4 ways to earn passive income on your crypto
Update: DO NOT use Anchor and Celcius, both are in trouble at the moment.
Make your Crypto work for you by earning interest!
The Crypto world provides a vast number of opportunities to earn passive income. The methods that I am listing below provides a reliable income that puts the bank’s interest rates to shame. I have ranked from the safest to the riskiest. In this newly developing space, there is always an inherent risk that one should watch out for, so do not blindly trust what is mentioned here but do your own research.
It is rather complex to understand at the beginning, so I will break down each method as include a comprehensive terminology guidebook at the end of this article. The number of opportunities in this vast world is endless as new technologies and tokens are being developed daily, it is therefore important to differentiate the true gems from the potential rug pulls. The following methods are also good directions to start with if you are a beginner!
Difference between CeFi and DeFi
In order to understand more, we take a deeper look at the concepts of Cryptocurrency. It is more than just Bitcoin and Ethereum.
The crypto world is divided into two parts, CeFi and DeFi. CeFI stands for Centralized Finance, while DeFi stands for Decentralized Finance. Both have their own pros and cons, but the main difference between the two is that CeFI relies on a business to handle their funds for you, very much like a glorified bank account and it is usually more trustworthy as they are audited, while DeFi relies on technology to execute transactions, meaning there are no third-party or middleman involved in this case (a.k.a. no “financial advisers” or companies).
You will often hear: “not your keys, not your crypto.” This is especially true for CeFI as they hold the keys to your crypto and can set or change their own rules at will, such as interest rates. DeFi entrusts you your own keys and you have full control over your assets that allows many services such as staking, lending or farming that are usually not found in the CeFi world. More on that later.
CeFi (interest-bearing accounts)
You can think of CeFi as bank accounts on steroids in terms of interest rates, they offer a certain APY % for deposits in cryptos and allows you to compound your assets’s interest. There are many CeFi platforms such as Celsius, Nexo, Blockfi and Hodlnaut.
These four Fintech platforms are quite popular due to their regulated audits and have a good track record. However, in my personal opinion, I will only recommend the first two for your consideration as they are more established. BlockFi interest rates have been dropping since I first started using it, from 7 to 4.5% current interest for less than 0.10 Bitcoin. It is unsustainable in the long run and might continue to drop.
Hodlnaunt offers up to 12.73% APY but they are new and it is uncertain whether they will be here for the long run. While the app is great, some users have expressed some concerns about the lack of transparency on their assets (from some of the Tele groups I have seen and Reddit). So, you might want to keep this in mind when selecting a platform.
I have started using Celsius and Nexo since last year and it is awesome to have a stable interest rates payout in these bleak times. Both offer a decent interest rate for different cryptos and have a good referral programme. Celsius also covers your gas fees free when you withdraw to another app or exchange, though you have to wait for 24 hours before withdrawing. Both platforms offer their own native tokens such as Cel and Nexo token, which allows you to earn-in-kind or earn in their native tokens for a higher rate.
Anchor Protocol (Luna)
Can you imagine earning a stable 20% interest on your assets? That’s what Anchor Protocol is all about.
Anchor Protocol is a savings protocol offering low-volatile yields on Terra stablecoin deposits (UST). UST is a stablecoin pegged to USD with a 1:1 ratio. Anchor provides a platform for both lenders and borrowers, which is amazing. Lenders can deposit stablecoins to earn interest from it, while borrowers can bond and provide assets as collateral such as BLuna or BETH.
There are two simple strategies:
- You can deposit UST to earn 20% interest (Simple).
- You can place collaterals to borrow UST, earning both the collateral and UST interest (advance).
As you can see from above, I placed arond $500 as my collateral and I borrowed$316. This $316 have been converted to more BLuna as I am bullish on it, but I must ensure my LTV does not go near 60%. Waiting for Luna to moon. 🙂
By placing collaterals such as Luna, you will get Bonded Luna (BLuna) in return, you can then borrow UST as a loan, which you can then deposit it in Anchor to earn the interest or do whatever you want with it. No forms to fill up, credit score to worry about. Just a few clicks and you are done. The downsides are that you run the risk of liquidation if your Loan-to-value (LTV) exceeds 60%. Let’s say your LTV ratio is at 40%, and the liquation price is at 60. If Luna crashes to 59, parts of your collateral will get liquidated to pay back the loan. If you do not wish to run the risk of being liquidated, then it is better to set a safer LTV ratio, perhaps 35% and below. You are also being paid out in ANC tokens, which are governance tokens you can sell, stake or participate in Liquidity pools (LP).
The Total Collateral Value in the world is 4.5 Billion! It has steadily increased in the past couple of months.
You can repay the loan anytime as there is no lock-in for UST. However, your collateral (BLuna or BETH) takes 21 days to unbond back to Luna or ETH, so you may need to plan in advance. The only downside I see to this is that if Luna moons, you may not be able to sell in time if you want to make a profit. Not an issue for long-term holders though!
If you want to borrow, you might want to wait for Nexus protocol’s features as it does all this much more efficiently. Alternatively, you can stake on Staderlabs. It auto-compounds the staking rewards for you. You can also look into providing LP on Astroport or Terraswap.
There are three types of Defi staking.
Staking (Proof-of-stake (PoS)
Staking is a powerful tool to beat inflation and earn that sweet passive income. How it works is that users hold a certain number of tokens to generate passive income. It is riskier than your traditional means of Celsius and other CeFi platforms, but it has many upsides such as lack of corruption, hidden fees and transparency issues. They usually generate higher rates than their traditional counterparts. There are many projects such as Anchor or Aave that allows you to borrow their tokens using collaterals to stake. Others such as Algorand (ALGO) and Fantom (FTM) offer platforms to allow users to earn up to a certain APY%. Thus, users can achieve solid yield returns by holding their crypto for the long term, in addition to capital appreciation. That is the power of staking.
Yield Farming refers to moving crypto assets between multiple Defi staking platforms to maximize returns. People can make their assets available to a lending platform or a liquidity pool and they earn passive income. Yield Farming can be riskier than staking simply because you are involving different platforms and protocols together.
Farms usually have a high annual percentage yield (APY) to attract new investors, but beware! For most of the farm tokens out there are meant to be dumped. Get in, make a quick buck and get out before its value goes to 0. Rugpulls, frauds and hacking are some of the major threats out there and that is why it is considered riskier than the others. High Risk, high reward. Some examples of yield farming platforms are Aave, Uniswap, Pancakeswap and Sushiswap.
Finally, we have Liquidity mining. It is a term you will hear often along with Impermanent loss (IL). Liquidity mining is a part of yield farming that involves providing assets to Liquidity Pools (LP). LP is usually made up of a pair of assets, such as ETH/USDC or BTC/FTM. An algorithm controls the LP to ensure that the price of the assets in the pool are equal, 50:50. The pool might buy or sell depending on the price of the asset. This allows people to trade one USDC for ETH for the same value. In return, you will be paid a certain percentage of the fees collected by the pool. Your aim as a liquidity provider is to ensure that the fees earned from transactions will offset or surpass impermanent losses. Remember that for every transaction that took place, you get fees. More explanation on LP and IL is below!
DeFi and Crypto is a world of wonder and holds the power to disrupt the Finance industry for the next few years and break the monopoly held by banks for so long. It would be wise to be part of it, your choice. As always, do your own research!
Crypto Terminology Guidebook:
Stable coin: pegged to 1 dollar E.G. 1 USDC :1 USD
KYC: CeFi platforms require KYC for regulations, it stands for Know Your Customer. They will conduct KYC to verify your identity and is a form of protection against anti-money laundering.
Earn-in-kind: Your reward interest will be paid out in the same asset type as your deposit asset.
LTV: it is the ratio of your loan to the value of your Collateral, determines how much you can borrow.
Proof of stake: POS is a type of consensus mechanism used to validate cryptocurrency transactions, evolving from Proof of work. It allows owners of a cryptocurrency to stake coins and create their own validator nodes.
Liquidity Pool: A liquidity pool is a smart contract where tokens are locked to provide liquidity.
Impermanent loss: Impermanent loss describes the temporary loss of funds occasionally experienced by liquidity providers because of volatility in a trading pair.
An excerpt from Reddit here:
“Let’s say you have $50 in ETH and $50 in SUSHI tokens, which adds up to a total of $100. If you deposit your tokens in a 50/50 liquidity pool, you would have a ratio of 0.024 ETH ($2104) and 3.27 ($15.28) SUSHI tokens. After depositing your tokens into the pool, the ratio and the price of the tokens change – This is due to market volatility and trades. This results in that at a given moment there may be more ETH than SUSHI in the pools (or more SUSHI than ETH).
If you decide to withdraw your tokens from the pool, you might receive more ETH than SUSHI (or vice versa). For example, you receive 0.015 ETH and 4.47 SUSHI – And the price of ETH has gone up – Your impermanent loss has become permanent.”By Fantastic-Cucumber 1
Non-sponsored article, the above are just my opinions. I am also vested in the above mentioned platforms.
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