While the lending market craze is plummeting and the “yield farming” opportunities are not as profitable as they were in the beginning, you might be looking for new ways to put your money at work.
In this article, I’m going to explore the best ways to leverage the current DeFi solutions for generating steady passive income at the lowest possible risk.
DeFi and passive income
Decentralized finance (DeFi) is the Ethereum ecosystem composed of financial DApps, smart contracts and protocols that are looking to revolutionize conventional banking by replacing its services with trustless code. The main idea is that without a middleman (the bank) the fees are much lower, no centralized authority has access to your funds, and everyone will be able to take advantage of these services regardless of where they leave. Today, we are already having decentralized exchanges, lending markets, tokenization platforms, prediction markets, payment networks, and many more to come.
Cryptocurrency is the perfect response to the current broken financial system. Anyway, things are not as different as you might think. DeFi gives you access to your tokens in the same way a bank is giving you access to conventional money(more info about the market). You can deposit, you can withdraw, you can spend them at your nearby store by using a payment card. And these services are extended to borrowing, lending, managing an investment portfolio. At the interaction level, today, there’s no big difference between a conventional financial system and a cryptocurrency-based one.
Banks are usually offering interest on your deposit which makes it appealing to keep your savings into their account. The “deposit interest rate” model is not bad. The actual interest rate that banks are offering is. In most cases, the interest rate for deposit accounts is under 2% while the annual inflation of developed countries is more than that. In the US the inflation in 2019 was 2.3%. In 2020 it will be even more than that due to the current global pandemic situation. In other words, even if you are earning interest on your money, in the end, it is still worth less than the year before.
DeFi solutions are looking to take these working financial models and adjust them to the current reality: offer better interest rate, capital protection, and more investment options. Let’s find out what are the new decentralized services that you can take advantage of right now to transform your cryptocurrency savings into passive income generators!
Structured deposits
You’ve already seen that cryptocurrency is high-risk high-reward, while securities and bonds are presenting less risk and steady income. Anyway, neither of these is a good option for users who are looking to create a passive income stream.
Gekkoin is one solution that merges the advantages of both markets by letting you choose your preferred investment strategy across them. The result? With one deposit you can choose:
Capital protection up to 100% (no loss if the cryptocurrency price falls) and returns from 2% to 18% of the rate growth per annum.
Or income up to 200% per annum (in case of cryptocurrency asset growth) with partial capital protection.
Even the lower risk strategy offers better returns than any bank can offer for a deposit at this time.
Gekkoin is managed by well-established company Adventarium, which made a valuable collaboration with Atlantex, a licensed broker managing crypto related operations, with Papaya, a financial institution that helps to held financial services in the conventional field and with 8848invest, a professional traders group to keep profit via stock market tools. The winning packages can be accessed under the form of a structured deposit.
In banking terminology, a structured deposit is a financial account where funds are placed into fixed deposits with an investment on particular assets. In this case, part of the investment will be made in securities and bonds providing a stable and secure income. While the other part of a cryptocurrency chosen by you. If the cryptocurrency shows significant growth, you can earn substantially more. If its price drops, the stable investment could compensate for it. In this way, Gekkoin provides guaranteed returns at a higher rate than banks and the possibility to significantly increase your earnings if the cryptocurrency market is growing. There is no other platform allowing its users to earn both on the growing and on the falling of the already full of risks cryptocurrency market.
The financial background of the platform can be seen in the overall user experience. Starting with Gekkoin is not different than making a bank deposit. The minimum deposit amount is 100 EUR and there is no maximum limit which could lead to serious income with the right amount. Gekkoin users have the option to replenish an account with popular crypto of choice BTC, ETH, or MONERO. Once the deposit is in the platform acts as a fully-featured financial portfolio giving you access to instruments that are currently associated with conventional financial systems. Actually, within the platform, your investment is always tied to conventional currencies. That’s possible due to the fact that your deposit will be stored in EURG utility token (at a fixed exchange rate of 1 EURG = 1 EUR). Even if your investment is managed in cryptocurrency, you are always having access to your funds in the same way you would access your funds in the bank.
While having all the advantages of a conventional banking service, you are also having the same opportunities as a professional investor: the ability to regulate risk and generate profit with your deposit. By default, the platform will give you the option to choose between three investment strategies:
- Safe strategy - for conservative investors who are looking for full capital protection
- Balanced strategy - for those investors who are looking for stable income with a minimum risk
- Dynamic strategy - for investors who are looking to take advantage of the high potential of cryptocurrencies despite the increased level of risk.
With Gekkoin, investing can be more flexible and less risky, making cryptocurrency investment less of a gamble and more of a way to generate passive income.
Lend for tokens
Between “yield farming” and leveraged borrowing, the one solution you’ll see in the news is Compound. It’s a loan market where you can borrow and lend cryptocurrency without a middleman. Lenders are earning interest similar to a financial institution, while borrowers need to deposit cryptocurrency as collateral.
Similar services were available before. Anyway, Compound is not a peer-to-peer matchmaker. You are not borrowing directly from a lender. All the lent assets go into a common “liquidity pool” from which borrowers can access directly. That’s why the interest rate is not fixed, but dynamically set by an algorithm based on the demand. Interest which is collected from borrowers then split between lenders. The whole system makes it profitable for both parties, and particularly lenders which are looking for a steady passive income for their deposited amounts.
A steady income is nice. But Compound wanted to incentivize its users through its native token COMP. Anyone who would lend or borrow on their platform would also earn a small amount of COMP tokens. It was seen by the team as a great way to distribute their token. But, with the increased demand the token price kept rising, up to $250 a token. At this rate, the token returns are higher than the interest returns. When the token reached its peak, around 2,880 COMP tokens were issued a day. That’s $720,000 in cryptocurrency. What was supposed to be a passive earnings-generating platform became a get-rich grab.
However, that ended fast. Today, COMP price is less than $200 and the codebase was already updated. Under the new rules, users will earn COMP on the dollar value of assets they have put in or borrowed from the system. That’s much less than the initial rewards. But the initial purpose of the platform of offering their lenders a way of generating passive income is still there. If their interest rate is attractive to you, you can check it out.
Lend for interest
Lending capital on a lending market is a way to earn income and you should know that Compound is not the only one. And, without the high income from the bonus COMP, the interest rate is the most important variable. As mentioned on Compound platform the rate is dynamically adjusted by their internal algorithm. Sometimes you can earn more, sometimes you can earn less. What if you are looking for a more stable income?
Aave, or ETHLend, as it was previously called, is a similar platform which offers flexible rates. This platform mostly differentiates itself from its competitors through the vast range of DeFi collateral. It’s one of the oldest projects in the market, launched in 2017, and, now, in 2020 holds a significant market share in the cryptocurrency lending space.
There are many lending platforms and most of them are limiting their users to their fixed interest rates just to be able to promise higher income rates. Anyway, with fixed interest, if borrowing is getting too expensive borrowers will go away, leaving lenders with no earnings until the market cools down. Basically, when the market is doing good, you, as a lender, you’re doing less income than before. This leads us to the second option, variable interest rate as seen in Compound. It solves the initial problem, but it brings new problems. The high swings in the demand-supply ratio are now translated into the interest rate. Sometimes you are earning a good income, sometimes you are earning very little income. There is no predictability, making it an awful tool for generating passive income.
Aave changes it with a system where the lender can switch between the two types of interest rates. Depending on the market conditions you can choose a stable or a variable interest rate. This change made the platform very attractive and a real contender for passive income. Due to the stable rate usually being higher than the variable rate, the lenders are generally seeing higher returns.
However, both Aave and Compound are lending markets where lenders and borrowers are indeed able to generate income. But the returns are marginal and you are always forced to choose a side. When you are lending you are hoping that the price of your asset will go up. While, when you are borrowing, you are thinking that the price might go down. If the opposite is happening, not only that you won’t earn any income, but, in the case of borrowing, you might lose all your collateral.
This being said, always make sure you understand the position you are taking when making an investment, placing it in a structured deposit or lending it on a decentralized market. As Andreas Antonopoulos, blockchain educator said in one of his streams: "Passive income is when you put your capital to work, and that carries some risks [...] An option is using a DeFi contract." He even mentioned that he managed to “generate a side capital” from DeFi platforms himself. As long as you are aware of the risks and you know how to manage them you might be sitting on the best way to put your money at work at the present time!