How to Earn Passive Income with Cryptocurrency
Cash in on the cryptocurrency revolution to earn money while you sleep.
“If you don’t find a way to make money while you sleep, you will work until you die” — Warren Buffet
In the following examples, we’ll look at opportunities to generate passive income on Optimism. If you don’t know what Optimism is, it’s basically a network layered on top of Ethereum that allows for cheaper and faster transactions. Learn more from their website below.
To get started all you’ll need is a wallet (I recommend Rabby since it has some useful security features), an internet connection, and some funds.
Each time you make a transaction, you’ll need to pay what is known as ‘gas fees’ which ensure that your transaction is executed. You can buy ETH from exchanges like Binance, Coinbase, or Kraken. Alternatively, you can use your credit/debit card with on-ramps such as MoonPay.
Once you have some ETH, withdraw it to your personal address using the Rabby browser extension wallet and then you’ll then need to bridge it over to Optimism. Check out the video guide below to learn how to bridge from Ethereum’s main net(where transactions are more expensive and slower) to Optimism.
Once you have ETH on Optimism, you’re all set to get started with the strategies below to earn a secondary source of income. Many of the strategies we’ll discuss take advantage of the fact that there are OP token rewards for using some protocols on Optimism.
The additional benefit is that these are on-chain strategies, so there’s no custodian involved and you’re fully in control of your assets at all times (although there is a smart contract risk to consider, all of these protocols have been audited and have a good reputation).
Disclaimer: the more capital you start with, the better the outcomes of these passive income strategies. As the saying goes, “it takes money to make money”. But on the bright side, these are some strategies that are easy to understand, and relatively hassle-free and I’ve done the research to take out most of the work for you.
1. Perpetual Protocol — Lazy River
For our first passive income strategy, you’ll need to buy some PERP and bridge it over to the Optimism network using Optimism Gateway. Some exchanges where you can buy PERP are listed here.
PERP is the native cryptocurrency of the decentralized exchange Perpetual Protocol, which has generated more than $15 billion in trading volume since its inception. What if you could earn a share of the trading fees generated on the platform and share in the protocol’s success?
That’s exactly what Lazy River does!
PERP token holderscan effectively earn 25% of the trading fees generated by locking their tokens at token.perp.com. Once you have some PERP on the Optimism network, you can lock them using the link below.
Remember, you cannot transfer or sell your tokens when they are locked, so take this into account when selecting your lock time. You can lock your PERP for anywhere between 2 to 52 weeks. You’ll then receive vePERP tokens in return, depending on your lock time. If you select the maximum locking time of 52 weeks, then you’ll receive more vePERP and earn more in USDC every week.
Of the trading fees generated by the platform every week, 15% is distributed to vePERP holders. The returns are also boosted with locked PERP payouts (equivalent to 10% of the trading fees per week). Here’s a table showing each USDC and locked PERP weekly payout to vePERP holders since the launch of Lazy River.
If you don’t know what USDC is, check out this starter guide. It’s basically the leader of the stablecoin market, regulated, and maintained by an American company known as Circle. It’s value is guaranteed to equal $1 and can be bought or sold on a variety of exchanges.
To better understand the vePERP model, let’s look at an example. Alice has 10,000 PERP and locks for 52 weeks. She receives 10,000 vePERP. As each week goes by, her vePERP balance will decrease to zero after 52 weeks, at which point she can unlock her PERP, sell it or keep holding onto it.
Also, at any stage, Alice can increase her lock time to increase her vePERP balance. The amount of rewards she receives each week depends on her share of the vePERP supply. So if she has 0.1% of the vePERP supply and the rewards for that week are 25,000 USDC and 25,000 locked PERP, she’d earn 25 USDC and 25 locked PERP.
On the other hand, let’s say Bob has 10,000 PERP but only locks for 26 weeks. He receives 5,000 vePERP. His vePERP balance will decrease to zero once 26 weeks have passed instead, at which point he can unlock her PERP, sell it, or keep holding onto it. If Bob’s vePERP holdings are only 0.05% of the supply, then he’d earn 12.5 USDC and 12.5 locked PERP in a week whereas Alice received 25 USDC and 25 locked PERP.
Comparing the two scenarios above, Alice earns a higher share of the trading fees since she has a greater share of the total vePERP supply as compared to Bob. However, if Bob doubled his amount from 10,000 to 20,000 PERP, then he’d have the same amount of vePERP as Alice and earn the same rewards.
You can also use the vePERP calculator to estimate your earnings when participating in Lazy River:
Or track all of the important information about Lazy River (including the 4-week rolling APY, average lock time, total locked amount, fees distributed per week, and more) using this dashboard:
Now we’ve talked about the benefits, let’s look at the risks so you can make an informed decision.
Risks
Since your tokens will be locked for up to 52 weeks if the price of PERP rises then you will not be able to sell them until your lock time expires. Therefore, you risk losing out on any appreciation, but you will continue to earn USDC and vePERP over time, so you have to weigh the benefit (earnings fees and rewards) with the risk (locking PERP and making it illiquid for some period of time).
There’s also a risk that the price may fall over time, but with more than 10% of the total supply locked earning yield, it’s likely that this trend will continue. As more PERP is locked over time and there’s more demand to earn ‘real yield’, it will reduce the circulating supply, in turn, supporting the potential for price growth.
Another risk is that trading volume falls, reducing the reward payouts, but the good news is that Perp has been doing $20 million in volume per day recently and this trend is likely to increase in the future as more people learn about the risks of custodial services and centralized exchanges.
As with any decentralized finance protocol, there’s also the risk involved with smart contracts behaving unexpectedly. Fortunately, Perpetual Protocol is open source and has a bug bounty for any potential attacks.
2. Velodrome — LP into a stable-stable pool
For the next strategy, we can use the decentralized exchange Velodrome to become a liquidity provider for a stable-stable pool.
For example, we can provide liquidity to the USDC-sUSD pool to earn trading fees, OP rewards, and VELO rewards. Since both USDC and sUSD are pegged to the dollar, avoiding any impermanent loss.
Whenever a trader on Velodrome wants to swap USDC for sUSD (or vice versa), they’ll be swapping against some of the assets you’ve added to the pool. For example, if they want to buy USDC, then some sUSD from your balance will be reduced and swapped for USDC. You’ll also receive a portion of the trading fees for facilitating any swaps.
This is a great way to earn passive income since your investment will not go up and down, since you’re only using stablecoins and you’re earning a return in four different tokens: USDC, sUSD, OP, and VELO.
Once you have provided liquidity for some time, you can check the rewards page to harvest your earnings. For greater rewards, you can buy VELO tokens and then lock them here:
An alternative strategy is to provide liquidity to a stable-stable pool such as WETH-SETH:
If you’re bullish on Ethereum, then you can provide liquidity to this pool and have exposure to ETH. If the ETH prices go up, you’ll earn an additional return from an increase in the value of your investment, as well as fees and token rewards provided by Velodrome.
Risks
As with any protocol, there are smart contract risks. There’s also a very small risk involved with stablecoins, which should hold the peg with the dollar, but in extreme cases may not be redeemable for one dollar. Also, if trading volume falls, then so will the value of fees and hence your rewards.
Not that the OP rewards are fixed and will not last forever, so this may put a dent in your returns once the incentives are gone.
3. Hop — LP into the USDC pool
Hop is a bridge that allows people to move funds between Ethereum, Optimism, and many other blockchains. To facilitate this, anyone can deposit funds into a pool that Hop users can use when they bridge funds from one blockchain to another. In return, you can earn a portion of the fees that bridge users pay.
Using the page above, we can go to USDC pool on Optimism to earn a yield of 8.07%. Most of this return comes from the incentivized HOP rewards, while just below 1% of it comes from the trading fees paid by users.
When you deposit USDC, you’ll receive hUSDC in return. As long as you hold hUSDC, you’ll be earning passive income! You can swap back for USDC at any time.
Risks
Bridges are known to be one of the weakest areas of crypto in terms of security. If the bridge gets hacked, then your funds are at risk.
Also, the yield mainly depends on the HOP tokens, which is not sustainable in the long run. If the HOP rewards are scaled down or stopped, then the yield becomes less attractive. The sustainable part of the yield depends on the demand for bridging through the Hop protocol. However, it’s worth mentioning it’s one of the most popular bridges (and will likely continue to be in the future).
4. Sonne Finance — Participate in Lending
On-chain money markets like Sonne Finance allow anyone to borrow or lend out crypto-assets without a credit check or using any sensitive information. When lending out cryptocurrencies on Sonne Finance, interest payments are accrued by the second. You can also earn an additional return when lending or borrowing with the OP token incentives.
The highest lending return at the moment is for supplying SNX tokens, with a base APY of 9.41% and a reward APY of 2.24%. The reward APY is the return that is denominated in OP tokens.
If you don’t want to risk price fluctuations and want to invest a stable asset, then you can lend out DAI, which currently has the highest APY out of all stable assets on Sonne at 7.24%.
Once you supply DAI, you’ll be earning interest payments in DAI, as well as OP tokens. You can then come back from time to time to claim your earnings. Whichever asset you supply, you’ll earn interest in that token.
Risks
If the borrowing demand for the asset you supply craters, then the APY will also fall too. There’s also smart contract risk, as with other protocols. If you choose to lend or borrow a non-stable token like SNX, then there’s an added price risk, which may decrease (or increase) the value of your investment.
All of the opportunities listed above rely on a single smart contract on the Optimism blockchain. As long as it works as expected, your funds can be considered safe. The next few strategies involve more than one smart contract and carry additional risk.
6. Participate in PoolTogether’s No-loss Lottery
PoolTogether is a no-loss lottery and a good example of one of DeFi’s innovative protocols. By depositing to PoolTogether, you basically take part in a lottery but you don’t lose your money if you don’t win!
How it works is that the deposited funds and put into a money market (Aave instead of Sonne Finance in this case) to earn interest payments. The interest payments are used to fund the prizes paid out daily.
You simply deposit some USDC, sit back, and then check each draw every day to see if you’ve won a prize! Just over $6,000 has been paid out in the past week and you can check your prizes using the link below:
As with other protocols in this list, there’s also a return in OP tokens to incentivize usage of the platform. The more USDC you deposit, the greater your chances of winning the draws and the more OP tokens you’ll earn.
Risks
PoolTogether uses the Aave protocol, so there are two smart contracts and added risk since they are combined together.
Also, your earnings will depend on your share of the pool. If you deposit a low amount, then your chances of winning a prize will be very low and you’ll just earn the OP rewards. Also, the OP rewards will not last forever, so some of this yield is unsustainable.
8. Toros Finance
Toros Finance is a yield aggregator that simplifies complex strategies so you can earn the highest return.
For example, by depositing USDC into Toros Finance’s Stablecoin Yield USDy vault, it will automatically use your assets to generate a profit using the protocols with the highest yield, switching between them when one protocol starts to offer a higher yield than another.
Not only will you earn a return from the profits generated by the strategy, you will also earn OP tokens!
Risks
Since Toros Finance interacts with many different protocols, this is the riskiest strategy on the list. There is exposure to many different smart contracts, not just one or two, and a chain is only as strong as its weakest link.
One final note: by regularly using these methods to earn passive income, you also increase your chances of earning an airdrop! Power users of Optimism recently received an OP airdrop for continuously using protocols on the network.
If you follow at least one of these strategies and frequently claim the rewards, you’re likely to become eligible for a future airdrop.
If you need any help, you can always check out the docs of each of these protocols, join their Discord servers or reach out to me on Twitter.
Now, let’s start making bread in our sleep!
Disclaimer: I am not a financial advisor and this content is produced for educational purposes only.
