Don’t Just HODL: Top 4 Passive Income Strategies in DeFi

HODL has been a mantra for crypto investors since Bitcoin’s early days.

More than a crypto joke, “to hodl” is a sort of investment philosophy: holding an asset for a long time, not considering the market’s short-time movements.

HODL makes a lot of sense if you believe that crypto is still in its early days, and that adoption will come in a few years.

This famous Morpheus meme synthesizes this investing philosophy well:

But why just HODL, when you can HODL more?

The invention of Decentralized Finances (DeFi) has made it possible to get yield on your crypto.

In this guide, we share the top 4 passive income strategies in DeFi, so you can put your coins to work for you. Let’s dive in! 👇

1) Lending

Lending is one of the simpler ways to get passive income in your crypto.

There is a considerable demand for borrowing coming from experienced investors. Those investors are willing to pay lenders’ interest to get more exposure to an asset, such as ETH or BTC.

Decentralized lending protocols such as AAVE or Compound allow anyone to lend their crypto and get some yield.

Smart contracts do the hard work of lending and borrowing, so you don’t have to worry about actively managing your position. There is no impermanent loss risk, and you can withdraw anytime.

However, yields typically are not high. Currently, most core assets (such as ETH or stablecoins) are earning less than 1%. Also, you will need to compound rewards by yourself.

2) Providing liquidity

Providing liquidity is another popular way of putting your crypto to work for you.

Users can deposit their tokens into a decentralized exchange (DEX) liquidity pool and earn fees.

If you’re bullish on ETH, you can deposit your ETH and USDC to the USDC-ETH pool on Uniswap and get a percentage of the trading fees of that pool.

This is a cool and sound method of getting yield on your assets without going through many steps.

The tricky part is that you will need to deposit two (or more) tokens — not only one. This means you will need to have more liquidity available.

Besides that, you will also have to compound rewards by yourself.

Finally, there are impermanent loss risks. This means that your position in the liquidity pool can momentarily go down in value during market fluctuations as the balances of each asset fluctuates.

We call the loss impermanent because value is expected to return to normal alongside the pool balances.

In this sense, choosing pools with high liquidity will decrease impermanent loss risk. However, they tend to offer inferior yields.

3) Blockchain Coins Staking: ETH, SOL, AVAX, DOT, etc.

Staking is the primary security mechanism of Proof of Staking (PoS) blockchains, such as Solana, Avalanche, and (soon) Ethereum.

By locking your tokens into the chain, you make those blockchains safer. In return, you get a small percentage of new tokens generated plus some portion of transaction validation fees.

This passive income strategy is only possible with blockchain tokens like ETH, AVAX, SOL, or DOT. Yield depends on the protocol, going from 4% on ETH to plus than 16% on Polkadot.

The biggest drawback is the locking times, which may vary from protocol to protocol.

Currently, one of the most famous DeFi protocols for staking is Lido. By locking tokens in their platform, you get a “staked-token” (such as stETH), which can be used in other DeFi applications.

4) DeFi Tokens Staking: CRV, SUSHI, OHM, etc.

DeFi Staking is similar to blockchain staking: lock your tokens, get more tokens.

However, it has nothing to do with securing a blockchain. Generally, DeFi Staking provides incentives for long-term holders and allows users to get voting power on protocols.

Staking mechanisms will vary from protocol to protocol. Let’s give two examples.

1) If you are bullish on the SushiSwap protocol, you can stake your $SUSHI tokens.

As a reward, you will earn a small percentage of every transaction fee on the platform.

Besides that, you’ll get the xSushi token, which you can use to trade or boost your yield even more.

Finally, by holding xSushi in your wallet, you can vote on governance decisions.

2) Curve has one of the most well-designed staking mechanisms.

You can lock your $CRV tokens for up to four years and get a veCRV token. The longer you lock your CRV, the more veCRV tokens you’ll get.

By staking the veCRV token, you can get boosted yield on several Curve pools. Furthermore, you can vote on which pools will get boosted yield!

DeFi staking is better than just letting your DeFi tokens idle on your wallet.

In this case, it’s essential to be attentive to locking periods and choose your protocol carefully — as those staking incentives are not always sustainable in the long run.

Final Remarks

DeFi allows users to “HODL on steroids”.

Or, as we say at OptyFi,

YIEDL > HODL.

Despite DeFi risks, getting yield is generally a better option than just letting tokens idle on a wallet.

If the market goes down, your loss can be considerably smaller. However, you can sell your crypto for higher returns if the market goes up.

If you’re more conservative, you may stay with lending only: lower risks, lower APYs.

However, suppose you have more time to manage your positions. In that case, you may combine multiple passive income strategies to maximize your returns.

Thanks for reading!