How to lend crypto ?
earn passive income by lendingWe’ve already introduced you to the DeFi ecosystem on 1bitcoincost. Between synthesized and ready stablecoins, the possibilities of decentralized finance are very numerous. But learning about the different projects and how they work, and taking care of their investments constantly, is something that takes time and energy.
So today we’re going to see how these services can help us get passive revenue.
When developing capital through one or more investments, strategy is key. It is the latter that keeps a cool head in the decisive moments, while guaranteeing an optimal development of your capital. The aim is to achieve a system that generates maximum profits while devoting a minimum of time to it. Because time is a scarce commodity, and non-passive income strategies cannot have infinite returns. That is why it is important to have systems in place that generate passive income.
These systems often require original capital, and do not necessarily provide the huge potential returns that cryptocurrency volatility can offer. On the other hand, these incomes are often more stable, and the risks are different, but not non-existent. It is therefore important to plan your strategy well and learn about the protocols and services used.
In this article, we can only outline these projects. You will also need to do your own research later on which services you think are relevant.
The first and best-known method of generating passive revenue through DeFi’s services is to simply lend its cryptocurrencies to other users in order to obtain interest. There are several types of loans, whether peer-to-peer or pool groupings, and different interest rates depending on the cryptocurrencies and the amounts lent. Indeed, it is the most in-demand cryptocurrencies that are the most profitable, and they are mainly stablecoins like the Dai or the USDC.
There are many platforms, protocols and interfaces to lend its cryptocurrencies, which offer different services and rates. And they tend to look the same, making it easier for you: once you’ve tried one, the others will be easier to understand.
Below is a list of the most well-known players in the sector at the moment. Note, however, that the information needed to understand their systems may remain obscure, and that you will need to exercise caution when using these services.
Compound is a major player in cryptocurrency lending through pools. In other words, lender co-ops. You deposit your funds on these pools in order to receive interest on your portfolio. Different cryptocurrencies can be loaned through the Compound protocol, but some offers are completely uninteresting. Indeed, at present, the site offers, for those who lend Ethereum, an annual return of… 0.01%, 70 times less than booklet A. Indeed, the sums available to be loaned are much less than those actually borrowed: in other words, there is a lot of supply and little demand. Interest rates for lenders are therefore extremely low today.
We’ve written a more comprehensive guide if you’d like to learn more. You can easily access Compound’s services, for example through the Silver Portfolio.
Maker is a lending protocol of stablecoins, the very famous Dai and Sai, whose value oscillates around a dollar.
Simply put, the creation of Dai or Sai is accomplished by guaranteeing Ethers or BAT, up to 150% of the value of the loan. Subject to market fluctuations, goods given as collateral must remain above a minimum value threshold, or risk triggering a liquidation procedure. The latter causes part of the warranty to go on sale to other users of the protocol, with a discount of about 5% compared to the market.
This is a protocol particularly known to the public since the famous “Black Thursday” of the crypto, during which it suffered a serious malfunction. Today, the causes of this problem seem to have been resolved, but this is proof that defi with DeFi must always be exercised.
Celsius Network is a mobile lending platform that offers its users interest with their cryptocurrencies, and borrow dollars if they put cryptocurrency as collateral. Many cryptocurrencies are available, offering interests ranging between 2 and 10% annualized (rather high rates compared to compound’s). So you can earn passive income by lending your Dai, BTG or USDC using the Celsius Wallet.
DDEX is a “decentralized” cryptocurrency exchange platform, which offers its users the ability to use leverage. These allow clients to multiply their positions in the markets but require the use of external funds. Usually, it is the platforms that lend the funds in exchange for fees, sometimes using other users’ funds.
As DDEX is a semi-decentralized platform, it is not the platform but other users who lend the money needed to cover the positions of speculators. It therefore allows you to invest your money by obtaining a variable return, such as the platforms mentioned above, even if the origin of the interest is not quite the same.
While the process of providing liquidity to trading protocols between different types of tokens may be akin to loans, the operation is not the same, nor are the rewards.
Liquidity protocols generally work as follows: by depositing your funds, you will receive Ethereum tokens that will represent your share of pooled funds. When these pooled funds are traded, transaction fees are levied, and these fees are added to the pooled funds. Finally, when you want to get your funds back, you exchange the chips you got in the first place, and you get a portion of the protocol’s monetary reserve, in proportion to the chips exchanged.
Small example: you decide to lend 1 Ether, and you get 1 token in return. There are already 99 existing tokens, and 99 Ethers in the pooled funds. After some time, the transaction fees added to the funds brought the total to 200 Ethers. And when you trade 1 token out of the existing 100, you get 1% of the pooled funds, or 1% of 200 Ethers. And so you leave with two ethers.
The value of the assets recovered will not necessarily be the same, so you may have lost money in the end. These protocols do not always compensate for the decrease in the value of an asset with the fees, if the decrease is too large. But in bull runperiods, lenders are almost always winners.
Like cryptocurrency lending services, there are many different projects that provide liquidity for rewards. The objective is to analyze the different protocols and services in order to make its choice between user experience and announced returns.
Uniswap is a major player in Ethereum chip swaps. But it’s not this feature that concerns us in this article. Indeed, Uniswap relies mainly on different liquidity pools to enable these exchanges so effective. These are users who bring this cash by depositing their funds on smart contracts,in exchange for a portion of the user fees of the protocol.
We also introduced Synthetix, which allows you to invest in assets such as Bitcoin, gold or equities through “synthetization”. It is actually the creation of tokens representing not crypto-assets, but derivatives relating to these crypto-assets. And this process requires, for the creation of derivatives, the use of SNX tokens as a guarantee. As a participant in the operation of the protocol, you can earn passive income by lending your SNX.
Cryptocurrency staking can also be a way to develop passive income. For those who already have a respectable amount of cryptocurrencies, it will be possible to take advantage of systems based on proof of stake directly. But this is not possible for everyone: it often takes a minimum amount of cryptocurrencies to be able to create a network node and produce blocks. For this reason, there are also services to pool its funds to receive a fraction of the interest obtained by a network node.
A few examples
Let’s discover the different ways to use cryptocurrency staking, which allows you to earn money passively. Between blockchain platforms that use staking to secure the network, and those based on super-nodes(masternodes), there are many opportunities in the cryptocurrency ecosystem. However, these opportunities are not without risks, which must be measured before embarking on this adventure.
Proof of stake
The proof of issue, or PoS for Proof of Stake,is a way to validate transactions made on an open network, which is often put in competition with proof of work. At each transaction block, a user among the stakers is selected to complete the block validation and get the associated reward. To give you an example of cryptocurrencies using staking, we can quote Tezos.
Unfortunately, most platforms offering node pooling are centralized. This is the case, for example, of exchange platforms such as Binance, which can indirectly dominate the market and the network of a certain cryptocurrency. When you pass on your funds to these platforms, the interest is passed on to you (often in exchange for a few management fees), but you often deny the voting rights associated with your network assets. And platforms don’t always make decisions that are good for you. This is something that happened to Steem recently,and which resulted in the creation of Hive.
Masternodes are, for the networks that use them, the only nodes in the network allowed to propagate transactions and participate in consensus. They often have other governance functions, and get rewards paid for in cryptocurrencies. These awards come mainly from the inflation of the cryptocurrency in question.
Setting up a super-node requires funds, as well as a dedicated IT infrastructure. However, it is possible to use services that offer to handle the hosting of the masternode, or to share the costs and rewards between different users with a system created for this purpose. Just be aware that the profitability of such systems is lower than that of conventional nodes, since a management fee is levied.
Investing in real estate through cryptocurrencies
The third way to get passive income that I present to you is less common at the moment, but it is still very interesting. It is simply a matter of buying tokened real estate (represented by a token) in order to obtain passive income through rents. The procedure is different depending on the services you use.
There are still relatively few services to invest in real estate through the use of cryptos, but I will introduce you to some of them.
RealT is a platform to invest in tokens representing real estate units, located in Detroit in the United States at the moment. You can buy in cryptocurrencies tokens representing shares of a company that owns a property, which allows you to indirectly own it. By owning these Ethereum tokens, you get daily rents in Dai, the stablecoin Maker has deployed. However, you should note that registration on the RealT website requires a KYC (customer knowledge procedure).
It’s a french startup which allows token different assets, such as real estate which interests us. The operation is similar to RealT, since it is shares of SCPI that are tokened, but there are some differences with their competitors. Indeed, the company is French and is therefore subject to French law. It is a guarantee of quality and safety for users. The platform also uses smart contracts, unlike its competitors. However, this is not an absolute guarantee of security, as the hacking of theforce protocol has (re-)proven recently.
There are many other ways to obtain passive income using your cryptocurrencies. Many do not fit within the framework of the article, since they remain outside of decentralized finance, but we have a nugget to share with you: a lottery without losers.
PoolTogether offers a more fun way to obtain passive income through cryptocurrency investment. Indeed, it is no more or less a large lottery whose tickets are buyable in stablecoins. Don’t worry about gambling risks, there are no losers on the platform! Indeed, the rewards do not come directly from the cost of tickets, the system is a little more complex. The money raised from the sale of tickets is placed in a loan system, and it is the interest on the loans granted that are distributed to lottery winners randomly. At any time, a ticket can be exchanged for the assets used to buy it.
In short, it’s a bit like a “crypto savings account,” in which you have the option to earn interest if you’re lucky. And if you’re unlucky, you can always remove what you’ve put in it.
The risks of these methods
While all these methods seem very attractive, we must not forget that they are high-risk investments. Indeed, if you can get good returns and the system works properly, the rewards are often distributed in cryptocurrencies. And these cryptocurrencies can see their values decrease. Getting between 4 and 10% return on a capital that melts as it goes is not very relevant. It is therefore a double investment that is sometimes made, especially in the context of staking. A first bet on blocking funds in a system, and a second on the value of a unit of this cryptocurrency.
In addition, these yields are not fixed. Many masternodes saw their yields crash inexorably, with no recourse to users, because inflation was too high. These figures are in fact annualized to look more interesting or to facilitate reading, but are not fixed. Some systems change rates from week to week, and others change rates in real time. It is difficult to determine the origin of the rates, since defined by algorithms of unknown origin and according to many criteria. So we must not take the rates indicated as absolute truths, and adjust his strategy. When it comes to long-term planning, it is best to be very careful and keep up to date at all times once the decision has been made.
Finally, DeFi protocols can be subject to computer attacks. While smart contracts allow decentralization, they are also prime targets for ecosystem hackers. To help you, we have also written a guide on smart contract security. .
Get your feet wet
What are the first steps to deploying passive revenues? It’s pretty simple:
- Assess your cravings and risk appetite,
- Define the amount of funds you want to allocate,
- Choose a method that you like and learn in depth about it,
- Test with small sums to understand the system and refine your strategy,
- Put in the funds you want to allocate.
Then all you have to do is take advantage of the passive income generated, and live a slightly more relaxed life.