Ways to Make Money with DeFi
Trading, Lending, Borrowing, and Providing Liquidity
Before we begin as always this is not investment advice or a recommendation to buy/invest in DeFi Protocols. I am simply giving you information based on my own experiences. Please DYOR
There are three ways that I am using DeFi Protocols.
- Trading
- Lending / Borrowing
- Providing Liquidity AKA Liquidity Provisioning or LPing
More DeFi use cases exist but in my opinion, this is how most persons interact with DeFi to accomplish their goals. The neat thing is you can combine these strategies to form your own unique strategy to accomplish a specific goal.
Some of the other use cases I will not be covering in the artcle are below.
- Staking
- NFTs (Non-Fungible Token)
- RWA tokenization (Real World Asset)
- Treasury Bills
Trading
When you think of trading I’m sure you’re picturing YouTube and TikTok influencers telling you how easy it is to make a fulltime income and live from anywhere. This is not the trading I’m talking about. As a matter of fact I technically don’t do much trading, but you will need to be familiar with how on-chain trading works!
So why am I bringing up trading if I’m not a trader myself. The reason is VOLUME ! Trading volume is extremely important in DeFi especially for providing liquidity. The more trading volume a currency pair has the more fees are paid out. More about providing liquidity later. All the major wallets have built in trade function which should do just fine for most pairs.
Memecoins have been driving most of the DEX volume but in my opinion memecoin trading is a no go unless its already in the billions. Then I might consider providing liquidity for a memecoin pair if the volume is high. Don’t believe these influencers trying to get you to buy the next small cap meme. It’s not worth the risk.
Lending and Borrowing
Lending and Borrowing in DeFi is severely underrated. On the surface its very straightforward, lend crypto on a lending protocol and receive interest. Then borrow against the lent crypto in the form of stablecoin or another crypto usually up to about 75% and pay interest on the loan.
However, if the initial lent out crypto AKA collateral drops in value below 75% of the borrowed assets will start to be liquidated automatically. So, borrow responsibly below 40% to be safe.
The real magic happens when lending and borrowing is combined with providing liquidity!
Providing Liquidity
Providing Liquidity is depositing two crypto assets in a Liquidity Pool for the purpose of helping traders execute a trade quickly and with minimal slippage. As trades are happening within those two crypto assets the liquidity pool gets a small fee which is shared between everyone who has deposited in the liquidity pool. There are also other factors to consider before entering a liquidity pool so that you keep your funds safe.
Below is a great video from a youtube channel that I highly recommend you follow. They outline good entry criteria. Full disclosure this company does have a paid membership but what I like about their youtube channel is they offer some great value for free and they’re not biased to any chain or crypto which is refreshing.