Capitalizing the Crypto Economy — What’s next?
Decentralized Finance(DeFi) has remodeled digital assets into a multi-dimensional platform with numerous use cases. Today, digital assets hold value because they fuel many different decentralized fintech services in Web3, and not just because of a common consensus about its value between crypto-asset holders. Learn more below!
Investors can benefit from learning about these fintech services in DeFi. This article aims to introduce the different techniques of capitalizing the crypto economy, we cover the concepts with increasing levels of complexity, from ‘HODling’ to complex techniques of liquidity mining.
So buckle up!
This is the simplest, most straightforward way of earning through crypto-assets. An investor buys a bunch of crypto assets with the hope to sell them at a higher price in the future. The digital assets market has been notoriously volatile in the past, one may choose to just buy certain ‘blue chip’ crypto assets for a long time or may decide to ride the volatility by deploying short-term trading strategies. Some of these strategies are listed here:
- HODling: A simple practice of holding crypto assets with the belief that the price appreciates steadily over a long time. The strategy requires a ground-level understanding of crypto-economics.
- Trading: Crypto-assets follow the rules of demand and supply just like any other asset in the world. Experienced traders from TradFi can use their active trading skills to profit from the short-term price cycles just like in the stock market. Techniques of day trading, scalping, range trading, etc can be applied here if one understands the economics of digital assets.
- Index Funds: This technique rests at a sweet spot between HODling and active trading, buying index funds that invest in a basket of crypto assets in different sub-sectors in the digital asset economy. Investors enjoy the benefit of not managing their portfolios and still being on top of the latest developments. This strategy requires basic technical know-how on digital assets.
The digital assets economy also functions as a decentralized digital bank. Investors can lock their funds in smart contracts, which will lend the funds to borrowers for interest. Stablecoins are the most suitable assets in this model, as they offer a predictable and fixed rate of return.
DeFi lending protocols function without intermediaries and therefore, they’re able to offer significantly higher yields than fixed deposits in TradFi. Such strategies require a basic understanding of smart contracts and yields and are suitable for risk-averse investors.
3. Running Nodes
Participating in blockchain network validation requires the commitment of one’s resources to the network. In POW networks, this is in the form of electricity and computing power whereas funds in the POS networks. Participants are rewarded with transaction fees or with new tokens minted by the network with each block. Profits from running nodes take time to realize, validators must be comfortable with riding the uncertain crypto market cycles. This strategy lacks diversity and requires the knowledge of technical nuances behind participating in network validation.
Staking is the process of providing liquidity to decentralized exchanges(DEX). DEXs have many liquidity pools of different pairs of tokens to facilitate swaps. Liquidity providers are rewarded with transaction fees charged with each swap, and with liquidity tokens, they earn for providing the liquidity.
Primary barriers to entry in this model are involuntary exposure to pairs of tokens that investors may be forced to acquire and in-permanent loss, which arises when the value of one token in the pair changes with respect to the other. Profiting from this model is fairly complex, one must understand the crypto economy thoroughly and have high-risk tolerance for impermanent loss.
- Liquidity Mining: This strategy takes the concept of staking a step further. Investors deploy complex mining strategies where proceeds from one pool in invested into others to maximize capital efficiency and rewards. Excelling in liquidity mining takes enormous skills in trading, crypto-economics as well as mathematics.
New blockchain start-ups are always in need of more funds and a greater follower base, sometimes they use airdrops to bootstrap these. Airdrop is a technique of free distribution of tokens to select individuals. This is often done to generate awareness about the project or to build value for the token as investors trade it in the market.
Projects set conditions on who could receive airdrops. For example, sometimes wallet addresses holding certain tokens or using certain protocols qualify for the airdrop. Making profits from airdrops is difficult as one must constantly be on the lookout for hints put up on social channels.
The investment required for airdrops is dramatically smaller than the rewards received, risks may arise when the integrity of protocols that host airdrops cannot be trusted.
Metaverse is probably the most unconventional yet the most famous form of the income stream in Web3. Popular NFT collections like Crypto Punks, Bored ape yacht club, and Axie Infinity are all part of the metaverse. Virtual real estate projects like Decentraland and The Sandbox have also gained significant traction.
The early adopters are the biggest beneficiaries of the metaverse. They were able to buy these assets for pennies and watched their value grow in millions. Metaverse is an extremely subjective asset class, which makes guessing the next multi-bagger quite difficult. The best sources for following the latest trends in NFTs would be social platforms like Twitter and Discord.
Note: There is a useful tool to track the latest NFT trends, check this out!
The digital asset landscape has endless opportunities. For the first time, there is such an unprecedented exchange of resources across the globe. We are yet to witness the full potential of this technology and new revenue streams will keep cropping up.
Did we miss any income strategies? Let’s keep the conversation going in the comments!
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