Decentralised Finance (DeFi) offers a wide range of opportunities for everyone, regardless of where you are in the world, or whether you have a bank or investment account, to earn passive income on your cryptocurrencies and stablecoins.
Armed with just a mobile phone or computer with an internet connection and a crypto wallet, anybody can start earning passive income through the wide range of protocols available in the Web 3.0 space.
The benefits of DeFi is understated — for one, it brings a wide variety of financial services and products to the masses in a trustless manner without any intermediary.
For example, you could take a loan — permissionlessly — and pay a fixed rate of interest and borrow for as long as you want, without being forced to pay more than what you were promised. You don’t even have to meet anyone or your banker face-to-face to take that loan!
There are several popular ways to earn passive income in Pangolin DeFi:
•Staking
•Liquidity provision
•Yield farming
In this article, we will walk through each one of them in detail.
Staking
Staking involves locking in cryptocurrencies to receive rewards. It started off as a less resource alternative to mining cryptocurrencies with expensive hardware and graphics card.
In a proof-of-stake blockchain network like Avalanche, users can stake their AVAX tokens and act as either validators or delegators to secure the network in a decentralised manner.
By staking in proof-of-stake blockchains, users commit their tokens to secure the network, and they are randomly chosen by the protocol at certain intervals to create a block, pro-rated by their stake. If they fail to maintain network security by engaging in bad behavior, their entire stake is at risk, and they might be penalised through a variety of ways such as slashing.
In return, the network can offer rewards known as staking rewards in return for staking.
In DeFi, staking has taken a slightly different concept. It usually does not involve securing a network. Instead, staking in a DeFi protocol locks up your tokens to share a proportion of fees generated by the protocol.
For example, staking PNG tokens in Pangolin currently generates an annual percentage rate (APR) of 10%. This yield comes from trading fees from users trading on Pangolin where 0.05% trading fees goes directly to stakers.
Liquidity provision
Liquidity provision is the act of providing liquidity to a protocol.
The decentralised exchange(DEX) Pangolin facilitate trades between multiple cryptocurrencies on their platform through the use of smart contracts.
Unlike centralised exchanges that use a traditional order book to facilitate trades, DEXes utilize liquidity pools which consist of tokens usually in equal proportion deposited into a smart contract.
Why would liquidity providers supply liquidity in the first place? Well, they are able to generate fees from trades routed through the liquidity pool. These fees can be configured for each pool, and it might typically be around 0.25% of the trade value.
This means that liquidity providers can claw back 0.25% of the trade, which gets distributed pro-rata to liquidity providers.
Passive income can be earned by liquidity providers through their pro-rata share of trading fees for trades facilitated by the liquidity pool.
Yield Farming
Yield farming takes the above concepts — staking, liquidity provision — and layers them with additional yield by distributing protocol governance tokens to users.
Governance token PNG is given out as reward for providing liquidity on Pangolin.
The reward has a market price attached to them, as they can be staked to earn more rewards and share platform fees. For example, Pangolin PNG token is an example of governance rewards, which can be either sold or staked in the Pangolin as described in the example above.
Yield farms offer high reward rates through the distribution of governance tokens on top of existing yield sources.
Conclusion :-
Through the various methods above, depositors interacting with DeFi protocols have a variety of ways to earn a passive income on their cryptocurrencies.
These methods range from low risk (staking) to high risk (yield farming), and the yields usually consummerate with the level of risk.
When interacting with a DeFi protocol, it is important to conduct necessary due diligence by analysing data points such as reputable audit reports, the presence of a bug bounty, how much deposits the protocol has, how long it has been live for, safety score etc.