For those who think making money with cryptocurrencies is only possible through frenetic, regular trading, prepare to be proven wrong! If keeping a constant eye out for the endlessly changing prices of crypto coins to make gains is not your cup of tea, you can always opt for yield farming or staking to generate a solid passive income stream. Here’s a primer to get started on that.
What is yield farming?
Remember the standard interest you earn on your deposits in your savings bank account? When you entrust the bank with your savings, you are, in essence, loaning this money to your bank. For that, the bank pays you back with interest on your savings. You are also free to withdraw money from the account anytime you want, without any limits.
In the decentralised finance (DeFi) space, the system is no different, except for the interest rates on offer. While interest rates offered by banks on savings accounts can range anywhere between 3.5-7%, the returns in the crypto space are much higher. Sometimes, as much as 2000%!
What basically happens here is that you provide the cryptocurrencies you hold to a liquidity provider (LP). This is a marketplace of sorts. Here, decentralised applications (dApps) lend or borrow available tokens. And since they are based on smart contracts any and all middlemen are absent from the picture.
Now, once all these tokens are consolidated into a liquidity fund for these dApps to utilise, everyone who contributed receives either fees or interest as remuneration. Currently, a large part of yield taking takes place on Ethereum network, with lenders only looking to make the most of wild crypto price fluctuations. This makes it risky, but also return-generating in the short run.
That’s why, the real kicker, says Raj Kapoor, chief advisor of crypto advisory Acryptoverse, is when “a coin appreciates rapidly”. Say you purchased coin A for yield farming purposes. Favourable market developments lead to the demand for A skyrocketing. You can now earn higher interest income by giving A to liquidity pools that offer solid returns.
But remember, your calculation for net returns should include deductions for the hefty transaction and gas fees you’ll pay as a result of this frequent activity. But, you are free to withdraw your tokens anytime you want.
“The 30% tax imposed recently on crypto transactions is driving enthusiasts towards yield farming. That’s because the system is familiar to most investors and is like the traditional lending system, bringing in more investors. It is a great way to earn a passive income,” notes Kapoor.
What is staking?
The same bank that offers you a savings account facility gives you an option to open a fixed deposit (FD) as well, right? Considered a financial instrument of the bygone age, the idea of an FD is simple. You invest your money with the bank for a stipulated time. During this time, your money is locked, i.e., you cannot withdraw it without incurring a penalty.
Once the FD period is over, you get your money back. In this case, the interest rates are higher than that on savings accounts, too. Unlike savings account rates, FDs conventionally offer rates around 4-5%. Hence, you end up earning a little more.
Staking is almost like the fixed deposit of the DeFi space. It’s ideal for beginners since it does not require any significant capital to begin with. Additionally, it does not involve any major transaction or maintenance cost. Your returns are not reliant solely on short-term market fluctuations and volatility, helping you ride over rough market patches with relative ease.
But it’s a long-term wait for the returns, so it’s wise to not expect gains immediately.
But how to choose the best yields and platforms? Tarusha Mittal, COO and co-founder of yield farming and staking platforms like oropocket.com, OpenDeFi and Unifarm, has some solid advice on that.
“There are no reasonable return expectation numbers in this space. That’s because crypto is in its infancy. And with any technology in its infancy, it’s very dynamic, ever-changing. There are certain users who’ve made like 17%, 100%, even 2000% returns. But essentially, that is a function of how long the individual has staked for. I would suggest beginning your journey only with highly reputed and established names. It’s important to do your own due diligence to see if the platform has been audited properly or not. Don’t just chase wild returns, but rather platform credibility,” she signs off.