How to Earn Low-Risk, Passive Income, using DeFi

Passive income: the millennial's wet dream. Using various DeFi dapps, dude, you can start earning passive income on your stablecoins from liquidity pool fees. Even better, you can sometimes get rewarded in governance tokens for your favorite DAO. This lesson will detail how to do so using two stablecoins (USDC and MAI) and the Qi DAO’s rewards over at Mai.finance.

First we’ll talk about stablecoins and then how to farm using stablecoins in a liquidity pool.

What’s a stablecoin?

Before we dig into how you can earn passive income with stablecoins, it’s probably good to define what one is… short story, a stablecoin is a cryptocurrency meant to peg its value to one US dollar. I.E. If you average out the worth of a stablecoin on the open market it should be around $1 USD.

You can use stablecoins to make trades on an automated market maker like
Quickswap and they generally maintain their value with pretty low-risk. Often when people say they are “taking profit” they mean they are trading their volatile crypto into a stablecoin. From there they can offramp it for fiat, or remain on the network and use the stablecoin for more trades or to use in a liquidity pool (more on that later).

There are various stablecoins out there with different mechanisms to maintain their peg, i.e. stay worth one dollar, and I won’t define every type but check out the video from the amazing Lisa Tan for more on that.

To get stablecoins you’ll either need to purchase it from a centralized exchange like Coinbase (i.e. USDC), trade for it on the open market (at Quickswap or Sushi for example), or create it using other collateral. The Qi DAO lets you mint their stablecoin MAI by vaulting collateral at Mai.finance. You’ll need to swap 1 USDC for 1 MAI, or put in collateral like MATIC and then can take out a loan on that collateral to receive MAI. (In the future, other collateral will be accepted than MATIC at Mai.finance.)

Nothing in DeFi is 100%, but a well established stablecoin like USDC or DAI is hard to beat for stability. USDC is backed 1:1 by USD, while DAI is an overcollateralized stablecoin made via the Maker protocol that maintains its value through arbitrage by traders and other mechanisms (read more here). Neither has failed to maintain value over a long (at least for crypto) period of time. The Qi DAO uses very similar mechanics to Maker’s DAI to keep its peg with USD.

How to farm stablecoins for passive income

Once you have some stablecoins in your possession you can start using them as liquidity earn fees on automated markets. Some protocols even reward you with other tokens for providing liquidity. Combine both and you can end up making some pretty high returns on your investment into stablecoins.

Trading on Ethereum or the Polygon network requires automated markets with liquidity pools. These pools let you trade easily for one token from another in the same pool. Automated markets link these liquidity pools together to allow almost any cryptocurrency to be traded for another. But this trading isn’t free. For the service of committing liquidity to a pool, automated markets like Quickswap charge a fee and give that to liquidity providers.

For example, let's say I provide liquidity on Quickswap for the USDC/MAI token pair. (Learn how to provide liquidity here.) When someone makes a trade of USDC for MAI, I am given a little bit of the fee (proportional to my share in the liquidity pool) for that trade. Since those fees are added to your liquidity pool in the same tokens you’re gaining passive income.

Liquidity providers gain fees from trades in their pool.

To provide liquidity I’ll need to do the following:

  • Have USDC or MAI in a 1:1 proportion. I can get some by buying it (USDC), creating it (MAI), swapping for it at Mai.finance (both), or trading for it on the market (both).
Swapping some Adamant Vault rewards for USDC
  • Pool my USDC/MAI at Quickswap by supplying liquidity.
Supplying an equal amount of MAI (previously miMATIC) and USDC

Provide liquidity, get rewards — how to farm

Certain protocols will incentivize providing liquidity for their token by providing further rewards. For example, Mai.finance does so for providing liquidity on Quickswap for the Qi/MAI pool, and for the USDC/MAI pool. Those rewards are in the form of the Qi DAO’s governance token, Qi, and rewarded per each block on the network. Once you’ve deposited liquidity at Quickswap you can then deposit the liquidity pool tokens you get (these represent your ownership of the pool) for rewards at Mai.finance.

For my example below I’ll be taking the liquidity pool tokens for the USDC/MAI pair I made at Quickswap and depositing them at Mai.finance. Before doing so make sure you’ve supplied some liquidity at Quickswap (currently, the only place that Qi DAO rewards for providing liquidity to).

  1. Once you’ve supplied liquidity at Quickswap head to the rewards section for Mai.finance.
Click on the Rewards tab to see the various pools

2. Then click on the pool you'd like to deposit your liquidity into.

You can see your stats, pool stats, and how much will be rewarded

3. You can click deposit and then the amount of liquidity pool tokens you want to deposit.

4. Once you have gained some rewards (about every two second for a block) you’ll see those start accruing, and can harvest them when you are ready.

Ready to harvest!

You can keep the Qi you have (currently it is used for voting on Qi DAO proposals, and soon will be part of their profit-sharing mechanism) or trade it for other tokens. It all depends on what you want to do with it. Big things are coming to the Qi DAO — I recommend hodling it for now.

That’s it! Isupplied some stablecoins for a liquidity pool and am gaining fees when folks trades from that pool. As well, I deposited the liquidity pool tokens I received for further rewards to farm them.

My stablecoins sit there with pretty low-risk and are generating a good amount of income. At the time of writing that yield is 26.83% APR — definitely beats a savings account or even the average return on investing in the stock market.

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