What is DeFi ( Decentralized Finance) in Cryptocurrency And How to Make Money with DeFi?

The yield farmers often adopt complicated strategies to churn their cryptos in various lending marketplaces to maximize the returns. These strategies involve staking tokens in a string of protocols for generating maximum yield.

However, the yield farmers rarely disclose their yield farming strategies, as the approach might prove ineffective if more people know about it.
The yield farmers stake stable coins like Tether (USDT), Dai, or USD Coin (USDC).

The yield farmers try to adopt new ventures as they can benefit more because of the value of appreciation. They use the considerable weight of initial capital for earning significant profits.
However, the risk is involved in this investment.

The risk associated with smart contract code and the capability of project teams can take away the potential gains. In addition, as the smart contracts are unaudited, their code might contain bugs and vulnerable attackers.

Liquidity providers (LPs) are ordinary Defi users. They offer their tokens into the pool controlled by smart contracts, creating liquidity for decentralized exchanges.

In return, LPs earn a 0.3% fee from the swaps, proportional to their contribution to the pool on Uniswap’s DEX. LP earnings increase with more trades made.

The profits of LPs cannot be guaranteed, as the fluctuations in one of the pooled tokens might swipe away the profits earned. This loss is termed impermanent loss (IL).

To minimize the edge of loss, LPs choose highly liquid pools having less volatile assets like ETH/WBTC. LPs take the help of LP aggregators to analyze data available on a real-time basis and maximize returns from various pools.

Staking: Staking involves locking funds in a Cryptocurrency wallet to enhance the security and operations of a blockchain network to receive rewards. In most cases, the investors can stake their cryptos directly into a Trust wallet. Whereas some exchanges also provide staking services to their investors.

There are different ways of calculating the staking reward by blockchain networks. For example, some networks calculate on a block-by-block basis, considering various factors like how long the validator is staking actively, the number of coins the validator is staking, the inflation rate, the total number of coins staked on the network, etc.

In contrast, sometimes validators earn a fixed percentage of reward from the network as compensation for generating volatility in the network. In this model, validators can calculate the reward they would earn.

Lending: The users earn an APY (annual percentage yield) from the lending platforms for bolting their assets into a smart contract. Borrowers then use these tokens and pay interest for operating funds. 

They returned a portion of this interest to the lender. Smart contracts govern the entire transaction of lending and borrowing.

This contract minimizes the risk associated with the non-payment of a debt by the borrower. Thus, the lender can withdraw the funds. 

As per research, the interest rate for crypto lending loans is always as high as 8% against a 1% return on fiat currencies.

This method is beneficial to lenders as a passive income source and for borrowers. They can short a fund by buying it on one exchange and selling it on another, thus earning margin trading.

Crypto loans are eligible for arbitrage trading for both borrowers and lenders. Between a Centralized Exchange and a Decentralized Exchange, arbitrage trading is done.  Traders borrow dollars at a lower rate than DEX for this transaction and use it on CEX for crypto. The lenders can lend it to the DEX to earn an arbitrage fee.

Because of underpinned Blockchain technology, there is transparency in the fund movements. Some well-known Defi lending exchanges are Dharma, MakerDAO, and Compound.

In Conclusion
Investment in Defi is an excellent option to earn passive income. But it is advisable to understand the risks involved. You should invest only that much fund which you can afford to lose.

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