Smart Ways to Earn Passive Income Through DeFi Pools

If you’re holding or investing in crypto, there are plenty of ways to earn passive income, thanks to decentralized finance (DeFi) pools. Whether it’s through liquidity pools, lending pools, NFT collateral, staking, or yield farming, there are plenty of options for you to generate some extra income.

Generally, to start earning passive income with DeFi, you’ll need some crypto and a good wallet. The best DeFi wallet not only stores cryptocurrencies, NFTs, and tokens, but also will provide access to DeFi apps and pools. Ideally, it should be convenient and intuitive to use. The wallet should also be compatible with the coins and tokens you intend to invest in.

Decentralized exchanges (DEXs) do not rely on intermediaries or centralized groups. Instead, they utilize smart contracts and automated market makers (AMMs) to handle trades and determine fair prices. For AMMs to work, there has to be adequate liquidity in the market, but this liquidity doesn’t naturally exist in a decentralized exchange. That’s where liquidity pools come in.

Instead, they use smart contracts and something called automated market makers (AMMs) to handle trades and set fair prices. But for AMMs to work, there needs to be enough liquidity—basically, enough crypto in the system to keep things moving. That’s where liquidity pools come in.

With liquidity pools, investors lock in their crypto (usually equal amounts of two different assets) to help power trades on a DEX. In return, they earn rewards. As a general rule, investors do not need to commit to a fixed timeframe and can remove their assets from the pool at any time, but there are incentives to leave the assets in place.

Yields vary, but a common setup is receiving a payment for each transaction. For example, you might receive 0.2% of any transaction that uses your tokens. The fee is paid in liquidity pool tokens. These can be sold or traded like other tokens, but keep in mind that liquidity pools have minimum investment amounts.

Even if this isn’t the case, there are fees associated with depositing and withdrawing that can make small investments unprofitable. There are other potential pitfalls to this type of investment, which we’ll go over in a later section.

Yield farming, also known as liquidity mining, is another earning method that utilizes liquidity pools. You invest cryptocurrency in a liquidity pool, then when you receive the yield, you reinvest those earnings back into the pool to grow your returns over time.

If you’re farming stablecoins, you might see returns around 10% a year. However, riskier crypto assets can offer even higher yields, sometimes even double that, but they come with more volatility and require a more hands-on approach.

Another popular form of DeFi pool is a lending pool. A lending pool enables potential investors to borrow cryptocurrency, putting up another coin or token as collateral. The pool is stocked with cryptocurrencies provided by investors.

The borrower pays interest based on the amount they borrow, and that fee is shared between the platform and lender. Some platforms split the fee exactly with the lender, and some share the entire amount. On average, you may earn around 5% APY, potentially a little more, using lending pools, but the amount does vary depending on platform and market conditions.

Lending pools require that the borrower puts up collateral to borrow other currencies. Typically, this means putting up another coin, but you can utilize other crypto assets, such as NFTs.

NFTs can be worth a lot of money, but to unlock their value the holder typically has to sell the asset, which many collectors and investors do not like to sell too early. But with NFT collateral borrowing, you can use an NFT as backing to borrow other coins like Ether or Doge. If you think those coins will go up in value while you’re borrowing them, this strategy could turn your NFT into a tool for making a profit, without giving it up.

Staking cryptocurrency is another means of passively generating income. The owner essentially uses their cryptocurrency to validate transactions on Proof of Stake networks. You can keep your assets, but keep in mind they are still prone to the same potential price changes while earning returns based on the amount you stake.

Ethereum is a popular staking coin, but it only yields around 2% per year in rewards. Other coins can earn up to 15% or more, depending on the currency, the period the coin is staked, and the platform used for the staking.

Cryptocurrency is often viewed as a hands-on investment tool since many elements are decentralized. However, this decentralization also allows for passive income opportunities that have several benefits.

You should research any potential investment opportunity heavily. Ensure you understand the method of investment, the individual program used, and the requirements. Once you’ve done this, though, your role is minimal compared to active investment strategies. It may take more work than simply depositing your crypto and raking in the returns, but you shouldn’t have to dedicate more than a few hours every couple of months.

Cryptocurrency pools benefit from the depositing of coins and tokens, and they can offer generous returns, typically much more than you can achieve by simply putting your money in a savings account. Returns do vary, though, according to the type of investment and its performance.

Using staking pools, liquidity pools, NFT collateral borrowing, and dividend cryptocurrency investment can give you a highly diversified portfolio. Diversification is important to long-term investment because it minimizes your risk and helps combat peaks and troughs in prices.

An increasing number of people hold cryptocurrencies in the hope of making long-term returns. There are considerable risks of impermanent loss using investments like liquidity pools, but if you are just going to sit on a portfolio of cryptocurrency anyway, you already face much of the same loss. You might as well put that portfolio to work and generate passive income.

The crypto industry offers a lot of profit potential for investors, but it also comes with risks. A lot of these risks are associated with the volatility of the market, as well as the prevalence of scams in the industry.

These passive income generators rely on smart contracts to operate. Smart contracts can experience bugs and malfunctions, which means cryptocurrency can be lost. This can be expensive, and users need to ensure the validity and history of any pool or other platform they use.

The value of crypto assets changes constantly. Impermanent loss is the difference between the returns an investor makes compared to the returns they could have made if they had just held the assets. It is called impermanent because the investor could hold their position and the cryptocurrency rates might bounce back and return their money. The loss is only permanent once the investor exits their position.

Cryptocurrency has shaken up the world of finance, changing how people invest and store value. Thanks to smart contracts and the constant demand for liquidity, there are now plenty of ways for investors to earn passive income, like through liquidity pools, lending pools, and other DeFi tools.