Episode 15 – Decentralized finance: Crypto passive income
“Here’s a question. And I advise you to BE HONEST. Why are you interested in crypto?
- I’m in it for the tech!
- LIAR. You’re trying to GET RICH aren’t you?
- Yes, yes…
There’s just one way, right? Buy a token cheap and watch it go up in value. Simples. Hey presto you’ve done a 5x. A 10x. Or maybe more. And you’re rich.
But what happens when it GOES DOWN again? Because as we all *really should* know, no-one actually manages to sell the top.
So what are you going to do instead? Well, one of the big differences between RIGHT NOW and the bull run in 2017 – is that there’s more than one way to make money in crypto. If you know your beans, then there’s a bountiful GARDEN of electrically PASSIVE INCOME just waiting to be gobbled up. Those sun kissed yields don’t farm themselves after all.
Stick around and find out how your fingers can get as green as mine. [PLANT POT ACTION]
Welcome to School of Block.
So before I dive into the fresh new exciting fields of yield that recent advances in crypto have made possible, let’s jump back to Episode 7, where I introduced the concept of PROOF OF WORK.
If you’ve not seen that Ep, then a quick recap: Proof of Work is the way that many cryptocurrencies including Bitcoin – and currently Ethereum – secure their network. Miners of these tokens are rewarded for solving equations that require lots of power and advanced graphics cards to spit out the answer. When they do, they’re rewarded with payment in the token in question.
But this isn’t the only way to secure a network. Many more recently established tokens use what’s known as PROOF OF STAKE. What’s this? Well, Proof of Stake means you can mine or validate block transactions according to how many tokens you hold. And the more tokens you hold, the more mining power you have. And yes, you are REWARDED for securing the network in this way. It’s called being a VALIDATOR.
Have you had to buy a fancy mining farm in Uzbekistan? [CLIP] No. You just have to hold a bunch of the tokens, although different tokens reward in slightly different ways.
Just to name a few, Tezos, Cardano, Solana and Polkadot all run off a Proof of Stake model, with Cardano and Polkadot offering the highest returns. Ethereum is currently attempting to defect faster than a compromised Russian spy and join them in its new form of ETH2.0 at some point in the coming year.
One word of advice – if you are going to go down this route, check out the validators you’ll be staking with. Networks like Polkadot enable you to check out their integrity in advance.
So, let’s say you fancy a bit of this, how exactly does it work?
So that’s staking… what about if you just want to earn interest on your holdings? Well, the wonderful world of DeFi, which we introduced in episode 13, has *really got you covered* on this one. Trundle down to your local high street, ask for a savings account and I’ll eat my own face if they can offer you a rate that doesn’t have a nought on the front.
DeFi though? 10% on stablecoins is more or less the minimum you should be looking for. Right now you can do as well as 18%, although rates do change all the time.
And given that these are interest rates on stablecoins, you don’t need to worry about the value of your token plummeting and negating all of those gains.
Savings might not seem sexy, but when you consider the compound gains possible with 18% interest – almost doubling your money after just 4 years and doing over a 5x after 10 years – it might just start to float your boat when it comes to planning your financial future.
But how does crypto manage to outperform the traditional banking sector when it comes to offerings as straightforward as interest on savings?
Well, in DeFi the CROWD replaces the role of the BANK. So some people in the crowd provide liquidity. Some provide loans. Interest rates are often adjusted algorithmically based on how many people there are on each side of that BORROWING and LENDING divide. But all of it is done without that dirty, dirty middleman fingering your wallet… yes, I’m talking about the guy in the suit.
Want to know how to exploit this brave new world? Well, here’s how INSTADAPP helps you do it.
Let’s say you want to go one step further than just earning interest. You really want to maximise your passive income. Well, that’s where YIELD FARMING, also known as LIQUIDITY MINING, comes in.
It caught the cryptosphere’s imagination with the launch of the COMP token, the governance token of the COMPOUND FINANCE ecosystem, and it takes advantage of the COMPOSABILITY function of smart contracts, which we discussed in the last episode.
In some sense, yield farming can be compared with STAKING, as essentially you’re locking up your crypto and getting rewarded for it. But there’s a lot of complexity going on in the background. You become what’s known as a LIQUIDITY PROVIDER as you add your funds to a LIQUIDITY POOL. And what happens when you dive into that pool?
It’s OK, you don’t have to hold your breath. It’s basically just a smart contract containing funds, and in return for providing liquidity you get a reward. But where it gets clever is how those rewards get distributed. Some LIQUIDITY POOLS pay their rewards in multiple tokens, and those tokens may be deposited to OTHER POOLS to earn rewards there. And then those rewards can get redistributed… and on and on.
So there can be a CASCADE of compound rewards, and complex strategies can pay extremely lucrative results.
However, it almost goes without saying that yield farming isn’t that user friendly just yet, and the most profitable strategies are only really recommended for cryptopunks of an advanced nature.
And there are risks – the greater the complexity of the MONEY LEGO CREATION you’ve become involved with, the greater the chance that ONE of those pieces of LEGO might have a BUG that causes the entire SYSTEM to fall apart.
So, in summary – if you don’t just want to play the MOONBAG game, but actually want to show your bank manager a clean pair of heels, then crypto has got you covered.
Between STAKING, the LENDING and BORROWING options available through DeFi platforms, and the wonders of YIELD FARMING there’s absolutely no reason why your money can’t work many times harder for you than it does on the high street.
And remember, when you’re looking at planting seeds that are going to grow – the compound gains that are possible in DeFi and staking aren’t just about giving YOU security for the future… projecting forwards it’s an entirely new way of looking after GENERATIONAL WEALTH, so Joe and Jane out there, anywhere in the world, can escape the legacy banking system and earn compound passive income now they can pass down to their kids.
It’s pretty compelling.
And that’s why I’ve spent the last few years becoming a HORTICULTURAL SPECIALIST. And perhaps you should too.”