A beginner’s guide to generate passive income through Decentralised Finance (DeFi)

To understand what Decentralised Finance is, we need to first understand what it isn’t. Unlike traditional finance that operates between savers and borrowers, DeFi seeks to eliminate third parties from the equation. The technology does this by enforcing a blockchain-based trust mechanism, thus allowing peer-to-peer (P2P) transactions without paying a fee to any third party such as a bank.

Here’s all you need to know to make passive income through DeFi.

Staking

“Staking” is the most ancient and fundamental method of earning cryptocurrency. It is the mechanism by which users can earn rewards by locking up their assets. In decentralised finance, staking can be used to earn rewards for lending or for operating a decentralised exchange. For instance, you could deposit some Ethereum (ETH) and after a few months, you’d get more ETH rewards for depositing and supporting the DeFi exchange.

But, why would you get more tokens? Well, there’s a rationale behind staking tokens. “Staking works on Proof-of-Stake (PoS) consensus mechanism that ensures that validators or ‘miners’ who are tasked to verify transactions do not game the system. If they do, they can be penalised by losing a part of their stake,” EasyFi Network, a decentralised finance platform wrote in a statement to indianexpress.com.

It should be noted that every transaction on the blockchain ecosystem has to be verified by ‘validators’. In return for verifying the transaction, they are rewarded with a ‘block’ that awards them tokens, for contributing to the network’s security and decentralisation.

Lending

Passive income can be earned in a variety of ways, one of which is lending and borrowing digital assets on DeFi platforms.

EasyFi Network, for instance, provides digital assets for borrowing and lending. But what makes this profitable? The platform notes that if you own an Ethereum, you may either lend it to a platform and earn a fixed return on it or trade ETH for a wrapped Ethereum (wETH) and use it as part of a DeFi protocol to earn an annual percentage yield (APY) of 0.5 per cent to 8 per cent. You may also borrow as much as 75 per cent of the value of your cryptos in return for collateralised loans. You may, in turn, trade or deposit these assets into a DeFi protocol to generate further passive income.

Produce your own tokens

Producing your own token is a way to make money in decentralised finance. Creating your own token and letting people use it as a way to earn a return on their assets is a great use case for decentralised finance. Some people have created…