Making Passive Income by Lending and Borrowing

The idea of earning passive income while you sit around indulging in leisure activities is one that's very attractive and it has become a common goal for individuals looking to amass wealth without necessarily trading their time for money. Although there are methods such as real estate, savings accounts or stock dividends, there is another way which is often overlooked; borrowing and lending. This method can help generate significant interest when it's done prudently and with an understanding of the risks involved.

In this guide, we'll walk you through the whole process of earning passive income through lending and borrowing.

What is Passive Income?

Passive income simply refers to earnings from an enterprise in which a person is not actively involved. It is the opposite of active income where you have to put in hours of work to earn. On the other hand, passive income, once set up, requires little to no effort to maintain, but provides long-term financial gains. A good example of this is rented properties. As the owner, you get to earn yearly or monthly just for renting out your properties. There's no need to be actively involved and as long as the property stands, you keep getting returns for a long time.

Lending and Borrowing as an Income Stream

Borrowing and lending have been important parts of the finance world for centuries. With finance now moving into the digital realm, these services are now more accessible to the average person especially in this blockchain era. Now, peer-to-peer platforms and decentralized finance (DeFi) offer opportunities to earn passive income by lending assets to borrowers and earning interest in return.

Decentralized Finance (DeFi) Lending

DeFi platforms are known for offering multiple financial services and now, they have also harnessed the powers of blockchain technology to offer lending and borrowing services. DeFi platforms are powered by smart contracts; self-executing contracts which write the terms of an agreement into code and automates transactions based on these predefined terms. This brings a new dimension to borrowing and lending.

So, how does lending on DeFi platforms work? Let's get into it.

Lenders are required to deposit their cryptocurrency into a liquidity pool on platforms like Liqwid Finance. Borrowers then take loans from the pool using their own assets as collateral. In return, lenders earn interest in the form of the platform's native tokens or another cryptocurrency.

On decentralized platforms, you can get higher than average interests, but it's also important to know that risks are higher due to the volatile market.

Advantages of Defi Lending

● High Yields: Compared to traditional banking and P2P lending, DeFi Lending can yield better returns due to the high demand for cryptocurrency loans.

● Transparency: All transactions on a blockchain are recorded publicly and since DeFi platforms are built on blockchains, they benefit from this.

● Easy to Access: As long as you have an internet connection and access to cryptocurrency, you can use DeFi lending platforms from anywhere in the world.

Risks of DeFi Lending

● Volatility: Sudden price changes and fluctuations can seriously affect the value of your assets.

● Lack of Regulation: DeFi platforms operate in an unregulated environment, so if a platform undergoes a hack or collapses, there might be no way to recover your funds.

● Smart contracts: Transactions on DeFi platforms are faster because of smart contracts and the reduced need for human input, but when there is a loophole or a bug in the smart contract, lenders could lose their assets.

Strategies for Making Passive Income by Lending and Borrowing

What are the best strategies to rely on when engaging in DeFi lending?

● Diversification

Spread your cryptocurrencies across different pools to reduce exposure to a single point of failure. This way, when a pool becomes volatile others will still give the expected returns.

● Start Small

The next thing you have to do is start small, take your time to learn how things work. This way, you can make more informed decisions before investing. Also, do enough research on any platform you decide to use, read reviews, check ratings and look into security audits of the smart contract if it's a DeFi platform.

● Law of Compounding

To make more, you have to invest more, so practice the art of reinvesting your returns. When you do this, you'll be able to compound your returns and earn much more.

● Volatility Mapping

Finally, you should keep an eye on volatility. This will keep you from being affected by drastic price changes and also help you make more informed decisions to reduce loss.

Conclusion

Having a side revenue stream can help you better save for the rainy day. Instead of leaving your funds or digital assets idle, you can put them to use by lending on DeFi services like Liqwid Finance to get good returns on them.Meanwhile, always DYOR and employ proper risk management practices when lending.