Decentralized finance is revolutionizing the conventional financial system by replacing the traditional centralized services with trustless protocols. One of the spectacular attributes about the Defi ecosystem today is the opportunities it provides for earning a passive income from your idle crypto assets.
Non-fungible tokens (NFTs) are also growing at a fast pace, expanding beyond collectibles. As their popularity has been increasing incrementally, NFTs are now promoted as the next big thing in the DeFi world.
Contrary to the common perception that NFTs are only used to represent items like artworks, these cryptographic tokens may also represent financial products such as insurance, bonds or options. As such, they can be used as collateral on DeFi lending and borrowing platforms.
The buzz around these concepts has evolved as more retail and professional investors are now seeing the benefits of accessing alternative financial products and services. This trend has been driven largely by the introduction of a whole new bunch of “yield farming” protocols.
But perhaps the source of those vibes is the idea that putting your idle crypto assets at the disposal of a yield-generating application can earn you more of the same asset in return. In other words, it is how anyone – even those without technical knowledge – can effortlessly make a profit simply by leveraging his existing crypto capital.
By “locking up” the assets you own into a third-party service that takes care of the technical aspect of the process, you can grow your crypto stack without risking it in trading or other investment activities. Instead, when you stake your coins, you are essentially lending them to a trusted network to validate transactions, while periodically claiming your rewards.
Staking your coins is usually done in a pool, where all users combine their tokens to receive a larger portion of the transaction validating power.
Although there are many risks to factor in when interacting with DeFi protocols, the idea seems to be catching fire. The total value locked in DeFi applications grew from less than $1 billion in 2020 to more than $60 billion in April 2021.
Even if you missed out on the early rise, it’s not too late to earn that kind of passive returns on decentralized finance. The space encompasses a wide array of applications intended to enhance hodlers’ returns without relying on intermediaries.
Below, we examine some of the most popular means of generating income in crypto, assuming that you have a basic knowledge of interacting with the DeFi ecosystem. We also take a look at the emerging trend of merging NFTs with DeFi use cases through allowing borrowers to post their collectibles as collateral.
KuCoin was the first cryptocurrency exchange to introduce soft staking in 2019. The Singapore-based platform allows users to stake a wide range of assets, including several tokens that you will not find on other major platforms.
Binance is arguably the world’s most influential crypto exchange. Alongside its traditional brokerage services, it has managed to establish itself as one of the go-to staking platforms for a large number of digital assets, including Bitcoin, BNB, Tether (USDT), SushiSwap, Tezos and many more.
Coinbase, the US most popular crypto platform, also allows users to stake their digital assets by leaving them in their Coinbase wallet. Its staking infrastructure, however, currently supports a few tokens and also charges high fees (20% – 25%).
Hoard is an Ethereum-based NFT marketplace for trading, renting and loaning non-fungible tokens. This platform opens the door to a unique staking model, where NFTs could be used as collateral to obtain crypto loans.
Lenders, stakers and borrowers interact directly with the Hoard protocol, earning (or paying) a floating interest rate. These parties don’t have to negotiate terms such as maturity, yields, or collateral as the entire lending and borrowing process is governed by smart contracts.
Compound Finance is a decentralized money market protocol to lend crypto assets and earn interest with multiple coins like Ethereum, BAT, Bitcoin, Sai, Augur, USDC, Tether among many others.
Compound was one of the early birds that kicked off the entire DeFi movement as we know it today. It played a central role in creating the yield farming niche with billions of dollars worth of tokens locked into the protocol.