Welcome to this article on How to make money with DeFi!
Did you know that over $50 billion has been locked into the Decentralized Finance space as of mid-2023?
Not too bad for a still-growing industry up against the goliath of traditional finance, if you ask me.
But how can you get a piece of the pie that DeFi has on offer?
First, let’s talk about Staking
The first method is staking.
Staking means simply holding your crypto assets in a wallet or a smart contract and earning a share of rewards for transactions on a network.
In this example, I will go through how you can stake Ethereum on Binance...
First, you need to get some Ethereum tokens into your Binance wallet. You can do this in a couple of ways.
For example, you could buy crypto straight from Binance using a credit card...
Of course, in the case that you already have some Ethereum tokens lying around somewhere, you could also transfer them directly to your Binance wallet instead.
You can access either of these options from the Binance homepage.
Now, once you have the deposit in place, you are ready to use your Ethereum on the exchange.
Next, go to Binance’s homepage.
You should click on the ‘Earn’ button in the top ribbon and then click on ‘ETH Staking’...
You’ll be taken to a page that looks like this...
On the top of the following page, click on ‘Stake now.’...
Once you’ve clicked on it, you can choose the amount of Ethereum you want to stake...
Click on ‘Stake,’ and… congratulations!
You are now staking your Ethereum. Not that hard, was it?
But everything has upsides and downsides, right?
So what are the Pros and Cons of Staking?
Staking benefits include being able to gain something from simply locking in the assets you hold.
It’s clearly the most significant aspect, as it gives you passive income, without you having to trade or invest your assets.
It’s also considered a safer method to profit from in that it can give you a fixed return in the form of crypto.
This is especially true when you consider that stablecoins staking on Binance can return as high as 4.65% at the time of writing.
That is more than 100x what a high-end Bank of America savings account.
Another benefit is that it also allows for long-term investments.
Like in traditional investments, rewards can compound over time, allowing for higher returns over a longer period.
Now - a disadvantage of staking is that it usually requires you to lock your assets for a predefined period of time.
Naturally, this means your assets are unavailable to you while they’re being staked.
However, note that platforms like Lido reward you with tokens for staking.
These can be used for earning returns as well, but more about those a bit later on.
The greatest downside though, is that market fluctuations can affect the rewards you get back from staking.
Over time, this can affect your returns quite a lot since crypto is probably the most volatile asset you can hold!
But staking isn’t the only way to make money on DeFi...
Next up, Let’s explore Leveraged staking
In leveraged staking, you can borrow funds from a decentralized exchange, and use those borrowed assets for further staking.
In this way, you are amplifying your returns yielded from staking.
It’s very similar to borrowing money in order to make an investment - but in this case you are using your original investment as collatoral.
To begin, we need to replicate what we did for staking Ethereum, but instead of Binance, we are going to use a different staking platform called Lido.
First, go to the Lido homepage...
Click on ‘Stake Now’ on the Ethereum tile for that page...
Once you’ve connected your wallet, you should be able to stake your Ethereum on Lido.
Here’s a question, though. Why LIDO?
Well, in a word, LIDO offers flexibility.
In this scenario, you are a liquidity provider for LIDO.
In return, Lido gives you something back, called staked or “st”-Ethereum.
And what’s special about st-Ethereum?
Well, firstly, they’re worth the same as Ethereum.
This means you have something liquid that you can use of equal value to what you just locked into Lido.
Secondly, perhaps surprisingly, you can use this stEthereum to go and get even more Ethereum.
So, Where do we go to Leverage our Stake?
Well, the answer to where you can use these stEthereum is a place called Aave.
Aave is one of the most popular DeFi protocols around, for good reason.
Once you have your stEthereum from staking the original Ethereum, you need to get a ‘wrapped’ version.
When tokens or coins are wrapped, it just means they are converted to make it easier to transfer value between different networks.
In this case, simply select wstEthereum from the ‘Wrap’ tab in LIDO.
It’s the button right next to ‘Stake.’...
Now we can use this wrapped version on Aave.
Next, go to Aave.
Scroll to the bottom of the page, you’ll see an option where you can deposit wstEthereum...
Once you’ve deposited your wstEthereum into Aave as collatoral, you can now borrow Ethereum against it.
For example, using a 50% Loan-to-value ratio, you could get 5 Ethereum for every 10 wstEthereum that you deposit to Aave.
So ultimately, you just used your Ethereum to get more Ethereum.
Pretty mind-bending, isn’t it?
Now, you can use your Ethereum to do whatever you want.
But one of the best things you can do is go right ahead and start the cycle from the beginning.
Take your new Ethereum, go to LIDO, stake it, and so on, as we just laid out.
Of course, there’s a limit to how far this will stretch but, it definitely allows you to gain more returns on the original investment.
This principle also applies to stablecoins, which may offer better, or at least more stable, returns overall.
Now, naturally, everything has its advantages and disadvantages...
What are the good and bad sides of Leveraged Staking?
The biggest benefit is that it allows you to make your investment pool bigger without actually investing more of your own assets.
You just use what you borrowed to earn more.
In contrast, the biggest downside to this method is related to something called impermanent loss.
You can find out more about impermanent loss on this site actually, but in this case, it happens when staked amounts fall under a certain loan-to-value ratio.
To put it simply, this is the ratio of what you get versus what you borrow.
If the market values of cryptocurrencies change for the worse, platforms like Aave will actually start to sell off your collateral to compensate.
But, these are not the only ways to make money using DeFi...
Let’s Move On To Making Money As Liquidity Providers
This is basically just contributing to a liquidity pool on a decentralized exchange in exchange for tokens.
Here’s how you do it.
First, you choose a decentralized exchange or DEX that supports liquidity for the cryptocurrency you want to deposit.
Some famous examples include Uniswap, SushiSwap, PancakeSwap.
Next, connect your wallet to the Decentralized exchange you chose.
In this case, I’m showing you Uniswap.
Go to Uniswap and click on ‘Launch app.’...
This will take you to the following interface...
If you haven’t yet connected your wallet, this is where you do that...
Once you have connected your wallet, select a pair of tokens you want to invest in.
In our case, we want to invest in the Ethereum/USDC pair.
Assuming that you only have Ethereum to start with and no USDC, here is what you need to do.
Swap some of your Ethereum for USDC...
Here’s the list of tokens you can choose from...
Now choose USDC and swap your Ethereum for it...
Once your transaction is approved, you can go to the pool...
By clicking “New Position,” select a pool and deposit your currency pair.
This next step involves specifying the type of fee you want to receive.
Different types of pairs warrant different levels of fee, as you can see in the comment with each level of fee.
You also have to specify the price you want your assets to be available at.
The cheaper you make it, the more likely it is that people will buy your funds.
The more people use your funds, the more fees you get - but remember it’s a balancing act...
Once you have deposited your currency pair, you can just sit back, relax and wait for the fees to hopefully roll in.
Of course, it’s always a good idea to carefully analyse any action before you make it...
So, what are the benefits and downsides to Liquidity Pools?
Well, the obvious big benefit to liquidity pools is in being able to generate passive income.
You can even earn rewards for depositing your assets into liquidity pools, too.
Since there is no intermediary for decentralized exchanges, no middleman fees are charged.
However, there are some concerns here too.
For example, volatility and impermanent loss are issues with this method.
Some platforms also have restrictions on the amount users can deposit.
This limits how much you can make in fees.
Conclusion
And there you have it!
By now, you've got a solid grasp of the exciting world of DeFi, or Decentralized Finance, and how you can tap into it to make your money work for you.
In this article, you learned three primary ways to profit from DeFi.
Firstly, you saw staking, a method that allows you to earn rewards simply by holding your crypto assets in a specific wallet or smart contract.
I used Ethereum and Binance in my examples, but remember, there are many other platforms and cryptocurrencies where you can try staking.
Next, we dove into the slightly more complex concept of leveraged staking.
Leveraged staking is an novel technique that allows you to borrow funds to amplify your staking returns.
I used the platform Lido to explain this concept, but again, lots of platforms offer similar services.
Finally, you explored the role of liquidity providers, allowing you to earn passive income by depositing your assets into a liquidity pool on a decentralized exchange.
Again, I used Uniswap for the demonstration, but there are other popular platforms like SushiSwap and PancakeSwap too.
That wraps up this tutorial on making money with DeFi.
Take care out there - and good luck!
