Passive Income

Understanding Passive Income

Passive income is the money generated from investments that do not require active involvement from the earner. The main objective of passive income is to create a consistent stream of income without the obligations and demands of a full-time job. There are various investment options that can generate passive income, including dividend stocks, peer-to-peer lending, rental properties, and royalties. These traditional choices allow investors to increase their earnings and achieve their financial goals.

The emergence of the crypto and decentralized finance (DeFi) industries has opened up new opportunities for investors to earn passive income. Whether you are a newcomer or an experienced investor in the crypto space, DeFi offers a chance to earn annual percentage yields (APYs) that surpass traditional bank savings. Since the rise of DeFi in 2020, particularly with the success of Compound’s COMP token, investors have had several avenues to generate passive income.

In DeFi, there are popular methods for earning passive income, including lending, staking, and yield farming, all of which utilize cryptocurrencies to generate returns.

Lending platforms operate on a simple concept. Users lend their idle crypto assets to a platform, which locks them into a smart contract. In return, the lending platforms pay the crypto holders an APY. Borrowers can access the locked assets as loans and repay the interest to the platform. The use of smart contracts ensures that there is no risk for the crypto lender in case of borrower default. This means that crypto assets can be withdrawn at any time.

Staking is a process that originates from networks that use proof-of-stake (PoS) algorithms. It involves crypto holders locking their assets in a smart contract. By keeping assets locked for the long term, users can earn more of the same token in return. For example, on the Ethereum blockchain, staking Ether tokens allows users to earn additional rewards. Staking incentivizes users to contribute to the network’s security and decentralization by sharing the network revenue with network validators.

Yield farming, also known as liquidity mining, is another popular method in DeFi for earning passive income. It enables crypto holders to earn extra rewards while providing liquidity to pools. Liquidity providers (LPs) receive an LP token that represents their pool share. The rewards for being an LP often include trading fees when transactions occur in the pool. LP tokens can be staked on a protocol or project to earn additional rewards, usually in the form of the project’s native token. These tokens can then be staked for even more rewards, making yield farming a profitable source of passive income. Although yield farming is considered riskier compared to staking and lending, it offers higher APYs.

Author: Harvest Collective.

Harvest Finance is a cooperative yield farming protocol at the forefront of decentralized finance. Harvest Finance continuously develops new farming strategies to automatically generate the highest yields available. By pooling deposits, the platform also reduces gas costs for individual users.