For people who know cryptocurrency or bitcoin, Decentralized Finance, or DeFi is no longer a new concept. While bitcoin has stimulated the idea of owning your own bank, and being the pioneer in digital assets, various protocols are established to manage and diversify cases of crypto use and enable the whole ecosystems (in this context).
One of these is Defi space (made on ETH network). It cannot be denied that Defi has been successfully drawing much interest from the crypto market. One of the reasons is that it can help create crypto passive income. Before rushing to do this, understanding background knowledge of Defi and passive income in cryptocurrencies is fundamental.
What Is Decentralized Finance?
So far, cryptocurrency is assumed as an ideal solution of the traditional financial system (or well known as CeFi) which has been suffering from various issues. Decentralized finance allows you to access tokens as the conventional banks or financial institute’s permission to your money under their management. Activities with the bank will be conducted the same (deposit. Withdraw, spend, borrow, lend, etc.). With a quick comparison, Defi and CeFi share no big difference in terms of interaction.
Decentralized finance is not a single entity, but an ecosystem involving DApps, smart contracts and protocols. These elements will differentiate conventional banks with decentralized space by providing its services under trustless codes. Defi is conceptualized with the idea of operating without any middleman as a bank, which might lower the transaction fee, limit authorities to interfere with their funds, and access them regardless of physical location.
As an alternative solution competing to Centralized finance, Defi is turning its light on the existing financial models by offering better rates of interest, protection of capital with more and more choice for investment patterns.
Advantages of Defi
Reduce error and mismanagement by man: It is well aware that financial breakdown has been happening because of ill-managed systems under control of central banks or third-party intermediaries. For Defi, thru smart contracts with proper writing, these errors, no matter how big or small they are, will rarely occur during the process.
Constant access: If in Cefi, if you have a need for a service like transfer or loan, going to the bank seems like the only way to proceed this, imagine how much time you have to spend on this. However, with Defi, these services will be completed with simple computer manipulation as one click, whenever and wherever you are. With the internet, the entire market is in your reach.
A better system: Recall the impact of Covid 19 to the conventional financial system, you will realize how vulnerable it may seem. In reality, Cefi is operating on a base of individual’s interaction. As a result, when Covid 19 spreads all over the world, it has created economic shocks and left a serious impact on both individuals and enterprises. In contrast, Defi requires no physical contact. It can be said that cryptocurrency is climbing to its peak even in the context of Covid 19 pandemic.
Operations without permission: Because of the concept of your own bank, you will not go through with and wait for the bank staff approval before touching your money. Permissionless operations are popularizing in the community of DeFi users.
Disadvantages of Defi
Risk of Stability: Defi activities may be under impact of unstable blockchain as its inheritance. As introduced above, Defi is made of Ethereum and this Ethereum blockchain is not yet complete but evolving to change and bettering itself. During this process, in case there are some errors come up, it may cause risks to projects involved in Defi.
Scalability: The host blockchain may bring out a serious issue of scalability. Suffering from this problem, the time for each transaction in the process may last longer before it is officially confirmed. Moreover, the fee charged during the congestion will be increasing and more expensive compared to congestion-free transactions. At this point, Ethereum exposed its weakness in processing capacity, in a comparison to its counterparts as Cefi.
Smart Contract: Smart contract code is as “smart” and high tech as its name, but it is only beneficial for Defi projects when it is correctly written. One minor flaw might lead to serious funds loss.
Liquidity: This is a fundamental element of token-based projects of Defi as well as protocols of blockchain. However, compared to conventional financial systems, the liquidity of Defi is much lower than that of Cefi.
What Is Passive Income in Cryptocurrency?
For simple explanation, passive income is the money earned while you are doing other jobs. The income from the direct job you do is active income, exchanged with your time, your energy invested.
Passive income partly contributes to one’s wealth. Besides mainstream income, people usually widen their finances by increasing the number of passive income paths. With little interaction, efforts, energy and time consumed, you can still ensure profit growth.
If you can make little passive income with traditional financial systems, surely you will get far more of it with the crypto industry, along with the active income.
The method to create passive income is no longer a secret, you can find wise ways we suggested above. In this article, some notes are given to help you avoid some unnecessary mistakes while seeking for a way to create your own crypto passive income in DeFi.
Do’s & Don’ts
Do risk assessment: Never underestimate a might be risk and carelessly invest in a virtual asset even if it seems like a big opportunity. Unaudited protocols should not be under your consideration for investing. Only when you are very well aware of the risks that might happen, then you can move to the next step.
Do not listen to gossip: cryptocurrency market is a dynamic environment with a huge amount of conversation, even if it is invaluable or valueless. Be careful of what you listen to, because there might be some scams or rumors spread to achieve its own bad intention. Be selective and conscious with confirmed and trash news.
Do research: Educate yourselves with research of the market and crypto investment, method to make passive income in Defi, Defi’s features, etc. and identify protocols you found its existence in the long term. This will ensure these protocols’ prestige in the communities and less risks for you.
In the future, Defi is considered as a new and optimal solution for dealing with financial issues that conventional financial systems are facing up to. It is even more appealing to people in the cryptocurrency community when they can earn crypto passive income – one key factor, in Defi. Even Though, despite how many immense advantages Defi may hold, along with its great revolution that is still undergoing, Defi still needs some time to develop and complete itself. As an investor in the Crypto market, to avoid arrays of scams, you should be fully aware of each and every project before you get involved.
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