Complete Guide - How to make passive income with DeFi

Decentralized Finance is a new trend in the blockchain space. These applications make it possible to earn a fixed or variable rate of interest. This type of investing is often described as yield farming or liquidity mining. They can generate passive income at levels that would often be unthinkable in the traditional banking world. However, there are also risks, that we show later in this article.

Intro and basic definitions


Bitcoin is the first and worldwide strongest cryptocurrency on the market. The Bitcoin network is based on a decentralized database jointly managed by the participants, the blockchain, in which all transactions are recorded. That will never be more than 21 million bitcoins which makes it useful to protect against inflation.


Crypto exchanges such as Coinbase or Kraken are central trading platforms for buying and selling cryptocurrencies. The crypto phrase "not your keys, not your cryptos" is often used in this context, since you do not hold the private keys for your cryptocurrencies on exchanges yourself. In most cases, however, the purchased assets can be transferred to your own wallets.

There are also decentralized exchanges, DEX (Decentralized Exchanges). The best-known example is Uniswap, a decentralized exchange based on Ethereum.

Ethereum and Smart Contracts

Ethereum is also based on blockchain technology. Unlike Bitcoin, it is not a pure cryptocurrency, but also a platform for so-called DApps (Decentralized Apps), which consist of smart contracts. There are a variety of applications for smart contracts, including e-voting systems, virtual organizations, identity management, and crowdfunding. Unlike traditional financing, DeFi offers us completely decentralized financial services that are executed using smart contracts.

Binance Smart Chain (BSC)

The Binance Smart Chain (BSC) is the blockchain of Binance, the crypto exchange market leader.

BSC is faster than Ethereum and has lower transaction fees. With the Ethereum Virtual Machine (EVM), the BSC even offers full compatibility with Ethereum, so that Dapps written for Ethereum can largely run on the BSC without any changes and run faster to boot. The fact that this blockchain is significantly more centralized than Ethereum is seen negatively. The token it uses is called BNB and was also created by Binance.

Stable Coins

The prices of cryptocurrencies like Bitcoin or Ethereum are highly volatile. Stable coins exist as stable assets within the crypto sector. The US Dollar Tether (USDT) is one of the first centralized stable coins and still dominates the market today. According to Tether, 1 USDT on the blockchain is backed by 1 USD in a bank account. Meanwhile, there exist many more stable coins, such as DAI, BUSD, and USDC.

Lending / Borrowing

Borrowing money from a bank comes with numerous restrictions such as a credit rating or depositing collateral. Decentralized lending and borrowing of cryptocurrencies remove almost all of these restrictions. Anyone who can collateralize their loan can borrow a digital loan. A bank account is not necessary. There is also no need for a custodian, as this is automatically taken care of by the transparent blockchain.


APR is the effective interest rate without compound interest. This means that the interest rate shown in APR is the return you receive on your base investment as interest per year. Accordingly, if you were to reinvest the said returns, it would result in a higher interest rate (APY). Earnings can be rewards in a different currency/token than the deposited one. For non-stable coins, we assume the value in USD with the current exchange rate.


As the name implies, Total Value Locked (TVL) is the total amount of funds locked into a DeFi protocol. TVL can be thought of as the total liquidity in the liquidity pools of a given marketplace. TVL can be a useful data point to give you an idea of the overall interest in DeFi. It can also help compare the "market shares" of different DeFi protocols.

Liquidity Pool

A smart contract that contains the collective TVL and funds secured on a platform. Those that contribute to liquidity pools,

Financial DeFi Apps

Because of DeFi's nature, loans are always collateralized and automatically liquidated and sold at the current market price if necessary. This guarantees a (mostly) safe investment. Most DeFi Apps run on Ethereum or the Binance Smart Chain. The following projects are examples of financial apps to earn passive income.


Aave is a liquidity protocol that specializes in asset lending and borrowing. On Aave, users can deposit their assets as collateral and "borrow" against them. Or simply "lend" to Aave via deposits and earn returns. It supports more than 20 cryptocurrencies.


Compound is an algorithmic, autonomous interest rate protocol built for developers, to unlock a universe of open financial applications. With a TVL of more than $13 billion, it is one of the most used protocols.


Uniswap is the leading decentralized exchange (DEX) on the Ethereum network. The platform is mainly used for trading and exchanging various assets using the AMM method. To ensure that the platform remains fully decentralized, Uniswap automatically balances liquidity to ensure that the trading experience remains stable.


Curve Finance is another popular DEX and AMM solution, but this time it is specifically designed for switching between stable coins with low fees and slippage. Rewards on Curve are delivered via their native token CRV along with fees and interest from trades made on the platform.

Alpaca finance

Alpaca Finance is the first leveraged yield farming protocol on Binance Smart Chain. The protocol enables users to open a leveraged yield farming position by borrowing from deposit vaults. They believe Alpaca Finance will give farmers a chance to enhance their yield.

Numerous more DAPPS exists that we didn't mention. Furthermore, some centralized exchanges provide tools for yield farming. You can discover more projects here.

How to buy stable coins (and other crypto)

Choose an exchange with low fees. At the Point of writing this, Binance and Kraken are both good choices.

This tutorial shows how to transfer the token to your own wallet. Remember: "Not your key - not your coin".

How to deposit into DeFi protocols

This guide explains how to lock your assets into the aave protocol. It works similarly with other decentralized Apps. In most cases, the official website is a good resource for guidace.

Find DeFi Apps with high yield

Section coming soon...


What are the risks

Smart contracts could be hacked or code vulnerabilities exploited. Not all smart contracts are sufficiently audited. And even an audit does not guarantee absolute security. Using DeFi Apps are often too complex for newcomers. Improper handling can quickly lead to financial loss.

Another risk is known as "impermanent loss". It describes the potential loss of value when using token exchange pairs in an AMM mechanism. Since the mutual exchange value of token pairs is subject to dynamic market changes, the value ratio can temporarily develop negatively.

It's always important to do your research before investing to evaluate the risks,

Why is the interest rate constantly changing?

Borrowing rates rise when there is more demand than supply and fall when there is more supply than demand. Most interest rates are often subject to change when the broad cryptocurrency market suffers from rapid volatility

How are some projects offering such high returns?

New projects sometimes offer higher returns to attract capital to the platform. In these scenarios. If one platform is offering significantly higher returns than others it can also hint at higher risks.

How to track your return?

Many lending protocols display returns in real-time, while others require the use of a DeFi tracking tools like InstaDapp. You can also use our comparison tool to see how different DeFi apps have performed in the past.

Find the best DeFi projects

To the Comparison tool