How to Use ‘Earn’ Features in the DeFi Wallet
From staking to lending and liquidity pools, learn how DeFi can earn you interest on your crypto holdings
Decentralised finance, or DeFi, is one of the major pillars of the crypto industry. Built on smart contracts for automation, DeFi offers fast transactions and wide accessibility to financial services to almost anyone with an Internet connection.
For more information on DeFi, check out our intro to DeFi.
Users can access DeFi projects through decentralised apps, also known as dapps. One of their appeals are so-called ‘earn’ features that give users the opportunity to earn interest on their crypto holdings.
Here, we explain how to use five of the most popular DeFi functions in the DeFi Wallet, step by step.
Learn how to:
- Stake & Lock-up
- Use a liquidity pool
- Lend
- Use a stablecoin protocol
- Use a yield optimizer
1. Staking on DeFi Protocols
Staking on DeFi protocols refers to the process of locking up cryptocurrency assets in order to participate in the validation or governance of a decentralized network. This is typically done in exchange for rewards in the form of additional cryptocurrency.
DeFi protocols allow users to earn passive income by staking their cryptocurrency holdings. This is achieved by participating in various activities such as providing liquidity to decentralized exchanges, lending and borrowing cryptocurrency, or participating in yield farming programs.
Staking requires a certain amount of cryptocurrency to be locked up for a specified period of time, which varies depending on the protocol. During this time, stakers are able to vote on governance decisions, such as changes to the protocol’s rules or the allocation of funds from the protocol’s treasury.
Staking on DeFi protocols can be a lucrative way for cryptocurrency holders to earn passive income while also participating in the growth and development of decentralized networks. However, it is important to carefully consider the risks and potential rewards associated with staking on individual protocols before investing any cryptocurrency.
2. Using a Liquidity Pool
Using a liquidity pool in DeFi involves providing liquidity to a decentralized exchange (DEX) by depositing pairs of cryptocurrencies into a pool. These pools are used to facilitate trades between different cryptocurrencies, and users who provide liquidity are rewarded with a share of the trading fees generated by the DEX.
Liquidity providers deposit equal values of two cryptocurrencies into a pool, which are then traded against each other by users of the DEX. The prices of the cryptocurrencies in the pool adjust based on supply and demand, which ensures that the value of the tokens held by liquidity providers remains constant relative to each other.
Liquidity providers earn rewards in the form of a share of the trading fees generated by the DEX. The more liquidity a provider contributes to the pool, the larger their share of the trading fees. However, providers must also be aware of the risk of impermanent loss, which occurs when the relative value of the two cryptocurrencies in the pool changes, resulting in a loss of value for the liquidity provider.
Using a liquidity pool can be a profitable way to earn passive income on cryptocurrency holdings, while also contributing to the growth and development of decentralized exchanges. However, it is important to carefully consider the risks and potential rewards associated with providing liquidity to individual pools before investing in any cryptocurrency.
3. Lending Your Crypto Assets
In DeFi involves depositing cryptocurrency into a lending platform’s smart contract, which then lends out the assets to borrowers in exchange for interest. The interest rates offered are determined by supply and demand, and can often be higher than traditional savings accounts.
Users who lend their cryptocurrency to these platforms can earn interest on their deposits, while also helping to provide liquidity to the decentralized lending market. Borrowers are required to provide collateral in the form of cryptocurrency, which is held in a smart contract until the loan is repaid.
Lending platforms often have different requirements for the types of cryptocurrency they accept and the collateralization ratios required. Users must carefully consider the risks associated with lending their cryptocurrency, including the possibility of default by borrowers or the loss of funds due to smart contract vulnerabilities.
Lending your crypto assets can be a way to earn passive income while holding onto your assets, but it is important to do your research and carefully consider the risks involved before investing in any lending platform.
4. Using a Stablecoin Protocol
in DeFi involves depositing cryptocurrency into a smart contract that mints a stablecoin, which is pegged to the value of a fiat currency or another asset such as gold or bitcoin. These stablecoins can then be used for a variety of purposes, such as making payments or investing in other DeFi protocols.
Stablecoins are designed to be less volatile than other cryptocurrencies, making them a more stable store of value. Some popular stablecoins in DeFi include Tether (USDT), USD Coin (USDC), and Dai (DAI).
Users who deposit cryptocurrency into a stablecoin protocol can earn interest on their deposits, which is often higher than traditional savings accounts. The interest rates offered are determined by supply and demand and can change over time.
It is important to note that stablecoins are not risk-free, as the value of the underlying asset they are pegged to can fluctuate or the smart contract could be vulnerable to attack. Users should carefully research the stablecoin protocol and understand the risks before depositing their cryptocurrency.
Using a stablecoin protocol can provide a way to earn interest on cryptocurrency while avoiding the volatility associated with other cryptocurrencies, but it is important to do your due diligence and understand the risks involved.
5. Using a Yield Optimiser
In DeFi involves automatically moving funds between different liquidity pools or protocols to maximize returns. Yield optimizers use complex algorithms to find the best returns across multiple DeFi platforms, and users can earn passive income without having to constantly monitor their investments.
Users deposit cryptocurrency into a yield optimizer, which then automatically moves the funds to different DeFi protocols to take advantage of the highest yield opportunities. The optimizer may also use strategies such as yield farming and liquidity mining to maximize returns.
While yield optimizers can potentially offer higher returns than other DeFi protocols, they also come with greater risks. There is a risk of smart contract vulnerabilities, as well as the risk of impermanent loss when providing liquidity to certain pools.
It is important to carefully research yield optimizers and understand the risks involved before depositing funds. Users should also be aware of any fees associated with using the platform, as well as any restrictions on withdrawing funds.
Using a yield optimizer can potentially provide higher returns than other DeFi protocols, but it is important to understand the risks and do your due diligence before investing.
Conclusion
DeFi has revolutionized the traditional financial system by providing decentralized alternatives to traditional financial services. With DeFi protocols, users can earn passive income, borrow and lend assets, trade cryptocurrencies, and much more, all without relying on centralized intermediaries.
However, DeFi also comes with its own set of risks and challenges, such as smart contract vulnerabilities, market volatility, and regulatory uncertainty. It is important for users to educate themselves and understand the risks involved before investing in DeFi protocols.
Despite the challenges, DeFi continues to grow and expand, with new protocols and innovations being introduced regularly. As the DeFi ecosystem evolves and matures, it has the potential to provide greater financial inclusion, access, and empowerment for people around the world.
Due Diligence and Do Your Own Research
All examples provided in this article are for informational purposes only and should not be considered legal, tax, investment, financial, or other advice. The material provided herein should not be construed as a solicitation, recommendation, endorsement, or offer by Ccurrencywallet.com to invest, buy, or sell any crypto assets.
It is important to note that returns on the buying and selling of crypto assets may be subject to tax, including capital gains tax, in your jurisdiction. Past performance is not a guarantee or predictor of future performance. The value of crypto assets can increase or decrease, and you could potentially lose all or a significant portion of your initial investment due to factors such as impermanent loss.
Therefore, it is critical to conduct thorough research and due diligence when assessing a crypto asset’s potential before making any purchase decisions. Ultimately, any decision to invest in crypto assets should be made based on your own judgment and at your own risk.
Share with Friends
RELATED CONTENT
Ready to start your crypto journey?
Get your step-by-step guide to setting up an account with Ccurrencywallet.com
By clicking the Get Started button you acknowledge having read the Privacy Notice of Ccurrencywallet.com where we explain how we use and protect your personal data.
