How to Make Money With Web3: DeFi, NFTs, and More

Web3 represents the internet’s next evolutionary phase, moving beyond the centralized models of the past. It is characterized by decentralization, leveraging blockchain technology to distribute control and data across a network rather than concentrating it with single entities. This shift empowers users with greater ownership over their digital assets, identities, and data. Unlike earlier internet iterations where platforms often controlled user-generated content and information, Web3 aims to provide a more open, transparent, and user-controlled online environment.

Earning Through Decentralized Finance

Decentralized Finance (DeFi) offers a range of financial services operating on blockchain technology. DeFi protocols enable peer-to-peer transactions and financial activities without the need for intermediaries like banks or brokers. This distributed approach provides users with direct control over their assets and fosters new avenues for earning income.

Staking

Staking involves locking up cryptocurrency assets to support a blockchain network’s operations. Participants, known as stakers, help validate transactions and maintain network security. In return, stakers receive rewards, typically as newly minted tokens or a share of transaction fees. The process involves selecting a staking platform, transferring cryptocurrency, and locking it for a period. Income from staking is considered ordinary income for tax purposes at the fair market value of the cryptocurrency received.

Yield farming

Yield farming is a strategy to maximize returns on cryptocurrency holdings by providing liquidity to decentralized exchanges (DEXs) or lending protocols. Liquidity providers contribute pairs of digital assets to liquidity pools, facilitating trading. They earn a portion of trading fees generated by the DEX, along with potential governance tokens. Becoming a liquidity provider involves connecting a digital wallet to a DeFi protocol and depositing the asset pair. Earnings from yield farming, including trading fees and newly acquired tokens, are classified as ordinary income.

Lending and borrowing

Lending and borrowing protocols within DeFi allow users to earn interest by lending out cryptocurrency assets to borrowers. Individuals deposit digital assets into a lending pool, making them available for others to borrow against collateral. Lenders earn interest on the assets they provide, with rates fluctuating based on market demand. Users can also borrow assets by providing collateral. Interest earned from lending digital assets is treated as ordinary income for tax purposes.

Monetizing Digital Assets

Non-Fungible Tokens (NFTs) and blockchain-based gaming offer ways for individuals to monetize digital assets. NFTs provide verifiable ownership of unique digital items, enabling new economic models for creators and collectors. Blockchain games integrate digital asset ownership directly into gameplay, allowing players to earn value from their in-game activities.

Artists and creators

Artists and creators can generate revenue by minting and selling NFTs representing their digital art, music, or collectibles. The process involves selecting an NFT marketplace, connecting a digital wallet, and uploading the digital file. After setting a price and paying a fee, the NFT is listed for sale, allowing creators to earn direct compensation. Sales of NFTs are subject to capital gains tax, with the rate depending on how long the asset was held.

NFT trading and flipping

NFT trading and flipping involve acquiring NFTs with the intention of reselling them for a profit. This strategy requires market research to identify potentially valuable NFTs. Traders execute purchases on various marketplaces and then list the NFTs for resale, aiming to capitalize on price appreciation. Profits from NFT trading are subject to capital gains tax, with short-term gains (assets held for one year or less) taxed at ordinary income rates and long-term gains (assets held for more than one year) at lower capital gains rates.

Play-to-Earn (P2E) gaming

Play-to-Earn (P2E) gaming integrates earning opportunities directly into the gaming experience. Players can earn cryptocurrencies or NFTs through various in-game activities, such as completing quests, winning battles, or owning virtual land. Players often acquire NFTs or tokens to participate in the game’s economy. The digital assets earned through P2E games are considered ordinary income at their fair market value at the time of receipt.

Participating in Decentralized Networks

Beyond financial activities, contributing to decentralized networks offers avenues for earning by actively supporting and engaging with Web3 protocols. These opportunities involve leveraging skills or resources to benefit the broader ecosystem. This participation fosters a more distributed and community-driven internet infrastructure.

Decentralized Autonomous Organizations (DAOs)

Decentralized Autonomous Organizations (DAOs) are internet-native communities that operate based on rules encoded in smart contracts, with decisions made through community voting. Individuals can contribute skills, such as marketing or software development, to a DAO and earn governance tokens or direct compensation. Joining a DAO involves holding its governance tokens and participating in community forums to identify contribution opportunities. Rewards are distributed based on agreed-upon terms within the DAO’s smart contracts.

Bounties and grants

Web3 projects offer bounties for completing tasks and grants for developing new features or tools. Bounties are smaller, one-off payments for tasks like identifying software bugs or creating content. Grants are larger sums provided to support development or research initiatives that benefit the ecosystem. Platforms exist where users can browse available bounties and grants, submit their work, and receive compensation upon successful completion.

Running network nodes or acting as validators

Individuals can earn by running network nodes or acting as validators, which involves operating software and hardware to support a blockchain network’s infrastructure. Node operators help process transactions and maintain network integrity, while validators participate in consensus mechanisms to secure the blockchain. This activity requires technical expertise and dedicated resources, providing rewards for contributing to network stability and security. Income from these activities is considered ordinary income.

Creating Content in Web3

The Web3 environment is reshaping the creator economy, allowing content creators to directly monetize their work and engage with their audience without traditional intermediaries. This shift empowers creators with more control over their content and revenue streams. New models foster a direct financial relationship between creators and their communities.

Social tokens

Social tokens are digital assets issued by individuals or communities to represent value, access, or ownership. Creators can issue their own social tokens to build token-gated communities, offering exclusive content, events, or merchandise to token holders. This allows creators to establish revenue streams directly from fans who invest by holding their tokens. Earnings from social tokens are classified depending on the transaction, as ordinary income when received for services or as capital gains when sold for a profit.

Tokenized content platforms

Tokenized content platforms enable creators to tokenize their articles, videos, music, or other digital works. This allows consumers to purchase or subscribe to content directly using cryptocurrency, with payments going straight to the creator. These platforms bypass traditional intermediaries, leading to more equitable revenue sharing for creators. This direct transaction model ensures a larger portion of revenue reaches the creator.

Decentralized social media platforms

Decentralized social media platforms aim to provide direct monetization opportunities for content creators. These platforms may integrate native tokens, tipping mechanisms, or advertising revenue-sharing models that directly benefit creators based on their content’s engagement. This contrasts with traditional platforms where creators often receive a small fraction of the revenue generated by their content. Income earned through these platforms is considered ordinary income.