DeFi Explained: How to Earn Passive Income With Crypto

Right now, all across the world, people are asking the same question: “How can I get as much money as possible without having to lift a finger?” It’s an honest question. We’re all trying to get the most for the least, although some of us go about it more efficiently (and ethically) than others.

Here’s a possible answer: decentralized finance. By putting certain financial instruments (i.e. monetary contracts, including cash, bonds, shares and derivatives) and services on the blockchain, we eliminate the need for third parties like banks, exchanges and brokerages to do all that paperwork. The savings get passed on to us.

In the meantime, we can make “passive income” through those DeFi instruments. But this is where we need to pump the brakes a bit. There’s always some effort involved when you invest in crypto or crypto-adjacent spaces – especially at the beginning, when you’re still trying to figure things out. We’ll show you the ropes here at Bookmakers Review; the rest is up to you, and how much time, money and energy you’ve got.

What Is Passive Income?

Passive income is money that you make with relatively little effort. It’s a type of “unearned income,” as coined by American economist and journalist Henry George in his 1879 book Progress and Poverty. George was talking about land ownership and other monopolies; today, we tend to divide unearned income into the following broad categories:

• Rent (from owning resources)
• Interest (from owning financial assets)
• Profit (from owning capital)

This is the kind of stuff most people think of when it comes to passive income – you make money off something that you already own. But there are other kinds of passive income, like when you sell an asset or receive an inheritance. And there are other kinds of unearned income, like strike pay.

The tax jurisdiction you live in will have more specific ideas about what qualifies as passive income, but generally speaking, this “acquired income” will be taxable, although often at a lower rate than you pay on income derived from your labor or other sources.

How Do I Do This With DeFi?

I’ve got two words for ya: smart contracts. These little computer programs automatically fulfill the contracts they’re assigned to. When crypto pioneer Nick Szabo came up with the term “smart contracts” back in the ‘90s, he likened them to vending machines; insert money, press button, receive product.

This was well before the blockchain, of course – more specifically, the Ethereum blockchain, which was launched in 2015 with smart contract functionality built-in. Thanks to DeFi, you can do all sorts of financial whiz-bangery using Ethereum with zero brokerage fees. Crypto transaction fees, yes, but those will be smaller if you do it right.

So you’re going to invest your hard-earned money in DeFi index funds, right? The CoinDesk DeFi Index (DCF) is one of many indices out there supporting a decentralized version of the most boring play in all of investing. Crypto is still a highly volatile space, but you can spread that risk across the 22 different constituents on the DCF, with 21.84% of your investment weighted towards the Uniswap (UNI) exchange.

How About Yield Farming?

Or you could embrace the volatility and chart your own DeFi path. Like everything else in life, yield farming falls into three different categories:

• Lending
• Staking
• Providing liquidity

DeFi lending is relatively low-risk for the crypto space – just deposit your asset on a platform like Aave, collect the rewards, and withdraw at your discretion. Or you could stake that asset on a platform like Cosmos; you’ll have to lock up that asset for a specific length of time, but you can earn a higher return for your troubles.

Liquidity providers (LPs) make money by depositing assets on a decentralized exchange (DEX) and collecting fees when those assets get traded. You’ll be subject to the whims of the market when you jump into these DEX liquidity pools, but you can also withdraw your assets at any time, thus lowering your risk. Invest accordingly, and keep checking in with us here at Bookmakers Review for more crypto tips and analysis.