impact of locking cryptocurrencies in the ecosystem?
DeFi solves the problem of liquidity through liquidity providers (LP) who pool their funds together to create liquidity in support of a DeFi protocol. These liquidity providers (LP) are individuals who decide to lock their coins for a reward. In other words, they are yield farmers or liquidity miners.
Yield farming is a symbiotic relationship in the sense that the two parties — the DeFi protocols and the liquidity providers like you or me — benefit from each other. Yield farmers provide liquidity to support the protocol, in return, they receive reward for supporting the system. The reward yield farmers get usually comes from trading fees generated by the underlying DeFi platform.
Binance smart chain and Ethereum protocols are two known protocols that support platforms for Yield farming using Binance smart chain (BSC) token and ERC-20 tokens respectively.
How Yield Farming Works
Yield farmers are instrumental to the structure that powers platforms that use automated market maker (AMM).
Yield farmers otherwise known as Liquidity providers deposit funds into a liquidity pool which powers a marketplace that offers users the platform to lend, borrow, or exchange tokens.
To access the above services, a user pays fees which are used to reward liquidity providers to participate, according to their share of the liquidity pool.
Besides the fees, another incentive liquidity providers sometimes receive can be the distribution of a new token which is usually governance token of the protocol. Yield farming is a good passive income stream for crypto holders but one risk every yield farmer should be aware of is impermanent loss.
Impermanent loss occurs when the price of deposited assets in a liquidity pool changes compared to the price when they were deposited in relation to the other asset in the pair.
If the change in price is big, it means more exposure to Impermanent loss. What this loss means is less than what was deposited at the time of withdrawal. The loss is termed impermanent because, when the price of the assets returns to the price at the time they were deposited, the loss vanishes.
One of the ways of circumventing Impermanent loss is using tokens with low volatility (stablecoins) for yielding farming but their annual yield is usually smaller than those with high volatility.
To understand how staking works, it is pertinent to understand the consensus mechanism that it comes from; and that is Proof of Stake (PoS) mechanism.
The Proof of Stake (PoS) concept is a type of blockchain consensus mechanism that allows a person to mine or validate block transactions according to how many coins he or she holds. This is in contrast to Proof of Work (PoW) concept in which miners or validators compete to solve a complex computational puzzle for a reward.
How Staking Works
From the users perspective, staking works almost the as yield farming. Like with yield farming, staking entails locking one’s Cryptocurrency holding for a reward.
The difference between staking and yield farming is that, in yield farming, yield farmers normally deposit two coins/tokens in the ratio of 50:50 and in return, the user receives Liquidity Pool (LP) Token which is staked in the liquidity pool but in staking, an individual can stake a single coin/token into a staking pool for a reward.
In staking, impermanent loss is not an issue because anytime a user removes his or her stakes, he or she receives the same number of the coins staked irrespective of the difference in price of the asset as at the time of withdrawal and the time of staking.
People who stake stand the chance of earning through incentives from the protocol and increases in the price of the asset staked, without the risk of impermanent loss.
Platforms that offer DeFi Applications
In its early stage, all the popular DeFi protocols were built on Ethereum protocol and this meant that passive income in DeFi was only available on Ethereum ecosystem.
Over time, there was need for an alternative as Ethereum network was no longer cost effective as transaction fees skyrocketed to an unbearable height and there was a scalability issue.
Binance Smart Chain (BSC) was launched at the time a better alternative to Ethereum protocol was needed most and up till now, it has lived up to the expectations.
Binance Smart Chain ultimately solves the issue of exorbitant gas fee often encountered on Ethereum network. By reducing the fees to its minimum and it has created more room for more projects to build on the chain seamlessly (Scalability).
DApps such as Pancakeswap, Farmswap, BnEx, Burgerswap and many more which are built on top Binance Smart Chain provide platforms where crypto holders can simply turn their long term crypto holdings into passive income generators.
You can access all of them from within the Trust Wallet DApp browser.
Beefy.finance is a new DApp on Binance Smart Chain that optimizes Yield farming across multiple platforms.
Beefy.finance is a yield optimizer that provides automatization that allows investors to interact with pools, projects, and other yield opportunities without having to constantly make decisions and take manual actions. This DApp allows users get higher and safer returns with less effort or technical knowledge.
On the Ethereum protocol, DApps that offer these opportunities include; Uniswap, Balancer, Synthetix, MakerDao, Compound, and many more. Yearn.finance is the Beefy equivalent on Ethereum.
How to access DeFi DApps
Most of the available crypto wallets allow users to access DApps through their Decentralized Application search sections.
Among these wallets, Trust Wallet stands out as it supports most protocols on Binance smart chain and also some on Ethereum protocol. Trust Wallet has both Android and iOS apps with user-friendly interface and built in DApp browser.
The revolutionary nature of DeFi is not only limited to removal of unnecessary third party interference in finance. It is bringing more opportunities such as passive income generation in a better, unbiased and simplified way that will draw more people into the ecosystem.