Gain Exposure To Crypto With Less Risk: Earning DeFi Fees

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AInvest Crypto Basics
Fri, Sep 9, 2022, 4:39 AM ET  ·  4 min read  ·  0 view

With everyone from Elon Musk to Tom Brady talking about crypto, the investing world's zeitgeist has finally reached digital assets. But even as crypto goes mainstream, many investors are still hesitant to put their money into such a volatile and unregulated asset class.

And they're not wrong to be wary. Investing in any individual cryptocurrency is incredibly risky. The prices of these assets can swing wildly, and there's always the possibility of hacks or other malicious activity that could result in total loss.


But there are ways to gain exposure to cryptocurrencies with less risk. The first fundamental to keep in mind is diversification.


Why Diversification Matters


Diversification is key in any investment portfolio, and that's especially true when it comes to crypto assets and digital currencies.

With the constant volatility in the markets, it's more important than ever to have a diversified portfolio that includes a mix of traditional assets like stocks and bonds, as well as alternative investments like crypto assets.


The importance of diversification largely comes down to the idea of "non-correlated assets." This simply means that when one asset class is performing poorly, another asset class may be doing well. By diversifying your portfolio, you're able to mitigate some of the risk associated with investing in any one particular asset.


Crypto assets and digital currencies are still relatively new and unproven compared to other asset classes, but they offer a unique opportunity for diversification.


They're not subject to the same economic forces as traditional assets, which means they have the potential to perform well even when the stock market is struggling.


Of course, there's always risk involved with any investment, and crypto assets are no different. But for investors looking to diversify their portfolios, crypto assets and digital currencies should definitely be on their radar.


Beyond diversifying your holdings, you can also diversify your income streams.


Diversifying Income With DeFi Fees


In addition to holding a variety of crypto assets, you can also generate income by earning fees from decentralized finance (DeFi) protocols.

There are a number of popular DeFi protocols that allow users to earn interest on their digital assets, including Compound, Maker, and AAVE.


By lending your digital assets to these protocols, you can generate a passive income stream that helps offset some of the risks associated with holding crypto assets.


And because these protocols are decentralized, they're not subject to the same centralized forces that can often impact traditional financial institutions.


One popular DeFi protocol that's gained a lot of attention recently is SUSHI. SUSHI is an open source protocol that allows users to stake their digital assets and earn fees in the form of SUSHI tokens. The SUSHI token has been one of the best performing assets in the crypto space in recent months, and it's now one of the most popular DeFi protocols.


Another popular protocol is YFI, which is similar to SUSHI in that it allows users to stake their digital assets and earn fees in the form of YFI tokens. Both SUSHI and YFI offer a great way to diversify your income streams and generate passive income from your digital assets.


Cryptoassets and digital currencies are still relatively new, but they offer a unique opportunity for investors looking to diversify their portfolios. By earning DeFi fees with protocols like SUSHI and YFI, you can mitigate some of the risks associated with holding these assets while still earning a passive income.


Staking and How It Reduces Risk


Another income stream is called "staking" from holding a cryptocurrency in a wallet to support the network. When you stake, you earn money for helping to run the network. The more you stake, the more you can earn.

Staking is an alternative to mining that can offer a way to generate income with less risk. When you stake, you are essentially lending your coins to the network to help run it. In return, you receive interest payments for contributing to the network's security.


For instance, with DPoS (Delegated Proof of Stake) systems, you can delegate your coins to a validator who then helps to secure the network. In return, you receive a portion of the fees that the validator earns.


The beauty of staking is that it offers a way to generate income without having to put your coins at risk by buying and selling them. And, because you're not actively buying and selling coins, there's less chance that you'll make a bad investment decision that could lead to losses.


Of course, there is still some risk involved in staking, but overall, staking is a much safer way to invest in cryptocurrencies than buying and selling them on exchanges.


Profiting From DeFi With Yield Farming


To preface the discussion on yield farming, there's no doubt that DeFi is notoriously risky. With that being said, risk is what allows for opportunities and in the world of yield farming, there are many. Yield farming is the process of actively seeking to maximize profit across staking, lending, and liquidity mining.

To recap staking is the process of locking up digital assets to earn rewards. This can be done with cryptocurrencies, but also with other digital assets such as WOM tokens. Lending is another way to earn rewards in the form of interest on digital assets. There are a number of platforms that allow users to lend their digital assets and earn interest on them.


And finally, liquidity mining is a process by which users can provide liquidity to a protocol in exchange for rewards. Now that we've briefly covered the three main components of yield farming, let's discuss how one can go about profiting from it.


The first step is to choose which assets you want to stake, lend, or provide liquidity for. This will largely depend on your personal risk tolerance. Once you've chosen your assets, the next step is to find platforms that offer the highest rewards for those assets. This is where doing your research comes in handy.


There are a number of online resources that track the highest yield farming rewards across a variety of assets. Once you've found the platforms with the best rewards, all that's left is to stake, lend, or provide liquidity and start earning!


Of course, yield farming isn't without its risks. The biggest risk is that the platform you're using could fail or “rug pull,” leaving you without your assets. This is why it's important to only use well-established platforms with a history of paying out rewards and not cutting and running with users' funds.


Another risk to be aware of is impermanent loss. This occurs when the value of the assets you've staked or provided liquidity for drops below the price you paid for them. While impermanent loss is technically a risk, it's important to remember that it's temporary and that the market will likely eventually recover. Besides, if you're earning high enough rewards, the losses incurred from impermanent loss will be more than made up for.


All things considered, yield farming is a great way to earn passive income from your digital assets. With a bit of research and due diligence, anyone can start profiting from this burgeoning sector of the crypto economy.

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