A Guest post by Comistar Estonia
Since the 2020 “DeFi summer” (prices rocketed gazillion times). At its peak in December 2021, the total value locked (TVL) in decentralized finance protocols reached over US$250 billion. At that time, it represented 8.2% of Crypto’s total market capitalization, which peaked at around US$3 trillion in November 2021. Since the crypto winter began, DeFi has lost about 75% of its total TVL, which currently stands at US$66.6 billion.
The simplest way to earn income through DeFi is to deposit your cryptocurrency onto a platform or protocol that will pay you an APY (annual percentage yield).
In a nutshell, you can buy digital assets (for example, ETH, USDC, USDT etc.) and deposit these assets to DeFi protocols, which enable you to earn yield.
Lending is probably the easiest way to earn yield. You can deposit your crypto asset into a smart contract. The platform lends this asset out to interested borrowers. Usually, borrowers have to provide collateral in the form of another crypto asset (for example, you don’t want to sell your BTC, but you can put it up as collateral you can redeem once you pay back the loan). The interest accrued will be distributed to you by the smart contract. The most known lending protocols include MakerDAO and Compound Finance.
Most DEXs use automated market makers (AMMs), whereby liquidity providers send their tokens into a liquidity pool to achieve this. Akin to traditional lenders and banks, providers offer their liquidity in exchange for interest. DEXs generate revenue by taking fees for every transaction.
Staking is the closest to what you’d call a savings account in traditional finance. You “lock” your tokens into the smart contract and earn a yield on that. In the Proof-Of-Stake algorithms, stakers also secure the network. For example, DEXes (decentralized exchanges and AMMs, for that matter) have their native token, which you can stake on their platform. The incentive here is the (partly) shared revenue of the platform, which the stakes receive as a reward. To learn more, check Uniswap or Sushiswap.
DEXs have liquidity pools, which are made up of token pairs of equal value. For example, take the token pair ETH and UNI. A liquidity pool should have an equal value of both. These liquidity pools are the trading markets and enable the loss of the order book mechanism centralized exchanges use to provide trading pairs.
Yield farming is connected to liquidity providing. Because when you provide liquidity, you usually receive LP tokens. These LP tokens represent your proportional shares in the liquidity pools. When you redeem your LP tokens, you will receive your initial contribution and any fees you’ve earned.
However, these LP tokens can be “farmed”. It’s the same activity as staking, but only for LP tokens. And many platforms enabling you to provide liquidity now will also allow you to farm your LP tokens. This means you can earn additional income. Sounds weird and even crazy? It is. But it’s a way to earn income.
Can I Make This Into A Business?
Yes, for example, you can open an Estonian company and start staking company funds DeFi, CeFi or in Crypto currency. This activity is legal and does not require you to have an crypto license. Another plus side of an Estonian company is that there is no corporate tax of realized gains or losses; tax is only payable when the company distributes dividends. If you are interested, do check out Comistar Estonia on why an Estonian company is perfect for you!
DeFi turns crypto assets into productive assets. Meaning, like rental income, it generates cashflows. Whether the underlying asset is fundamentally a good asset is a debate for another time. But it’s good to be aware of the possibilities, as many people earn a lot of money using these new technologies.
As always with Crypto, whatever you decide to do, ensure the project is legit and you can trust your money.