What is Passive Income?

Passive income is money earned through investments that do not require the earner to be actively involved. The goal of passive income is to create a consistent income stream without the demands of a full-time job. Traditionally, passive income is used in spheres like rental properties, royalties, peer-to-peer lending, dividend stocks, and so on. However, it can also be used in many other types of investments.

The expansion of crypto and decentralized finance (DeFi) businesses is creating possibilities for investors looking for innovative ways to earn a passive income. DeFi is offering crypto investors the chance to earn annual percentage yields (APYs) that put most bank deposits to shame. 

There have been a number of options for investors to gain passive income since DeFi began in the summer of 2020, assisted by the sale of Compound's COMP token. Lending, staking, and yield farming are the main techniques for earning passive income in DeFi, and they all require crypto to do it.

The notion of lending is simple. Users lend their unused crypto assets to a platform, which is secured by a smart contract. In exchange, lending services give crypto holders an APY. Borrowers can access locked assets as loans, with interest paid back to the platform. There is no danger to the crypto lender if the borrower dodges to pay their loan because the process is governed by smart contracts. This means that anyone can withdraw their cryptocurrency assets at any time.

Staking is the process of a crypto holder locking or staking their assets in a smart contract. It originates from networks that use Proof-of-Stake (PoS) algorithms. A user can earn more of the same token by keeping their assets locked up for the long term. Staking is a means for users to make extra money by contributing to the network's security and decentralization in exchange for rewards.

Yield farming (or liquidity mining) also allows cryptocurrency holders to earn additional rewards while simultaneously supplying liquidity to pools. By doing that, liquidity providers (LPs) earn an LP token that represents their pool share. Trading expenses are frequently included in the benefits of being an LP when trades take place in the pool.

To receive additional rewards, LP tokens can be staked on a protocol or project. These rewards usually come in the form of the native token of the project or protocol. These tokens can then be staked for even more rewards, which makes yield farming a lucrative and passive income source. Though note that yield farming is often considered to be riskier than staking and lending.