While most experienced crypto users recommend avoiding depositing crypto with third-party providers, the user-friendliness of CeFi (centralized finance) lending platform has led to billions of dollars in crypto streaming into CeFi lending. Once funds are deposited, users earn interest (typically paid in the deposited assets).
Popular CeFi lenders include BlockFi and Nexo.
Depositing crypto in a DeFi lending protocol
The more decentralized alternatives to the likes of BlockFi and Nexo are autonomous lending protocols, such as Compound (COMP) and Aave (AAVE). DeFi lending apps allow crypto holders to deposit funds into smart contract-powered lending pools to earn interest.
The main difference between CeFi and DeFi lending is that the latter gives users complete control over their funds and doesn’t require any KYC (know-your-customer) documentation or onboarding processes.
Yields are driven by supply and demand and vary from platform to platform. What’s more, some DeFi lending apps are riskier than others. The high yields found in DeFi also come with a higher level of risk.
Providing liquidity in liquidity pools & yield farming
In addition to lending, the DeFi markets also empower individuals to earn passive income by depositing crypto into decentralized trading pools, called liquidity pools.
As a reward for providing liquidity to an autonomous trading pool, depositors are rewarded with trading fees and liquidity provider (LP) tokens. To earn additional yield on deposited digital assets, users can then stake the LP tokens in so-called “yield farms”.
Yield farming has become a popular way to earn passive crypto income, but like DeFi lending, it’s one of the riskier ventures in the crypto markets.
Popular liquidity pools include Uniswap (UNI), SushiSwap (SUSHI), and PancakeSwap (CAKE).
Staking PoS-based cryptoassets
Alternatively, you could hold and stake proof-of-stake (PoS) coins to earn passive income in the form of staking rewards.
PoS-based crypto networks require validators to “lock up” a stake in the network’s native asset to secure the blockchain. The incentive to contribute to a crypto network in this way is earning a share of the block reward in the form of newly minted coins.
The staking process differs from network to network, with some requiring advanced software setups and a continuously running validator node while others simply require you to hold the assets in the official wallet.
Running a masternode
If you’d like to step up your staking game to earn more crypto passive income, you could run a masternode.
Masternodes, also known as bonded validator systems, are a special type of nodes that performs specific functions within a crypto network.
In the Dash (DASH) network, for example, masternodes power the network’s PrivateSend and InstantSend functions and provide governance voting rights to operators. To run a Dash masternode, however, operators need to stake DASH 10,000 (USD 1.6m), making it a capital-intensive affair to receive yield (in the form of newly minted tokens) on your holdings.
Fortunately, there are masternodes that require a much lower capital investment while offering double-digit yields, paid out in the network’s native token.
Running a Lightning node
If you are a bitcoiner and prefer to stick with Bitcoin to earn passive income, you could set up and run a Lightning Network (LN) node.
By supporting the fast-growing Lightning Network through operating payment channels, you can earn a few sats every time someone transacts using your channel. While the earning might not be something to brag about on #BitcoinTwitter, running a LN node means you are contributing to the most powerful open monetary network in the world that will potentially end up banking the unbanked. And on top of that, you can stack sats by contributing.
Before you run off and explore every single method in this list, remember that each of them carries varying degrees of risk. Do your own research and never invest more than you can afford to lose.
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Learn more:
– Investing in the Metaverse: 4 Ways to Invest in Virtual Future
– Fiat-to-Crypto Versus Crypto-to-Crypto: How Should You Trade?
– 5 Leverage Trading Platforms (for Experienced Margin Traders) in 2021
– Check These 4 Make-Your-Own-NFT Platforms
– Top 4 Risks DeFi Investors Face
– ‘Traditional’ Art vs. Crypto Art: How to Value It
