How to Make Money with DeFi: A Guide for Beginners

DeFi, short for decentralized finance, is a modern financial system riding on blockchain technology. It offers various ways to earn money passively, like liquidity mining, staking, lending, borrowing, and governance.

But diving into DeFi can feel like jumping into the deep end for newcomers. That's where Liquid Crypto steps up.This guide is your roadmap to making money with DeFi through DEX platforms.

DeFi lending

Lending is a broad term covering different ways to earn passive income. With decentralized or DeFi lending, investors can directly engage with borrowers through smart contracts. These contracts enable investors to offer their crypto tokens for loans, which borrowers repay within a specified time along with interest.

DeFi lending platforms provide a way for investors to lend their crypto to borrowers without needing collateral. However, they often lack the background checks that traditional lending requires to manage credit and fraud risks.

DeFi lending operates as a peer-to-peer (P2P) service, allowing borrowers to borrow crypto directly from other investors and repay with interest. This system differs from traditional lending because it utilizes smart contracts, enabling users worldwide to share and distribute crypto assets without intermediaries.

Moreover, blockchain technology ensures transparent and unchangeable transactions for everyone involved in DeFi lending.

DeFi staking

Staking in DeFi is quite similar to yield farming and encourages users to hold onto their cryptocurrency for longer periods. Like yield farming, staking involves users locking up their crypto holdings to become validators on the blockchain.

Through staking, users can earn rewards by locking their tokens for a specific period, depending on the plans offered by the platform. Each blockchain sets a minimum token requirement for users to become validators, such as Ethereum's 32 ETH.

The potential earnings from DeFi staking depend on the network's rewards plan and the duration of staking.

Aside from monetary rewards, staking also enhances the security and performance of blockchain projects by directly involving users in their operation.

DeFi yield farming (liquidity mining)

Yield farming, also known as liquidity mining in DeFi, is a way to increase your cryptocurrency holdings using the crypto assets you already have. This strategy involves investors staking or delegating their crypto assets in a smart contract-based liquidity pool. These pools use the invested cryptocurrencies to provide liquidity in DeFi protocols and share a portion of the generated fees with users as rewards.

DeFi yield farms primarily utilize ERC-20 tokens like Ether for investments and rewards. However, yield farming can be risky, aiming to achieve the highest possible yield or return of DeFi-based passive income.

Liquidity pools play a role in facilitating crypto trading on decentralized exchanges (DEXs) and offer yields for tasks like confirming transactions. The success of a liquidity pool's yield depends on the strategies implemented in the smart contracts and the monetary value of tokens invested by users.

When users deposit or lend cryptocurrency to a liquidity pool, operators aim to redistribute the assets to achieve the highest annual percentage yield (APY). APY measures the yearly returns on investments, including compound interest.

Compared to the average savings rate of 0.06% APY offered by traditional banks, DeFi has the potential for much higher returns.

Also read; How to Yield Farm In DeFi ( step-by-step )

How To Maximize Passive Income with DeFi

Now that you know the basics, let’s discuss how to optimize DeFi earnings. Keep these tips in mind.

1. Diversify Your Investments: Spread your funds across lending, liquidity pools, and staking to reduce risk.

2. Analyze Returns and Risks: Before investing, assess the expected returns and associated risks. Remember, higher yield often comes with higher risk.

3. Start Small, Grow Steadily: Begin with a modest investment and gradually increase it over time. Only invest what you can afford to lose.

4. Reinvest Rewards: Compound your earnings by reinvesting rewards. This accelerates the growth of your passive income.

5. Occasionally Take Profits: While compounding is beneficial, don't hesitate to claim some profits. It's essential to balance growth with securing gains.

6. Regularly Monitor Positions: Check your investments at least monthly. Adjust your allocations if necessary to enhance returns or manage risk effectively.

7. Stay Updated: DeFi evolves rapidly, so keep learning. Stay informed about new opportunities to maximize your earnings potential.

8. Prioritize Security: Protect your assets by following security best practices. Use hardware wallets, backup phrases, and enable two-factor authentication (2FA).

By following these guidelines, you can prudently grow your DeFi income and let your investments work for you.

My Personal Defi Income Strategy

In 2019, I ventured into crypto, but it wasn't until 2020 that I became serious with DeFi. After thorough research, here's how I structured my approach:

1. Portfolio Diversification: I divided my portfolio among BTC, ETH, stablecoins, and DeFi governance tokens for balance.
2. Stablecoin Deposits: I opted for Aave and Compound, earning a consistent 8% APY by depositing stablecoins.
3. ETH Staking: With Lido Finance, I staked my ETH, reaping around 6% rewards.
4. Providing Liquidity: I contributed to Uniswap and Curve, enjoying yields ranging from 25% to 50%.
5. Compounding Rewards: Weekly, I claimed rewards but mostly reinvested them into the protocols to compound earnings.
6. Monthly Adjustments: I made slight tweaks to my strategy based on performance.
7. Profit Withdrawals: Quarterly, I withdrew 10% to 20% of profits.

Thanks to compounding, my earnings grew steadily. Within a year, I consistently made over $5.5k per month in passive crypto income.

Although it's not entirely hands-off, requiring 3–5 hours of monthly monitoring and optimization, it's much closer to true passive income compared to active trading or conventional jobs.

The Reality of Defi Passive Income

No income stream, including DeFi, is truly passive if you aim for significant returns. DeFi demands ongoing involvement compared to traditional streams like stock dividends or rental income.

This involvement includes tasks like researching new protocols, analyzing investments, executing transactions, monitoring positions, occasional rebalancing, and ensuring security measures.

Plan to dedicate a few hours each month to these activities. Think of it akin to tending a garden — regular care leads to a bountiful harvest.

The crucial aspect to understand is that the time you invest is not linear. Once your DeFi portfolio is set up and running smoothly, the returns you gain are exponential compared to the effort you put in.

Final Words

Decentralized finance is revolutionizing our approach to money and markets, ushering in increased accessibility, empowerment, and efficiency.

As DeFi evolves, it will revolutionize finance in profoundly positive ways, offering significant benefits to those seeking passive income.

I've shared reliable strategies for generating steady cash flow from cryptocurrency, including lending, liquidity pools, and staking, all of which promise attractive returns.

By starting small, staying informed, reinvesting to compound earnings, you can work towards potentially retiring early with a successful DeFi portfolio.

Decentralization aligns with the notion that the financial system should serve everyone. By directly rewarding users for supporting valuable networks, decentralization moves us closer to that inclusive ideal.

Also read; What are the core concepts of DeFi Business? Beginner’s Guide( Learning the DeFi Slang)

Disclaimer:This is not financial advice. Mentioning coins and tokens is not a recommendation to buy, sell, or participate in the associated network. We would like to encourage you to do your own research and invest at your own risk.