Comparing four Methods for Passive Income Generation.
As the decentralized finance (DeFi) landscape evolves, cryptocurrency holders and investors continue exploring the different ways to optimize yield on their digital assets. In this article, we examine four methods to generate passive income in the world of cryptocurrencies: lending, staking, providing liquidity, and the Maya Savers feature. Each method has its unique characteristics and potential rewards, making them suitable for different investment strategies and risk appetites.
Lending is one of the simplest ways to earn yield on your crypto assets and the easiest to understand. By lending your digital assets to other people, you can earn interest on your holdings. How much you earn depends on different factors like the platform you use, the asset you lend, and the general market conditions. A good rule of thumb is that lending interest rates become higher wherever the market perceives more risks, for example exchange rate risks or counterparty risks.
In crypto, most platforms mitigate counterparty risk by requiring borrowers to over-collateralize their loans, and the biggest platforms – like Aave or Compound - might offer their users more security because they have been around for more time and have secured a bigger amount of assets.
Staking is the process of locking up your digital assets into a Smart Contract, usually with the intent to support the operation of a blockchain network what uses Proof-of-Stake (PoS) or Delegated Proof-of-Stake (DPoS) consensus mechanisms. Staking can be done “solo” or with the help of staking pools - like Lido or Rocketpool - where many people coordinate to stake their assets collectively.
Staking rewards usually come from the emission of new tokens or from transaction fees, since stakes usually represent the money that miners would have to spend to buy mining equipment. Risks associated with staking include the staked token price fluctuations or slashing penalties, which are typically applied to stakers found to be in violation of the rules of the network.
Similarly to staking, Liquidity provision involves depositing your digital assets into a Smart Contract, however the objective here is to provide liquidity on a decentralized exchange (DEX) like Uniswap or Balancer.
With your contribution, you enable other users to trade their assets, and you earn a share of the transaction fees generated by them. In most protocols, you need to deposit equal values of two assets (e.g., ETH and USDC) into a pool, which are then represented by redeemable “LP tokens”. This is called “Symmetrical Liquidity Provision” and it implies the risk of impermanent loss.
Providing Liquidity on Maya allows our users to earn yield on their crypto in the same way. Our pools happen to be multi-chain but the concept remains and the LP rewards comes from the same sources (i.e. fees paid by people swapping on Maya). Additionally, Maya's can support a “Savers” feature that would offer a unique way to gain yield with single-sided asset exposure using Synthetic assets. “Synths” are collateralized representations of assets that grant 1:1 redeem rights on an underlying L1 crypto and are locked in a “Savings vault”. This more advanced feature is considered in our roadmap and would be explained in more detail whenever we are ready to activate it.
For now, know that each of the methods discussed offer unique advantages and challenges, and that understanding their nuances will enable users to make informed decisions about the best strategies for their individual investment goals. Whether seeking the simplicity of lending or the potentially higher yields of liquidity provision, the DeFi ecosystem continues to present exciting and innovative opportunities to generate passive income.
If you're interested in learning more about Maya, its passive income capabilities, or have any questions, please visit our official documentation or contact us via our official Twitter account. Consider also joining our Discord community, see you there!
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