Decentralized finance (DeFi) has become a buzzword thanks to financial innovation. DeFi is an umbrella term used to define various financial products and services that run on the blockchain, and now encompasses everything from payment and money transfer services to lending, borrowing and trading. . It is a combination of technology and business model that addresses existing problems in the financial markets.
To understand what decentralized finance is, we must first understand what it is not. Unlike traditional finance, which operates between savers and borrowers, DeFi seeks to eliminate third parties. The technology achieves this by applying a blockchain-based trust mechanism, enabling peer-to-peer (P2P) transactions without paying fees to third parties such as banks.
Here’s everything you need to know about earning passive income through DeFi.
“Staking” is the oldest and most basic way to earn cryptocurrencies. This is a mechanism that allows users to earn rewards by locking assets. In decentralized finance, staking can be used to earn rewards for lending and operating a decentralized exchange. For example, if you deposit some Ethereum (ETH), after a few months you will receive more ETH rewards for depositing and supporting DeFi exchanges.
But why get more tokens? Well, there’s a reason for staking tokens. “Staking works on a proof-of-stake (PoS) consensus mechanism, ensuring that validators or “miners” tasked with validating transactions do not manipulate the system. If so, they could be penalized by losing part of their stake,” decentralized financial platform EasyFi Network wrote in a statement to indianexpress.com.
Note that all transactions on the blockchain ecosystem must be verified by a “validator”. In exchange for validating transactions, they are given “blocks” that award tokens for their contribution to the security and decentralization of the network.
Passive income can be earned in many ways, one of which is lending and borrowing digital assets on DeFi platforms.
For example, the EasyFi network offers digital assets for renting and renting. But why is this beneficial? The platform, if it owns Ethereum, either lends it to the platform for a certain return, or exchanges ETH for wrapped Ethereum (wETH) and converts it to It states that it can be used as part of DeFi protocols to earn annual yields. (APY) 0.5 percent to 8 percent. You can also borrow up to 75% of the value of your cryptocurrency in exchange for a secured loan. These assets can then be traded or deposited into DeFi protocols to generate additional passive income.
create your own token
Creating your own token is a way to make money in decentralized finance. Creating your own token and allowing people to use it as a way to profit on their assets is a great use case for decentralized finance. Some have created tokens with unique functions, such as acting as voting rights within organizations. These people can make money by providing liquidity to other tokens. Anyone looking to exchange tokens that they own but cannot easily dispose of can exchange them for your tokens. If the tokens are accepted by other decentralized exchanges, those exchanges may pay token holders a small percentage of their profits.
Investing in DeFi is now enabled by yield farming, a method that works similarly to staking. However, unlike staking, it is based on what is called a Liquidity Pool (LP).
By locking assets, you can earn what are called LP tokens, which you need to invest in DeFi products. You can choose to keep your LP tokens or exchange them for other cryptos to earn cuts. The final payout will be determined by the monetary value of the tokens invested in the liquidity pool.
Smart contract development
Smart contract development allows you to create customized use cases for blockchain technology. As you develop smart contracts and deploy them in a decentralized network, you can generate revenue by charging developers for using their code.
“There are several ways to make money with smart contract development. You can also charge a fee.Staking is a way to make money on smart contract development.When you develop a smart contract that allows you to earn a portion of the profits generated by other decentralized applications, you do staking. ,” the platform explained in a statement.
The last word
All forms of investment involve risk. Blockchain is an nascent technology and therefore comes with varying degrees of risk. In DeFi, some of the major risks can take the form of rag-pull fraud, but they can also arise outside the DeFi space.
It is very important to check the reliability of any DeFi platform before investing as you may lose profits if the market is bearish. DeFi revenues are directly proportional to the number of tokens received, so they can suffer losses if the market is volatile. DeFi leaves no room for opportunists. As decentralized finance grows, individuals will have a fair chance to participate in it, and wealth creation opportunities that were previously restricted to the rich will abound.