Passive Income in Crypto: How to Not Lose Money in Liquidity Pools

What Are Liquidity Pools and Why Aren't They Staking?

In short, a liquidity pool is a collective pot of money where anyone can deposit their coins (for example, ETH and USDC). When someone wants to swap ETH for USDC, they do it through your pot, and you earn a small fee for it.

This isn't quite staking. Staking offers simple and predictable returns: you "lend" your coins to the network and get a percentage back. Liquidity pools are a more active and risky business, but with potentially higher profits. Your income from liquidity pools comes from fees and bonuses, but there's a catch.

The Checklist: 5 Questions to Ask Yourself Before Entering a Pool

Before you deposit any funds, go through this list. It will save you from 90% of costly mistakes.

1. What Coins Am I Depositing?

• A stablecoin pair (USDC/USDT): The yield will be low, but so is the risk. It's perfect for getting familiar with the mechanics.
• A volatile pair (ETH/SOL): The potential yield is higher, but this is where the main enemy of a liquidity provider appears...

2. What Is This Impermanent Loss (IL) Beast?

This is the most complex but most important concept.

• In simple terms: It's your potential missed opportunity. It's the difference between what your coins would be worth if you just held them in your wallet versus what they're worth in the pool after prices change.
• When does it happen? When the price of one of the coins in the pair changes significantly. The bigger the price jump, the bigger the IL.
• The Golden Rule: Your income from fees must be greater than your potential IL. Otherwise, you're losing money.

3. Is This Pool Actually Alive? (TVL and Volume)

• TVL (Total Value Locked): How much money is locked in the pool. It shows trust in the protocol.
• Trading Volume: How many trades go through the pool. This shows real activity and your potential income from fees.

The Rule: Look for pools where the trading volume is comparable to the TVL. A high TVL with zero volume is a "dead" pool where you'll earn nothing.

4. Where Do These +100,500% APYs Come From?

Often, high yields in AMM pools are achieved by distributing "bonus" tokens from the project itself.

• What to do: Check if you can sell these "bonus" tokens immediately and if there's any demand (liquidity) for them. If not, your 100% APY is just numbers on a screen.

5. How Do I Get Out?

• Check for any lock-up periods or penalties for early withdrawal. Sometimes, you have to wait several days to get your money back.

From Passive Farming to Active Management: How the Pros Do It

While most people just deposit their money into a pool and hope for the best, professional market participants (market makers) actively manage their liquidity. They don't just rely on fees; they shape the market themselves by placing both buy and sell orders.

This is a more complex but also more stable strategy. It used to be accessible only to large funds. Our mission at Coinrate is to make these professional approaches, such as market making and liquidity management, understandable and accessible to the retail investor. We provide market depth analytics and tools that help you understand where and how to best place your liquidity for maximum efficiency.

The Bottom Line: So, Where Can You Earn Passive Income?

Earning passive income in crypto isn't a "get rich quick" button. It's about choosing a strategy that matches your risk appetite.

1. Want it simple and reliable? Start with staking. Staking yields are currently lower, but so are the risks.
2. Ready to take on more risk for higher returns? Explore liquidity pools. But first, learn how to calculate IL and choose "live" pools.
3. Want to level up? Look into more advanced passive income strategies, like active liquidity management and market making, using analytical tools that make these proven profitable schemes accessible.

Start small, test with amounts you're willing to lose, and always calculate your risks.

FAQ for Those in a Hurry

Q: How dangerous is Impermanent Loss?
A: For stablecoin pairs, it's almost non-existent. For volatile pairs, it can eat up all your fee profits if the market moves продуктально. Always calculate your potential IL before entering.

Q: What's better: staking or pools?
A: Staking is like a savings account. Pools are like owning a stake in a currency exchange. The first is simpler, the second is potentially more profitable but requires more attention.

Q: How do I find reliable pools?
A: Start with large, well-known platforms (Uniswap, Curve, PancakeSwap). Check their audits, TVL, and real trading volumes. Don't jump into no-name projects promising 1000% APY.

Q: How can Coinrate help me?
A: Once you've mastered the basics, Coinrate can help you level up. We teach you how to analyze liquidity like a pro and use more advanced strategies (like market making) to generate more stable income.

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