Anyone who has been watching the crypto markets and decentralized platforms will agree that 2020 was a good run for DeFi. The sector grew by leaps, recording a 2000% growth to close at $13 billion in TVL.
As other sectors were crippled under the global pandemic, decentralized finance thrived as crypto enthusiasts got on board. Whether this was fueled by FOMO or by the mainstream global adoption of cryptos, there’s no denying that the massive onboarding by enthusiasts across the globe marked a significant shift for the blockchain industry.
Although DeFi was initially established to bank the unbanked, these projects have come up with different ways for users to make money. Whether you know every nook and cranny of the sector or you’re just getting started, there’s something for you in DeFi.
Trying to figure out how to make some extra money through DeFi? This article is just what you need. Here are our top four picks for DeFi projects worth looking into and how you can make some coins from them.
Uniswap
Uniswap is, undoubtedly, one of the most popular DeFi projects, thanks to its automated market maker (AMM) protocols. Thanks to these, there’s no need for order books as is the case with traditional exchanges.
Uniswap offers the opportunity to make money by becoming a liquidity provider (LP). To do this, you will need to trade against a pool of assets so that you can swap tokens and ETH. The liquidity pools are public, and anyone can contribute to them. All you have to do is lock in equal amounts of the token pairs.
LPs then make money by earning a share of the trading fees. Uniswap currently sets this at 0.3% of the trading fee, distributed according to the amount held in the pool.
It is worth noting that providing liquidity on any DeFi platform isn’t entirely riskless. Instead, LPs can make impermanent losses, depending on the price direction of their selected pair. Let’s take an example;
Suppose you want to invest $200 in the ETH/USDT pool. You’ll need to deposit $100 of ETH and $100 of USDT. When the trading volume in the pool grows, so do your gains. However, if the prices of the pooled tokens fluctuate significantly, you could lose money through impermanent losses.
Suppose ETH gains 5x following your deposit in the ETH/USDT pool; you could have a 25.5% impermanent loss. However, if you gained 40% on the fees, you’ll end up making a net profit of 14.5% since the net gain is calculated by subtracting the impermanent loss from the trading fees.
They are called so because the loss isn’t realized if the price ratios are correct before you withdraw.
Therefore, you make the highest returns when there are low price changes and a high trading volume.
Providing liquidity presents a different kind of risk. As such, it’d be best to analyze real-time data from LP aggregators to project your potential gains better. You could further mitigate the risk of impermanent losses by choosing pools with less volatile assets, such as ETH/USDT.
MakerDao
MakerDao is another well-known name within the DeFi space. The open-source project was established in 2014 and has held its position as one of the top DeFi projects even as new contenders join the scene.
The Maker protocol has Dai as its native token, and token holders have several opportunities to make money on the network. Besides the staking and lending options offered by various DeFi projects, Maker provides a unique way to make money; the Dai Savings Rate (DSR) contracts.
Dai holders only need to lock their cryptos in a DSR contract through different gateways, including the Oasis Save Portal. There’s no lower limit on the amount to deposit, and users can start earning automatically.
MakerDao employs a global system parameter to determine how much Dai holders earn on their savings. The platform has another token, MKR, which serves as the governance token.
MKR holders mitigate Dai’s price instability whenever the market price deviates from the target price.
The network, however, has plans to implement the DSR Adjustment Module or easy adjustment of the DSR. The module will control both the DSR and the base rate, making it easier for an MKR holder to adjust the rates in lieu of a bigger group of holders.
The DSR is ideal for HODLers who want to earn money from their cryptos without assuming too much risk.
Compound
Our final pick for this list is Compound, a decentralized protocol for developers that makes it easier to access open financial apps. Compound takes advantage of one of the most important aspects of any financial system; borrowing and lending.
Compound users can choose either to borrow or lend cryptos at an interest. Lending your cryptos to the protocol earns you an interest rate in the same way as having your money in a savings account does.
The interest starts accumulating once you’ve made your first deposit and is denominated in the same tokens that you deposited.
Therefore, if you had lent Dai tokens to the protocol, you will receive interest in Dai.
However, once you make a deposit, you earn cTokens, which you can redeem at any time to get the underlying assets. As the underlying asset gains interest, the exchange rate for the cTokens increases over time relative to the underlying asset.
Compound protocol automatically determines and implements the interest rates, which fluctuate, depending on the market dynamics. The floating interest rates make it more lucrative to lend cryptos to smaller pools since they generate higher returns.
DeFi Yield Protocol (DYP)
Our top pick is DeFi Yield Protocol (DYP), a unique platform that offers various DeFi solutions to its users. DYP provides a bunch of advanced trading tools that its users can leverage to get the most out of it.
Users on the platform can make money in various ways. Just recently, DYP announced the Buyback program that offers 100% APR for staking supported assets. Ethereum, BSC, and Avalanche users can deposit any of the supported assets in a Buyback contract.
The platform will then convert the assets into DYP before depositing them into a staking contract. DYP then distributes the rewards automatically, and users can claim them every day.
Besides the Buyback contracts, DYP users can make money through several other ways;
- Vault- DYP integrates with Compound in this automated yield farming contract. Users can earn from the ETH, DAI, USDC, USDT, and WBTC markets. DYP distributes 75% of the earnings to the liquidity providers and uses the remaining to buy back their token and burn it.
- Farm- The platform is quite innovative, making history as the first and only in the DeFi scene to reward its users in ETH. The farms allow users to deposit tokens and become liquidity providers to receive their earnings in Ethereum.
- Stake- DYP token holders can earn DYP rewards by depositing into any of the staking pools. The pools offer different staking options, with the rewards ranging from 20% APR- 35% APR. Users can also choose to reinvest their daily returns into the staking pool or even more earnings.
- Referral- You can earn DYP by bringing more users on board. The platform provides each user with a referral link at request. Whenever any of your referrals stakes DYP, 5% of their rewards are automatically sent to you, free of gas fee.
Bottomline
DeFi is constantly challenging the traditional financial systems the world is used to. Thanks to the 2020 craze, crypto critics and fans from across the globe are paying more attention to the industry. Therefore, we can only expect developers to come up with even more ways to earn from these projects.
In the meantime, this article provides four of the best DeFi projects to be on the lookout for. They all offer unique ways to make money, so you’re bound to find one that suits you.