Best ways to make profits in the blockchain world
Blockchain which was first introduced in 1991 has made a phenomenal change to the world of finance. It surpasses traditional databases with its fast and secured transaction and recording which excludes the involvement of the central authority. Furthermore, the cryptographic system from blockchain has created multiple methods for users to enhance their profits like non-fungible tokens (NFTs) platforms or decentralized finance (DeFi) applications.
In this post, users will be provided with some ways to gain liquidity in the blockchain world, how to use them, and the pros and cons of each method.
By using this method, just like people coming to banks to loan money, users can lend an amount of crypto in DeFi lending platforms, except that third parties have no intervention. This service is open to anyone that has an account on the DeFi platform and crypto wallet. There are two main lending models that users can choose to follow: Peer-to-peer (P2P) and Peer-to-pool (P2Pool).
For P2P lending, a borrower will go through a list of available options on the platforms which are put up by different lenders. After finding a deal with a satisfactory interest rate, the borrower will match with that lender on the system and a smart contract including the date due and interest rate will be conducted only between them. Depending on whether this is a secure or unsecured transaction, the borrower may or may not need to deposit assets to borrow crypto.
For P2Pool lending, a pool of assets stands between the lender and the borrower. The lender invests tokens into the platform’s pool and the borrower, after depositing an asset into the pool system, can borrow an amount of crypto that matches the value of the deposited asset. The interest rate that the borrower needs to pay to the lender is determined by the EVM-compatible machine and smart contracts of the communal pool.
For example, assuming the user lends 10,000 DAI (9998,50 dollars) for 1 month under the P2P lending model and the interest rate is 0.15%. In that 1 month period, the value of DAI coin increases, and 1 DAI can be equal to 3 dollars, which makes the initial 10,000 DAI lending now worth approximately 30,000 dollars. After paying 15 DAI (45 dollars) interest rate and the lending amount, users finally earn approximately 6,637.7 DAI which equals 19,956.5 dollars.
- Pros: DeFi lending is accessible to everyone, even users who are not able to get a loan from traditional financial institutions. Quick transactions also allow borrowers to earn crypto instantly without the intervention of third parties. Furthermore, the transparency of DeFi lending protocols is high since all transaction information is broadcasted publicly.
- Cons: Regarding lending models that demand collateral, over-collateralization is a problem. To avoid the risk of low credit score borrowers, the borrowers are often asked to collateralize the assets that have a much higher value than the lending amount. Moreover, the low liquidity of DeFi projects is a concern for borrowers as the supply might not be enough.
The only action required in this method is to lock assets in the proof of stake (PoS) based network. As this action supports the network’s security and decentralization, users are rewarded with crypto by the system. There are two ways to stake which are solo staking and pool staking. As the higher amount of crypto users stake, the higher opportunity for them to be rewarded by the system, most users prefer the pool staking method where many coin holders act as a group and merge their assets.
The crypto reward is determined by many factors such as the cryptocurrency value that users stake or the demand on the blockchain network. For example, at the time of writing, the total reward rate of Ethereum is 4.82%. If users stake 1,000 dollars in the Ethereum network, they can earn approximately 3.85 dollars monthly and 46.79 dollars annually.
- Pros: The method allows users to gain long-term passive earnings from their crypto tokens. Compared to traditional financial institutions, DeFi staking provides users with a higher earned interest as the annual percentage yields of some coins are more than 10%. Moreover, when DeFi users utilize pool staking, the deposit requirement pressure is divided among users in the pool, which lowers the entry barrier.
- Cons: The volatility of cryptocurrency shows that the value of the crypto can go up incredibly high, but it can also drop easily and significantly at some point, which causes users liquidity loss. DeFi users can earn the most when the value of the coin increases and the staking process provides interest.
Becoming liquidity provider
Liquidity providers are investors in the platform’s pool. Becoming liquidity providers means that users will gain liquidity from transaction fees by staking a trading pair of cryptocurrencies into the liquidity pools of decentralized exchange programs. For each swap, a 0.3% transaction fee will be divided equally among liquidity providers. Users can earn 2% to 50% annual interest from liquidity provider fees depending on the pool they invest in and the number of swaps.
- Pros: Since users receive incentive fees monthly or annually, it assures them a steady passive income. Furthermore, liquidity providers are protected by the DeFi DEX security, which gives them full control of their assets from anywhere in the world. Cyber attacks rarely happen as the assets and tokens are saved globally.
- Cons: There is a chance that impermanent loss which appears to be a reduction value of current assets compared to their first investment might occur. The reason behind this is the decrease in the supply of assets and the rising price in the pool.
This method allows NFT owners to upload their NFTs on the marketplace and gain liquidity from renting them. After the NFT owner and renter make a smart contract, the renter is responsible for paying back the NFT and the negotiated renting fee on the expiration date. For example, some users invest a huge amount of money in digital land plots and rent out these properties for gamers. Moreover, to protect the NFT owners from asset theft, the renters are required to deposit assets that are equal to or higher than the value of the NFTs they rent.
- Pros: Instead of keeping the valuable NFTs in a digital wallet, renting these NFTs provides the NFT owners with an extra source of passive income. Moreover, anything can be rented from a helmet in a game to valuable artworks, which expands the sources to earn liquidity for users.
- Cons: The renter might not return the NFTs and that is not a happy situation for the owners who really like those NFTs even when there are collaterals as consolation assets.
NFT based lending
It is similar to DeFi lending where users collateralize their assets to get crypto. In this case, the users are NFT owners and the assets are NFTs.
For the P2P lending model, NFT owners can only regain the collateralized NFTs when they pay back the lending crypto and interest rate to the lender at the deadline; however, if they are unable to repay, the lender will be the new owner of those collateralized NFTs.
Usually, the lending amount that NFT owners can get fluctuated between 20% to 30% of the deposited NFT’s value, and the interest rate is determined around 20% to 80%. By using this method, users can earn liquidity instantly and have more time to invest in other promising projects.
For example, the NFT that the user collateralized is the CryptoPunks which is worth 122 ETH (156,000 dollars). Considering the platform agrees to give the user 30% of the NFT value as a loan in 30 days and charges a 20% interest rate, the user will gain 36.6 ETH (46,800 dollars) and has to pay 7.32 ETH (9,360 dollars) as an interest rate in the 30-day period.
- Pros: It allows users to gain an amount of crypto right after they successfully deposit their NFTs.
- Cons: NFTs are volatile assets that require users to calculate carefully before collateralizing. The value of the NFTs might surge after being collateralized, which is a lost opportunity for users to bargain a higher lending amount. The value of NFTs can also fall and cause difficulties for users to collateralize.
The invention of the blockchain has opened many opportunities for its users to earn liquidity from various methods. To get the maximum profit, users need to consider which method is the most suitable for their financial state and calculate the risks before getting on to the investment.
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Disclaimer: The information herein is for reference purposes only and should not be considered financial, investment, or trading advice. Please conduct your own research and due diligence before making investment decisions. You understand that you are using the Information provided at your own risk.