Blockchain enthusiast developer and writer. My telegram: ksshilov
While the lending market craze is plummeting and the “yield farming” opportunities are not as profitable as they were in the beginning, you might be looking for new ways to put your money at work.
In this article, I’m going to explore the best ways to leverage the current DeFi solutions for generating steady passive income at the lowest possible risk.
DeFi and passive income
Cryptocurrency is the perfect response to the current broken financial system. Anyway, things are not as different as you might think. DeFi gives you access to your tokens in the same way a bank is giving you access to conventional money. You can deposit, you can withdraw, you can spend them at your nearby store by using a payment card. And these services are extended to borrowing, lending, managing an investment portfolio. At the interaction level, today, there’s no big difference between a conventional financial system and a cryptocurrency-based one.
DeFi solutions are looking to take these working financial models and adjust them to the current reality: offer better interest rate, capital protection, and more investment options. Let’s find out what are the new decentralized services that you can take advantage of right now to transform your cryptocurrency savings into passive income generators!
Lend for tokens
Similar services were available before. Anyway, Compound is not a peer-to-peer matchmaker. You are not borrowing directly from a lender. All the lent assets go into a common “liquidity pool” from which borrowers can access directly. That’s why the interest rate is not fixed, but dynamically set by an algorithm based on the demand. Interest which is collected from borrowers then split between lenders. The whole system makes it profitable for both parties, and particularly lenders which are looking for a steady passive income for their deposited amounts.
A steady income is nice. But Compound wanted to incentivize its users through its native token COMP. Anyone who would lend or borrow on their platform would also earn a small amount of COMP tokens. It was seen by the team as a great way to distribute their token. But, with the increased demand the token price kept rising, up to $250 a token. At this rate, the token returns are higher than the interest returns. When the token reached its peak, around 2,880 COMP tokens were issued a day. That’s $720,000 in cryptocurrency. What was supposed to be a passive earnings-generating platform became a get-rich grab.
However, that ended fast. Today, COMP price is less than $200 and the codebase was already updated. Under the new rules, users will earn COMP on the dollar value of assets they have put in or borrowed from the system. That’s much less than the initial rewards. But the initial purpose of the platform of offering their lenders a way of generating passive income is still there. If their interest rate is attractive to you, you can check it out.
Lend for interest
Lending capital on a lending market is a way to earn income and you should know that Compound is not the only one. And, without the high income from the bonus COMP, the interest rate is the most important variable. As mentioned on Compound platform the rate is dynamically adjusted by their internal algorithm. Sometimes you can earn more, sometimes you can earn less. What if you are looking for a more stable income?
There are many lending platforms and most of them are limiting their users to their fixed interest rates just to be able to promise higher income rates. Anyway, with fixed interest, if borrowing is getting too expensive borrowers will go away, leaving lenders with no earnings until the market cools down. Basically, when the market is doing good, you, as a lender, you’re doing less income than before. This leads us to the second option, variable interest rate as seen in Compound. It solves the initial problem, but it brings new problems. The high swings in the demand-supply ratio are now translated into the interest rate. Sometimes you are earning a good income, sometimes you are earning very little income. There is no predictability, making it an awful tool for generating passive income.
Aave changes it with a system where the lender can switch between the two types of interest rates. Depending on the market conditions you can choose a stable or a variable interest rate. This change made the platform very attractive and a real contender for passive income. Due to the stable rate usually being higher than the variable rate, the lenders are generally seeing higher returns.
However, both Aave and Compound are lending markets where lenders and borrowers are indeed able to generate income. But the returns are marginal and you are always forced to choose a side. When you are lending you are hoping that the price of your asset will go up. While, when you are borrowing, you are thinking that the price might go down. If the opposite is happening, not only that you won’t earn any income, but, in the case of borrowing, you might lose all your collateral.