3 Ways To Survive a Bear Market with DeFi
Disclaimer: The Industry Talk section features insights by crypto industry players and is not a part of the editorial content of Cryptonews.com.
In the lead-up to 2020, the markets were in near-perfect conditions. All-time highs, a tech boom, and stocks that seemed to only go up. It’s safe to say that things have changed a little since then. After a worldwide pandemic, record-breaking inflation in countries all around the world, and more crashes than we can count, we’re most definitely in a bear market.
With traditional finance failing investors, more users than ever before have started to look into alternative methods of investing. One that’s become increasingly popular and lucrative is the world of Decentralized Finance (DeFi). Yet, with cryptocurrency also experiencing a historic crash, falling from a market total of $3 trillion down to only $1 trillion, investing in assets doesn’t seem like the best way to go.
The fear that’s created by a bear market has made the traditional mechanism of investing in an asset and waiting until it goes up fairly difficult to achieve at present. While a few years ago, there was a very good chance that a stock or asset would increase in price, that’s no longer the case.
Luckily, the world of DeFi has a range of solutions, with industry-wide methods that users are employing to gain passive income on their assets. If unable to sell without accepting an overall loss, these set-it-and-forget-it investment opportunities have become incredibly popular. In this article, we’ll be covering the main three, touching on lending, staking, and becoming a liquidity provider.
Let’s get right into it.
How To Use Lending to Generate Passive Income Within DeFi
A large number of leading cryptocurrency and DeFi exchange platforms offer loans out to their audience members. These crypto loans allow users to take out large sums of cryptocurrency, then recycle that money into investments or liquidity pools (more on that later!)
To run this service at scale, the platform needs to have a huge reserve of capital. Of course, anything they lend, they need to actually own, meaning companies have two choices:
Buy crypto - A DeFi exchange could buy an enormous crypto reserve, costing the business a huge bulk sum of money.
Get loans from others - A DeFi exchange could collect a range of smaller loans from individual investors, creating a large reserve while only having to pay interest.
Not wanting to have to pay a large sum all at once, the latter option is nearly always what these exchanges will opt for. When you have cryptocurrency in your account, you can lend it to these exchanges and receive a continual interest fee for doing so. This capital is paid out to you on a regular basis, creating a stream of passive income.
Let’s take one of the leading DeFi exchanges as an example, Cake DeFi. This platform accepts lending services and is constantly taking orders on some of the world’s biggest cryptos and stablecoins. For example, users are able to lend BTC to Cake DeFi and get a fixed APY on their loan.
A user could offer any sum of BTC and get a return of 5% or more, generating a stream of passive income. Users that don’t want to sell their BTC or ETH at a loss due to the current crypto downturn can lend their coins to a service like Cake DeFi for a continual passive return.
While not the most exciting APY available, this is a sure and steady method of beating the bear market with DeFi.
How To Use Staking to Generate Passive Income Within DeFi
Another fantastic method of generating passive income with DeFi is turning to a mechanism known as staking. In the world of cryptocurrency, which uses blockchain, there are a few methods of validating a transaction. All transactions must be saved into a data block to ensure they are permanently listed on the blockchain.
For earlier cryptocurrencies like Bitcoin, their transaction validation system is known as Proof of Work (PoW). PoW requires computers to complete incredibly complicated mathematical transactions, which consumes lots of energy. Other blockchain ecosystems use the more environmentally-friendly (and efficient) Proof of Stake (Pos).
The PoS model is where users are randomly selected to validate a block of information. This random system relies on having those users ready and available, with their funds being what makes them eligible to become a validator. In order to create enough potential users for this system to run effectively, blockchain ecosystems ask for users to stake their currency in a project.
This involves a user locking their funds away within a PoS system, even indefinitely, if they’d so like. For providing this service, users are continually rewarded, with the total APY depending on the project that they’re involved in. If we span across some top opportunities in Cake DeFi, we can see that staking APY rewards range from 5% up to 19.7%.
In some famous projects, this APY was pushed even higher, with blockchains desperately needing people to stake their funds to help with lightning-fast validation. If you have cryptocurrency that you don’t think you’ll sell for a long time, then staking can be a fantastic opportunity. Especially as there’s no fixed period for users to put their money in for, this can be a great way to ride out the bear market until things take a turn for the better.
How To Provide Liquidity to Generate Passive Income Within DeFi
Finally, we come to one of the most popular methods that investors within the DeFi space use to generate passive income - providing liquidity. Providing liquidity and staking are often confused, as they both involve doing similar things with your cryptocurrency. In staking, you’re locking away your money potentially indefinitely, helping to support projects that you love and that offers a high APY.
Providing liquidity, on the other hand, is about locking away your funds in a pool that collects cryptocurrency. A liquidity pool collects cryptocurrency pairs within smart contracts. Having lots of liquidity in these pools allow automated market makers to work, allowing crypto exchanges to create a fair market through continual buying, selling, and swapping within the pair.
Businesses that want to increase the circulation of their cryptocurrency will often get involved in these liquidity pools, using them to generate liquidity for their new token. Users that lock their cryptocurrency into these pools are rewarded with a fixed return. Often, the more time they commit to being in a liquidity pool (often in a month, two months, three months, six months, or year-long format), the better the APY return.
The central difference here between liquidity pools and staking is that users in the former get involved in DeFi protocols, while the latter is within blockchain networks as validators. While both have fixed APY returns, liquidity mining is often the preferred method as it’s more stable.
On Cake DeFi, users are able to browse many different pairs that are currently active. By selecting one of these pairs, investors can then enter their cryptocurrency into these liquidity pools. The APY return is very impressive with this tactic, with some of the available liquidity mining projects offering upwards of 21% APY.
For users that want to sit back and watch their funds accumulate, even through this bare market, liquidity pools are a great position to look into.
Final Thoughts
The traditional method of buying low and selling high sounds perfect - until a recession, global pandemic, and global financial failures send the markets into a tailspin. In bear markets, traditional financial investing methods simply don’t work. To evade the worst of these crashes, more and more people are turning to the world of DeFi.
With the sheer range of different possibilities of what users can do with their capital, investing in the world of DeFi is an exciting new frontier. At the end of the day, diversity is key in investing, making a move into DeFi an attractive leap for any investor. Whether you’re a crypto wiz or are just getting started in this industry, we recommend you take a look into the world of earning passive income with DeFi.
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