How Do DeFi Protocols Generate Income and Why They Matter? 🤔

Choosing between different#DeFiprotocols can take time and effort. Many may seem similar, but how do we know which one is best for generating passive income from our #cryptocurrencies? The first step is to understand a platform’s revenue and how much of that revenue is shared with users. Using this information, you can make more informed decisions about where to invest your assets.

How DeFi Protocols Work

Decentralized finance (DeFi) protocols offer a variety of financial services that operate through smart contracts. For example, a#DeFiprotocol can offer services such as decentralized exchanges, lending, and liquidity pools, all of which are run through smart contracts on a blockchain. All you need to access and use these services is a wallet and enough crypto to cover your trading fees.

There is almost no limit to the financial services that can be offered in the DeFi world. You can access exchange services, money markets, derivatives, and savings products. All of these services are permissionless and eliminate middlemen.

How DeFi Protocols Generate Revenue

The operating costs of#DeFiservices come from the computational power required to run smart contracts. Users typically cover this cost through gas fees. However, there are additional costs for services such as development and maintenance. DeFi protocols charge fees for their services to cover these costs and generate profits.

Decentralized Exchanges (DEXs)

Users who swap tokens on a#DEXmust pay a fee to use their services. For example, a transaction may be reflected in the DEX operator’s treasury or liquidity reserves with a 0.3% fee.