DeFi 101: How to Earn Passive Income in Crypto
“Passive income” is undoubtedly the most-searched term for newcomers to investing. It’s generally viewed as the ultimate end goal: setting up a revenue stream that is low-maintenance and sustainable in the long run.
Yet, because it’s such a desired end goal, claims of passive income are often littered with bad advice. Some would claim it’s even the wrong approach altogether because rarely is income ever truly “passive.” While this may be true, not all passive income sources are made equal. Traditional assets, for example, often require lots of capital to start, as is the case with real estate.
Cryptocurrencies arguably offer a much better alternative for those looking for passive income. This is because they are both more straightforward to set up and require far less capital to start.
For the crypto world, the term “passive income” is often called yield — and when it comes to yield, every protocol tries to entice you. Decentralized Finance (DeFi) revolves around yield. One can even say that much of the crypto market is a battle over who can offer investors the best place to park their funds and earn.
So far, a few industry leaders have emerged who have consistently demonstrated both security and returns. Still, it is essential to understand where the yield comes from. There’s a saying: “if you don’t know where the yield comes from, you are the yield.” Remember this line because it will help you make the right choice in the future.
So, let’s talk about a few protocols offering passive income, where it comes from, and whether they’re a sustainable place to park your money.
The DeFi Staples
If you’re already familiar with DeFi, you likely already know the market leaders. They fall into a few categories: automated market makers (AMMs), lending protocols, staking, yield farms, and other creative alternatives beyond these classifications.
The safest yield comes from AMMs and lending protocols. Additionally, passive income generation is best done through stablecoins pegged to a dollar and will save your capital without needing to stress over volatility.
AMMs are the backbone of the entire DeFi ecosystem. Aside from trading on an AMM, they also offer sustainable yield from trading fees. This is best done on Uniswap or Curve. If you hold stablecoins, you can provide liquidity to pairs like USDC/USDT and earn a healthy few percent APY. However, the APY oscillates depending on how much trading activity there is on the exchange.
Another means of getting sustainable yield is depositing into a lending protocol like AAVE or Compound. For example, you can deposit USDC or even ETH and earn. The yearly APY largely depends on how much demand there is for loans. During bear markets, however, this can be quite low.
Lastly, a recent option for passive income is staking your ETH if you are holding. This can be done through protocols like Lido or Rocketpool, which offer passive returns on your holdings amounting to 5–7% APY. The APY comes from the newly-minted ETH as per its proof-of-stake model.
Of course, DeFi offers other forms of yield, but they are not necessarily “passive.” For example, yield farms — once a popular way of shoring up deposits — are very volatile in price due to high emissions. Other experimental protocols require vigilance and are not for the passive-minded investor.
The most challenging part of earning passive income is tending to everything. The APY can often vary, and depositors are therefore known to mix and match to optimize returns. This can be tedious, especially if you are not investing a large sum. It also requires constant monitoring.
Luckily, there are ways to make this a whole lot easier. Vesper is what you could call a “yield aggregator.”
Plenty of these are on the market, one of the most well-known being Yearn. But Vesper is a comprehensive suite that automates passive income across various leading yield sources. All you have to do is deposit, claim, and compound your earnings. This is suitable for many different strategies, whether you want to earn passive income on stablecoins or the leading cryptocurrencies like Bitcoin (BTC) or Ethereum (ETH). The yield comes from a diverse set of protocols with a low-risk profile, plus you also earn some Vesper governance tokens (VSP).
We believe the future of passive income in crypto involves consumer-facing DeFi suites like Vesper. So, try it out for yourself — as your portfolio develops, set aside a portion, deposit it into Vesper, and watch your passive income steadily grow.