How to Earn Passive Income in DeFi

This post is a walkthrough of how you can earn “passive income” in DeFi, inspired by a panel I am speaking on at Consensus 2022. For regular readers, it may be more intro-level than usual, though maybe you know someone who could benefit from this!

For Consensus newcomers, welcome! I publish a crypto article almost every Friday, often focused on tokenomics, DeFi, or gaming.

Let’s start with the important caveat: there is very little “passive income” in DeFi. Passive income suggests you have built some product or business which can generate profit for you with minimal or zero continuing effort on your part. 

Unless you write a smart contract that charges fees that are paid to you, or sell an NFT with royalties that keep accruing to you, most returns in DeFi are not really passive income. They’re better understood as “yield.” Returns on your assets that you are putting to work in the DeFi ecosystem, either to help another platform function better or to simply take advantage of free tokens that are being kicked off. 

The core difference is that passive income is something you could accrue without an existing amount of capital. But if you want “passive income” in DeFi, you almost always need some amount of crypto assets you’re willing to put at risk. Those assets are what earn you your yield. 

As I explained in “How are DeFi Yields so High?” The sources of yield vary. Some are dividends of profitable crypto businesses. Some are the fees you’re earning for helping provide a service. Others are completely unsustainable free money faucets, the amped-up crypto equivalent of VC-subsidized Uber rides. 

But regardless of where they’re coming from, there is free money out there for those who want to claim it. You just have to know where to look, and how much risk you’re willing to take. 

Through the rest of this post, I’ll explain some of the safer easier ways you can earn passive yield on your crypto assets. At the end, I’ll go over assessing whether or not it’s worth it, and where some of the hidden risks are.