In African countries, the lockdown effect of the COVID-19 pandemic has totally changed the way we live, work and interact with each other. This is proof that the decentralized Web 3.0, the Fourth Industrial Revolution, Artificial Intelligence, Cryptocurrency, and Blockchain are already here- and in fact, here to stay.
Satoshi Nakamato created Bitcoin with the goal to serve as an alternative to fiat currency, but Decentralized Finance (DeFi) is taking it a mile further. As the name implies, DeFi is designed to provide a trustless and permissionless system which eliminates the need for middlemen, with a special focus on a community-driven financial services platform.
Decentralized finance (DeFi) has been one of the hottest topics in the crypto space, with a report from DeFi Pulse showing about $45.54B in Total Locked Value (TVL), with Market Dominance of 16.67% on different DeFi protocols at the time of writing this article. This is in sharp contrast to the world of Centralized Finance (CeFi) where there is high governance, lack of transparency, and no absolute control over funds.
Decentralized finance (DeFi) is here to innovate and deliver an alternative to the existing faulty banking mode, and disrupt traditional financial intermediaries. Also, it is not only targeting the banked, but also the unbanked- a population that is estimated to sit at around 60% in Africa, according to Microsoft.
Decentralized finance (DeFi) provides a lot of opportunities such as earning a passive income with little or no stress, either you choose to connect to DeFi dapps, or apps, via decentralized Web 3.0 platforms or simply through regular web interfaces.
In this article, we will take an adept look into the ways (such as staking, providing liquidity, yield farming, and lending) you can leverage on Decentralized finance (DeFi) products and services as an African for passive income.
It is a process of locking up your tokens and earning more of the same token (or another token, which will be specified by the platform) over an agreed specific period of time into a smart contract. It is similar to mining but uses less power and resource-intensive alternatives.
The locked tokens are referred to as stake, which usually involve keeping the stake in a suitable wallet (either online or offline) and this stake is used to perform several network functions such as validating transactions, decentralization, maintenance of the network’s security etc.
Therefore, the individual that provided the stake will be receiving staking rewards which can be claimed daily, periodically or annually.
Decentralized exchanges (DEXs), such as Pancakeswap, Uniswap, Bakeryswap, and Julswap etc fully support swapping of token pairs such as BNB and BUSD. This is made possible by liquidity providers which provide the liquidity needed.
The liquidity providers (LPs) contribute the tokens into a smart contract, which will control the contributed tokens, which is referred to as a pool. When you provide liquidity on these DEXs, you will be rewarded with 0.3% from all swaps which will be directly proportional to your pool share. The more swaps are conducted via that pool, the more your rewards.
The major setback to liquidity providers is impermanent loss – when the liquidity provided into the pool, and the price of one of the pooled tokens fluctuates significantly compared to when they were deposited. To reduce this, liquidity providers are advised to choose highly liquid pools that contain less volatile assets, such as WBTC/ETH.
Also, to increase your rewards as a liquidity provider, make sure you analyse real-time data from liquidity provider (LP) aggregators. This will help you predict your potential future gains from various pools.
It is the symbiotic relationship between liquidity providers and DeFi protocols. The users are known as yield farmers, which provide the liquidity first on decentralized exchanges (DEXs). For providing the liquidity, they are rewarded with this form of token (LP tokens) which can be locked into Yield Farms, which are DeFi protocols.
The rewards come in more of the same token being farmed or with another token known as harvest. Yield farming is a good passive income stream, since the earning is from both providing liquidity and farming.
Yield farmers are expected to perform due diligence on the Yield Farms, before investing or farming their LP tokens. This is to ensure they are valid with no intention of “rug pulling” (stealing LP tokens, which will be used to withdraw liquidity from DEX pools) and externally audited by reputable firms.
DeFi lending platforms such as Aave, Compound Finance, Maker etc provide loans to individuals or business owners without any form of intermediaries or third parties. These platforms make use of smart contracts – DeFi lending protocols to enable interested individuals (lenders) to deposit their assets, which is referred to as money market.
The process is made possible, by the lenders sending their assets (either stable coins or tokens) to the smart contract, in which the assets will be available for borrowing.
These lending platforms pay the lenders an APY for providing and sending the requested assets into their smart contract. The assets sent by the lenders are therefore made available by the platform to the borrowers, in which they pay an interest when they return what they borrowed.
A portion of the interest is returned back to the lender with his assets provided. The process is controlled by a smart contract, which means the lenders can be rest assured they will receive their money back with interest.