By investing in the right protocol or pool, you can create a source of passive income and earn interest in various crypto tokens. For example, putting money into the SAVAX pool on Benqi Staked AVAX yields 5.53% in base assets with a 15-day unstaking cooldown. It is an interesting way of making money right here and right now.
It is true that investing in the DeFi ecosystem requires a hands-on approach and some consistency on the part of an investor. However, you can create a balanced portfolio that outperforms all traditional asset classes by a large margin. Let’s explore some of the interesting investment options available to crypto investors.
The idea of receiving interest in cryptocurrency investments is relatively new. In 2008, when the concept of Bitcoin finally turned into reality, people were excited about each next development. Buying two pizzas for 11,000 BTC was newsworthy and praised. In hindsight, it was one of the biggest investment blunders in history.
Today, price appreciation is not the only way of gaining by investing in the crypto market. The DeFi sector has a variety of interesting tools. One of them appeared after Ethereum switched to a new consensus mechanism.
Proof-of-work was the default option for a decade. Satoshi introduced the novel concept to the world with his ultimate creation Bitcoin pioneering the PoW mechanism — an army of machines calculating sophisticated equations — as a reliable way of confirming the addition of new blocks and verifying transactions. However, the whole system was hungry for energy. At some point where mining accounted for roughly 1% of the world’s energy consumption! Buterin saw this as an opportunity decided to switch Ethereum’s PoW mechanism to the, now hugely popular, PoS.
Instead of massive computational resources, the PoS mechanism uses stakeholders as validators. To become a validator and run one of masternodes responsible for the addition and confirmation of new blocks in the chain, an investor must lock in a solid chunk of their holdings (32 ETH). All stakeholders are compensated for their contributions with the current interest rate on ETH staking hovering above 4% which is in line with the expected ROI on US Treasury bonds (4.11% in October 2024).
Ethereum also introduced more flexibility and freedom to the DeFi ecosystem by creating an environment suitable for building and expanding. The introduction of novel financial mechanisms significantly shortened the investment horizon for crypto holdings improving returns and allowing investors to utilize a wide range of hedging instruments to reduce risks.
Contemporary investors can easily access a rich selection of protocols and pools promising incredibly high returns. However, the biggest number does not always mean the best option.
The DeFi ecosystem is infamous for its difficult onboarding and sharp learning curves that often intimidate newcomers. One of the reasons for slow adoption rates across the globe is the novelty of blockchain technology and unfamiliar interfaces that allow users to manage previously unseen digital assets that behave wildly differently from traditional asset classes like real estate, bonds, stocks, and commodities.
Below are simple explanations of APR and APY:
The vast majority of decentralized protocols use APYs when displaying potential yields. You must be aware of the fact that some protocols automatically compound interest while others must be interacted with daily or through auto-compounders.
In general, 5% APY is better than 5% APR. The difference becomes apparent over several years but, even of shorter spans, it is noticeable if you operate with a large portfolio.
The journey of a typical investor starts with acquiring some crypto. For that, you will need to learn several tools:
Note that DEXes are numerous yet do not represent the diversity of the decentralized finance ecosystem with many other interesting platforms offering a wide range of investment opportunities to crypto holders. Below are some interesting options and excellent Dapps you can use to earn cryptocurrency passively in the near future.
Lending is the second biggest sector of the DeFi ecosystem with all tracked protocols in this category representing roughly 30% of the overall TVL or $41.5 billion across 463 different platforms. The biggest player here is Aave which is a massive platform with over $17.5 billion locked in 145 pools averaging 3.42% APY. The protocol is available on 13 chains including Ethereum, Polygon, Arbitrum, and many others.
Interest rates here are relatively low yet it is one of the best places to go if you are interested in efficient risk diversification. All loans must be collateralized by over 100%. For instance, you can take out a loan in ETH for a 2.68% APY with just 80.5% LTV (you can borrow no more than 80.5% worth of ETH in the principal currency). Lending is considered very safe and highly reliable for liquidity providers.
Below are some of the best protocols and pools in the lending category:
These protocols have relatively low interest rates and focus primarily on layer 1 tokens like BTC, ETH, SOL, and others. However, they also offer a high level of safety and stronger protection from various risks than other types of projects.
The number of active DEXes in the DeFi ecosystem is close to 1,200. Decentralized exchanges keep the whole sector going and offer investors the necessary level of freedom and flexibility to interact with a wide range of different assets. The fierce competition for liquidity makes it possible for liquidity providers to find impressive deals and earn a lot by simply providing their tokens to liquidity pools.
Here are some great DEXes that offer high APYs and rewards to their users:
Providing liquidity to DEXes is a good way to earn money without actively participating in the market. However, you should be ready to switch exchanges whenever you see a better deal on another platform.
Many investors are interested in receiving payments just for holding their assets without using them in any meaningful way. This is a passive strategy that can pay off for some coin holders who are interested in sitting on their assets for a while. Cryptocurrency dividends are rewards paid by protocols for keeping assets in wallets or in trading accounts.
Some of the best options are offered by centralized exchanges like Coinbase and Kraken. However, you can also find other interesting deals. Below are some examples of such investment setups:
Note that these payments are considered realized gains for the purpose of crypto taxes. Dividends are transactions directly to your balance on a platform that likely abides by KYC and AML practices. It reports financial information to the IRS and other relevant taxation authorities. It is hugely important to never forget about taxes when it comes to dividends from crypto holdings.
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