What is DeFi and How to Make Passive Income Using DeFi
The cryptocurrency market can be intimidating, especially if you have little to no knowledge about it. Cryptocurrency is a relatively new concept, which means it is constantly reinventing itself, making it all the more confusing.
The industry is constantly reinventing itself and can be highly beneficial to its investors because innovations and new concepts are being made every day. One such concept is Decentralized Finance (DeFi). DeFi is taking the cryptocurrency world by storm by offering unique ways to grow your cryptocurrencies.
Explore the world of Decentralized Finance and discover which platform can help you get the most out of your investments.
What is DeFi?
Perhaps you are wondering what is DeFi. Decentralized Finance (DeFi) aims to create a financial hub free from individual corporations or entities controlling it. Companies are prone to human errors and other things like corruption and folding, which DeFi aims to avoid.
Transactions are done through a “Smart Contract,” platforms programmed to do specific things without error, ensuring a purely peer-to-peer transaction. To eliminate intermediaries, Smart Contracts can handle all of your investments, and you simply choose where you want to invest your tokens.
How to build passive income using DeFi
Using DeFi, people can invest, lend, and borrow as they would with traditional cash, creating new job opportunities. This section discusses these jobs and different ways of growing your passive income.
As DeFi attempted to change how financial institutions work, you can use the platform in the same way to maximize your profit. The only difference is, DeFi doesn’t rely on centralized financial institutions.
Here are some ways you can double or triple your tokens when you sign up for DeFi:
Staking is the process of putting your crypto assets into a Smart Contract, effectively making you a stakeholder of the contract. Some Smart Contracts work through a proof of stake, meaning, if a Smart Contract has tokens staked on it, it gains more credibility. You get paid with the same token, in DeFi’s case, it’s Ethereum, as an incentive for helping a Smart Contract gain credibility.
This type of income building is similar to buying bonds from companies or the government. However, the other catch with staking is that it’s equivalent to getting paid in dividends when investing in stocks. The longer you have a stake in a smart contract, the longer you reap the benefits of doing so.
2. Becoming a Liquidity Provider
Liquidity providing is the process where liquidity providers, or people who invested in smart contracts, can earn 0.3% of the value gained through the swapping of tokens. For example, if Ethereum tokens are swapped for USDT, a liquidity provider can get an additional 0.3% proportional to how much they have staked in the smart contract.
So essentially, staking and liquidity providing are connected. If you stake your tokens on a smart contract that exchanges tokens, then you can reap the rewards.
Liquidity providing can come with some risks. The risk that poses the main threat to your stake is “Impermanent Loss.” Impermanent loss happens when the price of a pooled token considerably changes, making it impossible for a fair exchange to take place.
3. Yield Farming
Yield farming is the process of using the tokens that you have earned from being a liquidity provider on a yield farm. A yield farm works similarly to a smart contract in that as long as you stake your tokens on the platform, you can earn more of the same token as time goes by.
To dive deeper into the concept of yield farms, they are lending platforms that use your tokens to lend to borrowers. In exchange, you get rewards with similar tokens or different ones.
The concept of yield farming is similar to time deposits for traditional fiat money, with the only difference being, there can be high rewards in yield farming, but only if you’re willing to take high risks.
Other DeFi platforms are explicitly built for lending. While some platforms work in the same principle as lending, lending platforms are specifically created for supplying your money to a Smart Contract. The advantage of staking your tokens on a lending platform is that some of these platforms offer a considerably higher interest rate, which makes it a good enough incentive for some people.
With RAMP being a lending platform, you might want to know all about its features and the benefits of using the platform. Read this about Liquidity Incentive Program for more information about RAMP.
Join the RAMP community
Backed by world-class investors, RAMP DEFI is an optimized lending platform that aims to give users the highest deposit yields and lowest borrowing fees on collateral assets within Binance Smart Chain and Polygon.
RAMP has also enjoyed considerable upgrades to its system, making it more secure and efficient. With the recent launch of the RAMP 2.0, processes have been streamlined to give its users a good experience.
Using the RAMP solution, users with staked assets can continue to receive staking rewards, retain capital appreciation potential on their staked portfolio, and unlock liquid capital to invest in new opportunities at the same time.
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