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2 Reliable Ways DeFi Can Help You Generate Passive Crypto Income

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Decentralized Finance is rapidly developing at a remarkable pace in 2024. This blockchain technology offers different crypto financial services to users. These services include lending, borrowing, trading, and investing through blockchain networks. 

It helps individuals make fast transactions anonymously without intermediaries. Also, it reduces the transaction fees for making payments. DeFi is evolving with time with the advent of blockchain. 

Now, it is straightforward to earn crypto rewards through staking and yield farming. These methods require minimal active involvement from users. In this article, we will tell you how these two DeFi passive income methods enable you to make your crypto assets work for you:

What is Staking in Crypto?

Staking is a process for participating in the DeFi platform’s operations. Users ought to lock up (or) their crypto holdings to validate transactions on a blockchain network. They receive rewards for staking their crypto holdings with a DeFi platform. 

Investors earn additional cryptocurrencies for their contributions. Staking crypto is easier than the crypto mining process. An investor can begin the staking technique with minimal crypto holdings. Cardano (ADA), Polkadot (DOT), and Solana (SOL) are the top coins for staking.  

About Proof-of-Stake (PoS) 

Proof-of-Stake (PoS) is a consensus mechanism for staking your crypto holdings. Also, it helps in validating transactions in blockchain networks. This process doesn’t require users to solve complicated mathematical problems through computational energy. A validator creates new blocks to validate transactions based on the number of coins they hold. 

They stake their crypto holdings as collateral. This method is more energy-efficient than the traditional methods. Also, it is accessible to a broader range of participants. A crypto holder can easily access PoS with a smaller amount of capital.

Steps for Staking Cryptocurrencies

Below, you can check the complete process to stake your crypto holdings with a DeFi platform:

First, you can select a PoS cryptocurrency that is consistent with your investment needs.
Then, choose a crypto wallet that helps the staking alternative for your chosen cryptocurrency.
If you don’t have sufficient funds to run your validator node, you could be a part of a staking pool to combine with other assets. 
Now, look for staking pools associated with your selected cryptocurrency. Consider the fees charged by the pool.
Follow the platform’s instructions to lock your coins for staking crypto
After completing the stake period, decide whether to re-stake your rewards to compound your earnings.
Keep track of your staking performance. You can adjust your strategy as needed.

    Potential Returns and Risks

    1. Returns: Staking rewards vary widely but can range from a few percent to over 20% annually. It depends on the network and the amount staked.
    2. Risks: The primary risks include the cryptocurrency market’s volatility, the potential for slashing (penalties for validator misbehavior), and the liquidity risk of having your assets locked up.

      What is Yield Farming?

      Yield farming is a DeFi strategy for providing liquidity to decentralized exchanges (DEXs). Participants get rewards in the form of liquidity tokens. Users can trade these tokens on different platforms. Yield farming strategies continue to evolve to provide the best returns to the users.

      Now, different lending platforms also provide yield farming options. Crypto holders deposit their cryptocurrencies in return for providing liquidity. They receive rewards in the form of additional tokens.

      The Process of Earning Rewards

      1. Choose a DEX platform that supports liquidity pools. Ensure the platform supports the tokens you wish to deposit.
      2. Deposit a pair of tokens (e.g., ETH and DAI) into the pool.
      3. Receive LP tokens representing your share of the liquidity pool. 
      4. Stake these LP tokens on the platform to earn rewards. 
      5. Users who trade or borrow from the pool earn a portion of the transaction fees.

        Risks and Considerations

        1. Impermanent Loss: When the price ratio of the tokens in the pool changes significantly, you may suffer impermanent loss. This occurs because your LP tokens represent a fixed value of both tokens and if their prices diverge, you lose compared to simply holding the tokens.
        2. Smart Contract Risks: DeFi platforms are susceptible to hacks. Assessing the security measures for participating in crypto yield farming is important. 
        3. Platform Reliability: Some projects are experimental or short-lived. Stick to established platforms.
        4. Market Volatility: Crypto prices can swing wildly, affecting your returns.
        5. Exit Strategies: Have a plan for when to exit a pool or switch to better opportunities.

          Case Studies of Successful Yield Farming Platforms

          The diversity of platforms is expected to make DeFi more accessible to users worldwide. Below, we have mentioned the details about the best yield farming platforms:

          1. Yearn Finance (YFI): Yearn Finance is a pioneer in optimizing yield for crypto buyers. They provide the best returns to their users for providing liquidity to them. Their governance token, YFI, has been instrumental in rewarding users. 
          2. Compound Finance: Compound Finance is another decentralized lending platform for borrowing cryptocurrencies. Also, their COMP token incentivized participation by means of giving lenders and borrowers a say within the platform’s governance.
          3. Uniswap: Uniswap is a decentralized platform with an automatic marketplace maker (AMM) version. Users offer liquidity to their liquidity swimming pools to earn passive income. The launch of the UNI governance token rewarded customers. Also, it helps users participate in the community. 
          4. Aave: Aave is another decentralized borrowing and lending platform for users to deposit crypto cash into liquidity pools. It gives several lending pools with exceptional features. The platform’s native token gives holders with discounted fees. Aave has added capabilities like flash loans.

            Conclusion

            Staking and yield farming are two widely-used ways to make passive profits in DeFi. It is essential to consider the risks associated with different strategies. These DeFi techniques present interesting possibilities for investors to grow their crypto earnings. Start making crypto passive income from today as the DeFi sector continues to evolve.

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