This post was originally posted on r/ethtrader DAO on July 11, 2021. Link to original post.

While HODL is a good proven strategy, ETH ecosystem offers you much more! Instead of just having your coins sit in your wallets, you can generate passive income from them while not losing out on their price action.

Here are some ways you can do it

1. Providing Liquidity

Platforms like UniSwap aren't new to any DeFi user. Well guess where do the tokens come from when you swap? They come from "Liquidity" provided by other users.

Well what's the incentive for you? : All LPs divide the 0.3% Fees users pay when they swap tokens and share it among them proportional to their share. (LP means liquidity provider)

For example, if you provided 100 USDC, 100 DAI to a 1000 USDC-DAI pool, you take 10% of all total 0.3%fees paid by users when swapping DAI-USDC/USDC-DAI

What is the risk? : The risk is "Impermanent Loss" where you make more profit just by buying and HODLing the tokens rather than providing liquidity. A great video and read on IL

2. Yield Farming

When you provide liquidity to a platform, you receive some "receipt tokens" as a proof that you are the owner of that liquidity you provided. Now what you can do is stake these receipt tokens on "platforms" that offer APR% and earn money.

What's the incentive for the platform to offer APR? : Newly launched platforms have trouble getting decent liquidity on reputed exchanges like UniSwap. So they encourage users to provide liquidity for their newly launched tokens and as a reward offer extra tokens for such users

What is the risk? : Yield farming is the MOST RISKIEST thing to do. The high risk sometimes also brings high rewards.

Remember the word "Rug pull"? : Yield farming is where majority rug pulls happen. When you stake those tokens at the newly launched platform, the devs take all the users' "receipt tokens" and head over to UniSwap. Because they own the receipt tokens, UniSwap allows them to remove liquidity that users provided. The devs drain all the liquidity leaving tokens of users "unswappable" and worthless.

INVEST LESS THAN WHAT YOU CAN LOSE IN YIELD FARMING

3. Borrowing

Imagine you own 1 Ethereum. You suddenly had a need for $500, either to buy them dips or some personal requirement. Now you can sell some ETH and get $500 or, you can deposit that ETH as collateral and take a loan.

But why loan while I can sell? : Because, you don't miss the potential of the underlying asset. You know that ETH is going to $5K or even $10K so don't wanna sell any part of ETH for $500.

What's the risk? : Platforms like AAVE/Compound are as legit as DeFi can get but always DYOR.

What are the borrow limits ? : Well the loan to value ratio (LTV) matters. For example 75% LTV means you can take a loan of max 75 USD after depositing 100 USD worth tokens. Your LTV increases as you pay back more loans.

What to interest rates? : The interest rates vary. It is currently around 3% for USDC and 0.61% for ETH. Before ETH rates seem lucrative, hold on..if you take a loan of 0.1 ETH (200 USD) when ETH price is 2000..What happens when you decide to payback the loan and ETH price is now 4000? The payback should be of the same asset so you have to payback 0.1 ETH(400 USD). That's why stable rates are high. More on rates here

4. Lending

Well where is the asset coming from when you borrow? The assets you borrow are assets staked or lent to you by other users called Lenders. You can also lend your assets and get rewarded an APY for your tokens. It is currently around 2-3% for Stable coins.

Bonus : You also earn APRs on the assets you deposited as collateral! Which means even while your tokens are locked away as collateral in borrowing case, they are also earning some income. More on Deposit rates

5. Staking/Validator

ETH 2.0 is coming and you can stake your ETH in the staking contract and earn nice 5% APR on your staked ETH. If you have 32 ETH, you can become a whole validator yourself instead of joining a pool.

What are the risks? : You cannot withdraw staked ETH until ETH 2.0 launches. So if it delays, your ETH is also locked away for more time. More on staking rewards

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Now that the price action frenzy is at a low, I urge everyone to take sometime and understand all these protocols and platforms. Many DeFi protocols like ones above allow you to truly be your own bank and earn passive income while not losing underlying asset performance.

Apart from monetary incentives, who knows if you might develop a new idea/protocol that gives banks like JPM a run for their money?