The Best Passive Money-Making Yields: 5 Ways to Generate Wealth with DeFi
Crypto provides a plethora of opportunities to make incredible sums of money with just an internet connection and a few clicks of a button.
And right now, Decentralized Finance (DeFi) is revolutionizing the entire financial system.
For the first time in history, the average person holds the power of their financial instruments outside of companies’ and governments’ control.
This is the money playground where most central banks are NOT allowed to legally participate.
It’s also growing into one of the biggest financial opportunities of the century for the average person.
It’s how the crypto savvy and early DeFi adopters are printing “magic internet money” out of thin air with yield farming.
But just with anything that sounds “too good to be true”, there is a flip side.
As with anything crypto related, there are risks involved…
However it can be extremely lucrative for the person willing to jump in and explore this current “blue ocean” in the crypto marketplace.
Yield farming is simply the beautiful art of using your crypto to make even more crypto.
(Instead of just “hodling” your assets and praying they go up).
In this article, you’ll discover the best money-making yields, how they work, and what the risks are.
None of this is financial advice.
Let’s jump in.
Money-making yield #1 — Lending and “acting as the bank” (two strategies)
This is probably the safest, non-risky way of making money in DeFi.
And it’s the closest thing we’ve ever come across as “free money.”
(Apart from the atrocious 0.1%-0.5% you get from your bank, which is actually the biggest con in history thanks to the hidden inflation rate, but that’s a topic for another blog post:-).
Decentralized exchanges, like Binance Smartchain, Polygon, Phantom, etc. are currently giving away money when people use their platforms.
This is the bread and butter of DeFi and why it’s currently transforming the current financial system.
For the first time ever, the average person can act as the bank.
And there are *virtually* zero risks involved.
In short, it’s because the bank always gets paid (more on that in just a moment).
So how does crypto lending work?
You simply loan out your money (crypto assets) and the borrower pays a fee for that loan.
A small percentage of that fee goes to the decentralized platform. But a vast majority of that fee goes to YOU — the lender.
There’s no bank taking a major cut of your hard-earned money like in traditional finance.
So in theory, the people who are lending their money in DeFi are also the ones “raking in all the cash” (not the banks).
This is far from a “get rich quick” thing but it’s one of the safest ways to make money in DeFi right now.
How come it’s so safe?
Well, most lending in DeFi is overcollateralized. This means that the borrower has put forth more collateral than the loan itself, which “favors” the lender (in other words, he gets his money back).
And when the demand for loaning crypto assets is high (like it is right now and probably will be in the future), the yields for the loan provider tend to go up.
It’s basic supply and demand.
The main risk is something called counterparty risk, meaning if the lending platform “goes under” and can’t pay out the collateral. But there are ways to protect yourself against that, as you will see in this article.
Now, there are several ways you can lend out your crypto and earn money.
Here are two of the most common one’s:
Lending Strategy #1 — Lending to individuals who are long
Here you’re basically lending out stablecoins (GUSD, DAI, USDC, Tether, etc) to bullish individuals who leverage long.
As long as crypto prices “go up”, you make money as you receive a share of the gains the borrower is making.
As you can imagine, this can be extremely profitable in a bull market.
The problem is, however, for this yield to be profitable the crypto marketplace needs to be in an upward trend.
The good news is, you’re not tied to an individual project, like hoping for a shitcoin to go to the moon. Instead, you’re essentially “betting” on the entire crypto ecosystem as a whole of not failing.
But what if BTC goes down and HODLers who are long lose their money?
That’s when platforms sell the collaterals so the lenders still get paid and don’t lose their money.
The true risk lies in a dystopian scenario where everything crashes and “crypto goes to zero” where everyone sells their assets for fiat currency.
In that case, the DeFi platforms would be unable to pay out the collaterals (so the lenders would lose their money).
So if someone believes crypto is just a fad and it’s all coming down, then they probably wouldn’t jump into the DeFi space.
But then again, they probably wouldn’t be reading an article like this on a topic less than 1% of the world knows about in the first place. 🤷♂️
Either way, make sure you do your diligent research on every platform before depositing your crypto assets. Some platforms have a better financial capacity to pay out the collateral in a “worst case scenario.”
Lending Strategy #2 — Lending out to whale arbitrageurs
Some of the bigger traders in the crypto space tend to utilize price differences on exchanges for arbitrage opportunities.
In this case, you’re not lending to retail traders (who tend to be long).
Instead, you lend to the advanced traders, often the whales.
Since the price margins for these kinds of arbitrage opportunities tend to be small, these traders require a HUGE amount of capital to make it worthwhile for them.
This is probably one of the safest ways to lend out your crypto assets.
A few reasons.
First, the liquidities on most DeFi lending platforms are not high enough for these arbitrage opportunists.
That’s why you often get higher yields on centralized financed exchanges, like FTX or Celcius. That’s where the institutional borrowers trade short-term in enormous quantities.
And when you’re on a centralized financed exchange, compared to a decentralized one, you usually get higher insurance coverage.
Second, when lending to arbitrageurs, you’re not relying on the price of a crypto asset to go up or down, so it’s a relatively reliable yield.
Third, chances are you’re lending to a crypto billionaire who knows what he’s doing compared to Joe Schmoe who trades emotionally based on a meme he saw on Twitter (I’m exaggerating but you get the point).
Of course, large whale traders can still get rekt. But they tend to have better risk control and an informational edge (due to their network) in the marketplace compared to your typical retail trader.
Fourth, you’re always protected, to some extent, by their collateral.
Money-making yield #2 — Liquidity pools in AMMs
AMMs stands for Automated Market Makers.
These are decentralized exchanges that automatically execute the actions between two different parties (like releasing funds from one wallet to another) without relying on “outdated” centralized institutions.
But how does it actually work?
Well, these decentralized exchanges use something called smart contracts. These smart contracts can also be known as “money robots.”
And these “money robots” are how the prices of crypto assets can be set algorithmically by the decentralized exchanges.
This is how two individuals can automatically (and instantly) trade or purchase certain crypto assets without a middleman “overseeing the operations.”
So how exactly do you make money?
Well, if you are the liquidity provider (meaning you put tokens in a smart contract or a “money robot”), you get paid a percentage of the fees generated from those transactions.
This is what generates yield and how you make money.
You earn a fee when people in the liquidity pool swap (buy/sell) tokens.
In other words, the more money in your liquidity pool and the more people that “play” in it, the more you earn.
In traditional finance, this is what trading fees would be. A centralized institution, like a stockbroker, would give you an order book and if you buy stock through them, you pay a trading fee.
These fees then go to the platform, which is how stockbrokers, usually, make billions of dollars. The more people trade (buy/sell stocks), the more money these centralized platforms make.
But in DeFi, these exact fees go to YOU. The liquidity provider and the holder of a certain token. There’s no traditional order book.
Do you see how the financial system will never be the same again?
Unlike before, a regular person can now, by being a liquidity provider, make money the same way banks have been exploiting other people’s assets for their own fortunes for centuries.
However, despite the opportunities, there are still risks involved.
What exactly are those risks?
Well, a liquidity pool always consists of two cryptocurrencies.
And playing in these pools creates arbitrage opportunities because the price of these crypto assets fluctuates. This creates opportunities to buy crypto assets “on a discount” compared to regular exchanges like Coinbase for example.
And that’s when “price imbalances” can occur between two different crypto assets in the liquidity pool.
At first, it might seem like there will always be winners and losers in the liquidity pool. But it’s a bit more complicated than that because the strategy of the liquidity holder can affect the outcome.
However, if someone loses money in the liquidity pool, the loss only gets realized when the funds from the pool get withdrawn.
But there’s a chance to cover such losses from the earnings from the transaction fees.
You also have an opportunity to automatically “rebalance” your portfolio by adjusting the price of the crypto assets in the liquidity pool to ensure more profitable outcomes.
While liquidity pools in AMMs might be a bit tricky to execute for the DeFi beginner, they can be very lucrative for the seasoned crypto pro who knows what he’s doing.
Money-making yield #3 — Receive protocol fees (aka “dividends”)
Let’s say a person needs to convert one crypto token to another on a decentralized exchange.
For every transaction, although small, the parties in that transaction pay a protocol fee.
And instead of those fees going to a centralized exchange (like Binance or Coinbase), a majority of those fees go to the holder of said token instead.
In other words, YOU get paid instead of the traditional centralized institutions.
This is similar to dividends that are paid to stockholders in traditional finance.
To receive these fees typically requires staking in a protocol’s yield farm/pool.
But all you’re really doing is providing liquidity by holding the token in exchange for a piece of the revenues.
The difference between this and money-making yield #2 (liquidity pools in AMM’s) you’re practically immune to the price volatility of another crypto asset in the pool.
Instead, as long as people are trading the token you hold, you’re receiving protocol fees and making money.
The risk lies in the platform token itself and how much you trust the decentralized platform. That’s why we always recommend deeply researching the platforms you deposit your crypto assets to.
Some yields in the DeFi world can be truly “degenerate” with astonishing high returns. Naturally, those tend to be riskier.
But overall, protocol fees (or “deFi dividends”) are almost fully passive and can be a great tool to earn money.
Other money-making yields worth mentioning
The 4 types of yields mentioned so far are the most popular and tend to be safest.
However, they aren’t the only yields to earn cold hard moolah.
Here are two more you should at least know about:
Staking a token with a high APY (up to 100%)
Some new DeFi projects offer an average percentage yield of up to 100% to the holders of a token in hopes of getting off the ground.
But sadly, the odds of a project like this “making it” is like finding a pink unicorn.
Because just like in the startup world, most of these projects fail.
These tokens usually have low volume meaning the price is easily manipulated. And you can quickly get taken out by a whale if he decides to sell his stake.
Even if the project lasts, more and more tokens tend to get created every year shooting the inflation up and eating away at your APY.
This is often, not always, done as a marketing strategy by the developing team to “sell the dream” of a new token being a success.
Overall, the survival chance is roughly 1% for these projects.
So while you can make a boatload of money, it’s crucial to know the risks involved. Make sure you do your diligent research before investing in a project you believe has potential.
Earning yield rewards from user activity in a project
If you’re familiar with crypto gaming, this is DeFi’s answer to the “play to earn model.”
But instead of you feeding your Cryptokitties, you can get rewarded governance tokens for sharing your opinion on a certain project.
By participating and voting on the direction you want a project to go in, you might be eligible for yield rewards depending on the project (some projects pay zero yields though).
While letting its users have a voice is a crucial part of DeFi, it tends to be more beneficial to the whale owners in the project.
And it’s not really a passive strategy but still worth mentioning as some projects do pay out yields as rewards.
There are countless ways to make money in crypto, DeFi currently being one of the front-runners of those opportunities.
If you are in the crypto space and you prefer to be “ahead of the curve”, it can definitely be something to explore further.
With the current developing projects in DeFi, there are a ton of predictions saying this is forever going to change the financial system.
Yes, there are always risks involved with crypto.
But the idea that the money in your bank account is completely “safe” is almost laughable. But again, that’s a topic for another blog post :-)
However, rarely has anyone made massive amounts of money without taking some form of risk (yes it’s cliche but it’s absolutely true).
The same goes for yields in DeFi.
We still recommend taking a smart approach and doing deep research before you jump headfirst with your life savings in DeFi (not financial advice but probably shouldn’t do that anyway).
The barrier to entry is higher than simply buying BTC or ETH on a centralized exchange and hodling.
But again, the barrier to entry is the difference between a small group of people currently “printing money” with yields and another group virtually losing their money letting it rot in their bank accounts.
If you enjoyed this article, feel free to share it and spread the word.
And if you want to learn more about these money-making yields, we currently have a free video showing you everything from start to finish, in a step-by-step manner.
How to find the best yields, how to actually do it (click by click), and how to best protect yourself from risks in a bull, bear, and neutral market.
To view the free video, click here.
PS. Disclaimer: None of the projects or exchanges mentioned are endorsements or in the interest of the author. They are used as examples only.
Everything written in this article belongs to the author alone. Nothing in this article is financial advice. Please conduct your own thorough research or seek a financial advisor before making any investment decisions.