One of the ways to achieve financial freedom is for your passive income stream to cover your daily living expenses. But many people get confused with passive income as sometimes the lines get blurred or people are just using the wrong terms for the wrong things.
What is Passive Income?
In traditional finance, many would deposit their money into bank savings accounts to earn some interest, which is considered passive income. Passive income is your money earning you more money without you doing anything. You could be sleeping, eating, exercising, or traveling and your money still earns an income for you.
Passive Income = Your money making you more money
But ideally, the passive income stream has to be something that can support a part of your living expenses or bring you additional money that you can use for investments that can further grow your money.
Like traditional finance, the crypto space has different Decentralized Applications (Dapps) under the Decentralized Finance (DeFi) category that allows users to earn some form of passive income.
ICYMI, we have covered some methods of earning extra income with cryptocurrencies that do not require the use of DeFi. Those methods can give you additional income, however, you will need to put in some effort to earn that income.
In this guide, we have put together some DApps in the DeFi space that you can use to earn passive income.
What is DeFi?
In short, DeFi is Decentralized Finance where users are able to Decentralized Applications (Dapps) for financial products and services. This includes Decentralized Exchanges (DEXs), Lending Platforms, Yield-Farming, Yield Aggregators, Liquid staking, Insurance, and many more.
What is Staking?
One of the easiest ways to start earning passive income with DeFi is through Staking, which is a reward system for the Proof-Of-Stake Consensus mechanism. Very much like your traditional bank account where you deposit fiat and receive a small interest. With DeFi staking, you can deposit the supported crypto and you receive a certain APY (Annual Percentage Yield) which can range between 1-10% depending on the Dapps and the crypto that you are staking.
For example, you can stake AXS on the Axie Staking Platform which will give you 62% APY back in AXS tokens. This means if you stake 100 AXS, you will receive 62 AXS after a period of 1 year. Based on the current price of $14, this would mean a $1,400 investment in 100 AXS tokens can give you $868 in AXS tokens provided AXS prices remain at $14, if the price of AXS increases, your tokens will be worth more, and if the price of the token falls, then your tokens will be worth less.
What is Liquid Staking?
On some DeFi platforms like Lido.fi, they provide liquid staking for tokens like ETH, SOL, MATIC, DOT, and KUS. Liquid Staking allows you to delegate your tokens to a service that does the staking for you, but you still have access to your funds during the staking process.
For example, if you are staking 10 SOL on Lido.fi, you will receive 9.48 stSOL. 1 stSOL is equal to 1.0544 SOL because you get a 5.4% APY on SOL with Lido.fi, stSOL acts like a receipt that you have staked 10 SOL with Lido.fi and you can then redeem your SOL back by removing your tokens from Lido.fi.
However, stSOL does have its use cases and we will talk about it in Liquidity Mining.
What is Liquidity Mining?
As we covered in Liquid Staking, by staking SOL with a provider like Lido.fi, you will receive stSOL which acts like a receipt for redeeming your SOL from Lido.fi. We can also use stSOL in another Dapp like Saber by creating a stSOL-SOL Liquidity Pool(LP) token to get additional yield.
Liquidity Mining is a process where crypto holders lend their assets to Decentralized Exchanges (DEXs) for liquidity and in exchange receive a reward in a crypto asset.
To start Liquidity Mining, you will need a token pair, in this case, we can use stSOL from Lido.fi. By pairing stSOL with SOL tokens in a 50:50 ratio, you will receive a stSOL-SOL LP (Liquidity Pool) token. By providing the LP tokens to Saber for their stSOL-SOL trading pairs you will get an additional 0.05% in stSOL-SOL LP tokens.
With Liquidity Mining, there is always a risk of Impermanent Loss (IL). This happens when the crypto that was deposited into the LP token gains or loses too much value, which causes a loss because the yield earned is much lesser than the price growth of the token.
What is Yield farming?
Yield Farming is very much similar to Staking but one of the main differences here is the rewards that you receive for your tokens staked. In staking, you will receive the same token, if you stake USDC, you receive USDC as interest. In Yield Farming, you could be staking USDC, but in return, you might be getting a different token, more often than not, it’s the native token of the platform.
For example, depositing USDC in a Dapp like Tokemak will yield you 6.69% APY(APY is fluid and will change from time to time), this reward is not given in USDC, instead, it is given in Tokemak tokens.
Which DApps should I use?
Depending on a few factors like risk tolerance, strategy, and experience, will point towards a Dapp that will suit your investing style. For users who are new, things like Staking might be a good starting point in your DeFi journey. For more experienced users, mixing and matching some of these Dapps can help you maximize your gains by pairing your tokens with different Dapps.
Risk of DeFi
As with any type of investment, DeFi carries its own set of risks as well. Some of these risks include hacking, smart contract bugs, or even regulatory risk by governing bodies. Therefore before using a Dapp, it would be wise to look up some reviews and do some research before depositing any money into the platform.
Disclaimer: The information and publications in this article are not intended to be and do not constitute financial advice, investment advice, trading advice, or any other advice or recommendation offered or endorsed by Coins.
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