In the early days of crypto, the only way to earn was to buy low and sell high. Today, DeFi innovations provide diverse earning opportunities, from staking to liquidity provision, albeit with added risks.

In this article, we’ll explore:

• Popular DeFi mechanisms.

• How they work.

• Their risks and rewards.

• The safest way to earn passive income on TON.

What is DeFi?

Decentralized Finance (DeFi) refers to financial services built on blockchain technology. Unlike centralized organizations like banks, DeFi protocols allow users to provide liquidity and earn a share of the protocol’s revenue.

For example, decentralized exchanges (DEXs) let users swap tokens, while lending protocols enable borrowing without intermediaries. When users provide liquidity, they allow these protocols to use their tokens for operations, similar to how banks use deposits to issue loans.

A common risk in DeFi is the potential for token prices to decline, wiping out accumulated rewards. However, native tokens are generally less volatile, and stablecoins maintain consistent value.

What is Liquid Staking?

Staking is foundational to Proof-of-Stake (PoS) networks like TON. Validators lock up TON to gain the power to validate transactions and create blocks. For every block created, they earn a reward of 1.7 TON and transaction fees.

Liquid staking protocols like Tonstakers allow users to delegate their TON to validators, increasing validator power while earning users a share of staking rewards.

Crypto Staking Risks

The primary risk in staking is slashing—a penalty for validators who misbehave. However, Tonstakers protects users from slashing through smart contracts that guarantee validators return the full amount of delegated tokens, plus rewards.

Crypto Staking Rewards

Staking rewards are distributed by the blockchain itself and are stable over time. These rewards are paid in TON, the network's native token, valued at $13 billion at the time of writing, offering significant liquidity and market support.

What is a DEX?

Decentralized Exchanges (DEXs) use two-token liquidity pools to facilitate token swaps. For instance, users can provide TON and USDT to a pool, enabling traders to swap between the two.

Traders pay a fee for each transaction, which is distributed among liquidity providers. However, DEX liquidity providers face the risk of impermanent loss. If one token in the pair drops in value, providers may withdraw fewer tokens than they initially deposited.

Additional DEX Liquidity Provision Risks

Rewards for liquidity providers depend on trading activity. Low trading volumes result in smaller rewards, and the rewards—paid in the provided tokens—can lose value quickly.

What is a Lending Protocol?

Lending protocols let users borrow tokens by providing collateral in another token. For example, a user can deposit USDT into a protocol, allowing others to borrow it and pay interest. If borrowers default, their collateral is liquidated to cover the debt.

The main risk in lending protocols arises from sudden drops in collateral value, which can leave liquidity providers with fewer tokens than they deposited.

Additional Lending Protocol Risks

Lending rewards depend on active borrowing. If demand for the deposited token is low, earnings decrease. Like DEX rewards, they are paid in the provided tokens, which can lose value unpredictably.

What are Perpetual Swaps?

Perpetual swaps function like leveraged margin trading on centralized exchanges but in a decentralized, permissionless environment. Traders borrow tokens from liquidity providers for leveraged trades.

Liquidity providers face significant risks, as traders’ profits are paid out from their deposits. If traders incur losses, their margins are distributed among liquidity providers, but prolonged inactivity or low trading volumes can reduce earnings.

Additional Perpetual Swaps Risks

Rewards depend on both trading activity and unprofitable trades. A quiet market reduces liquidity provider earnings, and rewards are paid in volatile tokens, leading to unpredictable returns.

What is Farming?

Farming offers additional incentives for liquidity providers. DeFi protocols issue Liquidity Provider (LP) tokens as receipts for contributed liquidity. Farms let users lock LP tokens to earn extra rewards.

Additional Farming Risks

Farming inherits risks from the protocols where LP tokens are issued. For example, DEX farmers face impermanent loss, and withdrawing funds requires additional steps, adding complexity during volatile periods.

Conclusions

The TON ecosystem features various DeFi mechanisms, each with unique risk-reward profiles. Among them, liquid staking stands out as the safest option due to:

• No impermanent loss.

• No liquidations.

• Rewards in stable, native tokens.

• Independence from user activity.

• Simplified withdrawals.

Tonstakers adds an extra layer of security by protecting users from slashing, the primary risk in staking. This makes it the most reliable and secure DeFi protocol, both economically and technically.

While staking may offer comparatively lower rewards, its predictability and stability make it a dependable option for passive income. High-yield DeFi protocols come with higher risks, but liquid staking offers a balanced and secure way to earn in the DeFi space.