November 30, 2022
Using DeFi To Counter Through A Bear Market

Using DeFi To Counter Through A Bear Market

Global markets were in an almost perfect condition at the end of 2019 and going into 2020 – being at record highs, a tech stock boom, and other stocks were going up.  

However, since then, the conditions have changed quite a bit. Currently, the markets are in a bear because of the global pandemic, record-breaking inflation worldwide, and multiple market crashes.

And with traditional finance instruments not yielding the desired results under such conditions, more people are looking into alternative investment methods than ever before. 

The world of Decentralized Finance has grown in popularity and profitability (DeFi). 

However, with the cryptocurrency market also experiencing a historic crash, dropping from a market total of $3 trillion to only $1 trillion, investing in crypto assets is not the best option.

Because of the fear generated by a bear market, the traditional mechanism of investing in an asset and waiting for it to rise is currently difficult to achieve. Although there was a decent possibility that a stock or asset would rise in value a few years ago, that is no longer the case.

Fortunately, the world of DeFi offers a variety of solutions, including industry-wide methods that users use to generate passive income from their assets.

If you can’t sell without taking a loss, these set-it-and-forget-it investment opportunities have now become extremely popular. This article discusses opportunities for using the assets for lending, staking, and becoming a liquidity provider.

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Generating Passive Income from Lending in DeFi 

Many popular cryptocurrency and DeFi exchange platforms provide loans to their users. These crypto loans enable users to borrow large amounts of cryptocurrency and reinvest the proceeds in investments or liquidity pools. 

The platform must have a large capital reserve to run this service at scale. Of course, they must own whatever they lend, which leaves businesses with two options:

Purchase crypto: A DeFi exchange could purchase a massive crypto reserve, costing the company a large sum of money.

Borrow from others: A DeFi exchange may gather a variety of smaller loans from individual investors, resulting in a substantial reserve with only interest payments.

Because no one wants to pay a large sum all at once, the latter option is almost always chosen in these exchanges. If you have cryptocurrency in your account, you can lend it to these exchanges and earn a constant interest fee. This capital is distributed to you regularly, generating a passive income stream.

Using Staking in DeFi for Generating Passive Income

Another excellent way to generate passive income with DeFi is to use a mechanism known as staking. There are several methods for validating a transaction in the world of cryptocurrency, which uses blockchain. To ensure that all transactions are permanently recorded on the blockchain, they must be saved into a data block.

Proof of Work is the transaction validation system used by earlier cryptocurrencies such as Bitcoin (PoW). PoW necessitates computers performing extremely complex mathematical transactions, which consumes a significant amount of energy. Other blockchain ecosystems employ the more environmentally friendly (and efficient) Proof of Stake algorithm (Pos).

Users are randomly chosen to validate a block of data in the PoS model. This random system relies on those users being prepared and available, with their funds qualifying them to become validators. Users must stake their currency in a project to generate enough potential users for a blockchain ecosystem to function correctly.

This involves a user depositing funds into a PoS system, potentially indefinitely. Users are continuously rewarded for offering this service, with the total APY varying according to the project in which they participate. Looking at some of the top opportunities in Cake DeFi, staking APY rewards range from 5% to 19.7%.

This APY was pushed even higher in some notable projects, as blockchains desperately needed people to stake their funds to assist with lightning-fast validation. Staking can be an excellent investment if one has cryptocurrency they do not expect to sell for a long time. Because there is no time limit for users to invest, this can be an excellent way to ride out the bear market until conditions improve.

Generating Passive Income Within DeFi by Providing Liquidity 

And lastly, amongst the most popular methods DeFi investors use to generate passive income is providing liquidity. Staking and providing liquidity frequently need clarification because they both entail undertaking similar stuff with one’s cryptocurrency. Staking involves locking away one’s money for an indefinite period to support projects you care about and pay a high APY.

Providing liquidity, on the other hand, entails putting your money in a cryptocurrency pool. Within smart contracts, a liquidity pool collects cryptocurrency pairs. Because these pools have a lot of liquidity, automated market makers can work, allowing crypto exchanges to establish a fair market via constant buying, selling, and swapping within the pair.

Businesses seeking to increase the circulation of their cryptocurrency will frequently participate in these liquidity pools, generating liquidity for their new token. Users who deposit their cryptocurrency into these pools receive a fixed return. The longer they commit to being in a liquidity pool (often for a month, two months, three months, six months, or a year), the higher the APY return.

The main distinction between liquidity pools and staking is that users in the former participate in DeFi protocols, whereas users in the latter act as validators within blockchain networks. Although both have fixed APY returns, liquidity mining is often preferred because it is more stable.

Users on Cake DeFi can browse through a variety of currently active pairs. Investors can enter their cryptocurrency into these liquidity pools by selecting one of these pairs. The APY return with this strategy is impressive, with some of the available liquidity mining projects offering up to 21% APY.

Liquidity pools are an excellent option for users who want to sit back and watch their funds accumulate, even in this bear market.

Thus, Investing in the world of DeFi is an exciting new future due to the vast array of possibilities for what users can do with their capital. And considering that diversification is essential in investing, choosing to move into DeFi is an appealing step for any investor. Whether one is a crypto expert or just a starter, it is pertinent to look into the area of earning passive income with DeFi.

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