Dec 15, 2020 - 1 day read

Earning Passive Income with Ethereum DeFi

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Via Medium

The global pandemic the world has been dealing with since 2020 coupled with a hefty rise in the value of crypto assets within the last couple of months has ushered in a surge of interest in passive…

The global pandemic the world has been dealing with since 2020 coupled with a hefty rise in the value of crypto assets within the last couple of months has ushered in a surge of interest in passive income. Now more than ever, people are seeking viable ways to earn a steady income that does not require them to actively spend time or labor tending to it.

The cryptocurrency world has introduced us into a limitless society of carrying out safe and trustworthy transactions. As years roll by, many upgrades are brought into blockchain technology for its advancement and that of the human race. Let’s take a look at one of these advances in the blockchain industry.

What is passive income?

A passive income is any income generated from a source in which you do not need to invest your time and energy just as you do towards full-time jobs. Most times, you don’t even need to monitor the source. You simply accumulate your earnings as time passes by. This can be widely seen in the trading of stocks, and recently cryptocurrency has joined the wagon.

What is DeFi?

DeFi in full is known as “Decentralized Finance” formerly known as Open Finance. Decentralized finance is possible due to the application of blockchain technology in the financial industry. The traditional finance systems require the use of human intermediaries and government entities to regulate or broker deals. Blockchain technology sees these intermediaries as a burden to the finance system and makes the system less efficient. Therefore with DeFi, customers are given the control and freedom of the financial industry as it eliminates all forms of third-party interference in the system.

How to earn Passive Income with Ethereum DeFi

Ethereum is a hotspot for every form of decentralized finance. This can be attributed to the ease to program its blockchain as compared to other complex cryptosystems. Other cryptos with these capabilities include Polkadot, Cardano, etc. Here are some of the top ways to earn passive income with DeFi:

  1. Yield Farming

Yield farming has been generating a lot of interest lately which may be due to the lockdown and the need to earn money during the lockdown.

Yield farming is more like the usual case of investing money into some company or business or even investing in some government bond in which you expect returns later.

Yield farming is a system whereby the investor, known as the yield farmer, borrows out his or her cryptos to people skilled in the art of crypto trading through smart contracts. These skilled people are expected to trade with the crypto offered by the yield farmer and return them within a stipulated time to the yield farmer along with the agreed interest.

Though this might sound easy, it is a very tough venture. The yield farmer is expected to swim between various yield farming platforms in search of better interest rates to invest his or her crops. An individual has to be very skillful in the market before venturing in as it is a very risky adventure.

2. Liquidity Minning

Decentralized exchanges (DEXs) are platforms through which crypto exchanges can carry out transactions or trading amongst themselves without the interference or control of a third party or government entity. For these DEXs to be able to carry out these services, they need liquidity. The liquidity miners are the individuals who provide this liquidity to the DEXs for them to smoothly run their transactions. The DEXs now reward the liquidity miners for providing them with capital. For example, after a liquidity miner provided capital to a DEXs when a user carries out transactions or exchanges on the platform, the users are charged a fee for these transactions. These transactions are thereafter shared amongst the miners that provided liquidity to the platform. The liquidity miner basically provides the user with a suitable ecosystem to carry out transactions and exchanges while earning some extra cash. Example of platforms that provide these services includes Uniswap, CoinBase, etc.

Other means of earning passively with Etherium includes;

  1. Hodling

Hodling is an almost risk-free and very effective system of earning passively with Ethereum. Hodling involves buying cryptocurrencies when the prices go down (dip) then holding the coins for some time until the price comes up to a favorable value. An example of this is buying Ether around March 2020 when it was at $90 and holding up to January 2021 when it hit more than $1400. Making a profit in Hodling might take some months or years.

In as much as this practice is very effective, it also has its risks. There are thousands of altcoins in the market, most attributed to scams or fraudulent practices, some tagged as shit coins (values are very volatile). An individual can invest in these coins and end up losing everything as the coins may become worthless in the long run.

2. Staking

This is a very important part of blockchain technology. When transactions are carried out, the blockchain needs validators to verify these transactions by solving mathematical problems. For an individual to serve as the validator of these transactions, they need to stake.

Staking in Ethereum involves locking about 32 ETH in a safe so as to be certified as a validator. The validator is thereafter expected to process and verify transactions on the Ethereum blockchain. The validator, in turn, earns a particular amount of Ethereum as they verify these transactions.

Conclusion

There are some avenues to earn income passively through Decentralized Finance on Ethereum. Just as there are plenty of rewards, there is also a high amount of risk attached to these ventures. Before an individual chooses to venture into earning through Decentralized Finance, they are expected to carry out thorough research on these platforms in which they want to invest their funds, checking if they are fraudulent or scam sites, study their protocols, and also pay close attention to the movement of prices.

Most importantly, an individual who wishes to venture into Decentralized farming is always advised to stake what he or she can afford to lose.