Another day, another series. I love writing mini-series because they challenge me to think outside the box and focus on the subject. Today I will be doing a deep dive on my favorite topic, Passive Income.
This will be a little different because I will discuss passive income opportunities inside of Decentralized Finance (DeFi). I am fresh off reading the book “How to DeFi- Beginner,” and I am pumped to explore more of this world.
In traditional banking (TradFi), there are not many ways to earn interest on your cash. You have savings accounts, high-yield savings accounts, and certificates of deposits. Without getting into bonds or dividend-paying stocks, those are some of the main ways to earn passive income in TradFi.
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DeFi looks to shake this up by offering many ways to earn passive income. Some ways include interest from coins, staking, lending, farming, and lotteries. Understanding these different methods will help lower risk and increase profits. Let’s jump into the least complex of all of these methods, interest in coins.
Is it possible to earn a 9% return on an almost risk-free investment? Absolutely. I know because I have been earning 9% on my USDC coins for the last four months. You don’t truly understand how much 9% is until it starts hitting your account every 1st of the month.
I invest in my interest-paying coins through a centralized wallet on Voyager. You can just as easily open a decentralized wallet and earn interest on your coins as well. Remember, to open a decentralized wallet; you will need to follow a step-by-step guide.
When you open a decentralized wallet, you, and only you, will be responsible for protecting the keys to your wallet. Many people keep these keys offline to avoid online hackers gaining access to their keys. You will want to do your due diligence before you open your decentralized wallets.
For now, I am on Voyager, a centralized wallet. They have great rates on coins, including 9% on USDC and 7% on their own coin, VGX. The cool part is that they base their interest rates on the number of coins you invest in the platform.
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So, if I have 100 VGX coins, I would earn seven coins annually. It doesn’t matter how much the coins are worth. I just experienced how important this is because the price of VGX just doubled in a week. However, I am still earning interest on my 895 coins. Now, the value of the coins I earned from interest has doubled as well.
Back to USDC, it is a stable coin pegged to the US Dollar. It stays at the value of a dollar. I have $830 on Voyager, and I’ve earned $16 since May. If this money were sitting in a high-yield savings account at 1% interest, it would have accumulated $3 of interest over four months. 9% interest is huge.
To understand why stablecoins pay so much, you will need to understand the value of peer-to-peer, borrowing, and lending on the blockchain. I will go more in-depth into borrowing and lending in a future article of the series.
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Let’s just say that a borrower can put up collateral via coins, say 6 ETH, and they could then borrow 3 ETH. They could ask to receive their 3 ETH via USDC at an 11% interest rate. Your 9% would come from the borrower paying back the loan.
The borrower gets to keep their 6 ETH once they fully pay back their loan. This is important because the price of ETH could continue to sky-rocket over time. They may not want to sell, just to find some new investments. Think of this as a home equity loan—where banks use the home (the asset) as collateral for the loan.
The main risk to your investments is that the interest rate may drop from 9% (or whatever) it starts with. Stable coins will remain in high demand because they can move freely throughout many DeFi functions. Other coins’ interest rates may fluctuate; however, their prices have a chance to appreciate.
Conclusion. That’s all I have for interest from coins. You can open a Voyager or Coinbase account and start earning interest today. If you want to go the DeFi route, you can as well. We will need a decentralized wallet for everything else we cover in this series. Enjoy and Happy Investing.
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