Decentralized finance (DeFi) offers multiple ways for users to earn attractive yields on crypto assets. By providing liquidity and participating in leading DeFi protocols, you can put your holdings to work generating yield. This guide covers proven strategies for earning income with decentralized exchanges (DEXs) and DeFi platforms.
Provide Liquidity on DEXs
Decentralized exchanges like Uniswap and Curve Finance rely on liquidity providers (LPs) to fund trading pools. As an LP, you can earn trading fees when others swap between the assets in your provided pool.
When contributing equal values of the paired assets to a liquidity pool, you receive liquidity tokens proportional to your share of the pool. As trades occur, a 0.30% fee is charged and distributed pro-rata to all LPs based on pool ownership.
The trading fee revenue compounds your earning potential over time when combined with the appreciation of the underlying crypto assets. Providing liquidity takes advantage of idle holdings.
Earn Yield Farming Rewards
Many newer DeFi exchanges like SushiSwap incentivize liquidity with yield farming rewards. When you stake your liquidity tokens, you can earn additional rewards in the protocol’s native governance token.
For example, depositing your Uniswap LP tokens into SushiSwap earns you SUSHI tokens as an added incentive. This «liquidity mining» makes providing liquidity more attractive on platforms trying to bootstrap adoption.
Just be aware of impermanent loss which happens when the underlying asset ratio changes. Yield farming rewards help offset impermanent loss risk.
Leverage Automated Market Making Arbitrage
The AMM math inherent in DEX pricing algorithms creates opportunities for arbitrage profits. If external prices deviate far from the bonded curve rate, traders can execute trades onchain at a discount.
For example, if BTC/USD briefly spikes on spot exchanges while Uniswap’s BTC/USDC pool lags behind, you can trade on Uniswap at the stale rate for instant gains. Then the arbitrage activity rebalances the AMM pool back to the market rate.
The profits from arbitraging price discrepancies tend to be small per trade but are low-risk and automatable at scale. You just need the programming skills to leverage onchain data flows.
Participate in Lending and Staking Pools
Decentralized lending protocols like Aave, Compound, and Maker allow you to lend crypto assets to earn interest from borrowers. Your provided assets earn a floating interest rate based on market demand.
Similarly, you can stake tokens into staking pools to help validate proof-of-stake blockchains like Tezos, Cosmos, and Cardano to earn more of the native token as rewards.
Consider lending and staking tokens you plan to hold long-term anyway to generate extra yield. Interest rates vary based on the asset’s utility and demand cycles.
Go Long or Short With Crypto Options
Decentralized options platforms like Hegic allow taking directional bets on crypto assets without needing to own them. Call options benefit from upside gains if prices rise. Put options benefit from downside falls.
You collect option premiums from buyers looking to hedge their portfolios. Options buying/selling has risks, but the decentralized structure eliminates counterparty risk. Options offer speculative leverage on crypto volatility.
Provide Crypto Collateral for Loans
Using platforms like Aave and Maker, you can unlock liquidity from crypto holdings by using them as collateral for overcollateralized loans. This generates cash flow without selling the assets.
For example, staking $10K worth of ETH lets you borrow stablecoins you can use elsewhere while you keep the upside potential of ETH. You pay interest on the stablecoin loan but earn interest on the staked ETH collateral. The net result is leveraged gains.
Earn Interest on Idle Stablecoins
Stablecoins like Dai and USDC don’t fluctuate, so the easiest low-risk DeFi yield is depositing them into lending pools like Aave, Compound, and Celsius to collect interest.
Supplying stablecoins to these pools generates around 5-10% APY currently. The interest comes from borrowers using stablecoins for trading, shorting, and transactions.
Parking stablecoins earns better yield than traditional savings accounts with similar low risk.
DeFi presents a paradigm shift in generating yield from crypto assets with options like staking, lending, liquidity pools, and synthetic trading. The composability spanning protocols lets you creatively stack strategies for compounding gains. As blockchain adoption increases, DeFi will offer more ways to earn attractive yields on your cryptocurrency holdings.