In this blog post, we'll explore the best ways to earn interest on your idle cryptocurrency. If you are holding crypto for the long-term, why not put it to work and generate interest?
Successfully generating interest on crypto can be a great way of mitigating against market downturns; if the price of Bitcoin falls by 10% in 2022, but you have earned 10% on your Bitcoin, you have significantly lessened the impact of the decrease in price. On the other hand if you generate 10% and the market rises by 10%, your earned crypto has also gone up in value.
This can be a powerful way to increase the value of your holdings, but it is not without risk. As always, nothing in this post should be considered financial advice, it is purely for informational purposes and to give you something to consider.
What are the popular methods?
Defi (Decentralised Finance)
In the world of crypto, decentralisation is often spoken about. This is the idea that there is no single body, no single point of failure, controlling the relevant area in question. Decentralisation is what underpins blockchains, in that, if you take the Bitcoin network, it is a peer to peer network that is not run by a central authority.
Decentralisation could in theory be extended to many aspects of society, however, defi is one that has become incredibly well known recently. This system is one that is not reliant upon a central authority such as a bank, and instead functions in a peer to peer manner where users keep control of their private keys.
Using defi, a person can earn interest in a number of different ways. For example, some defi platforms allow the lending and borrowing of assets in exchange for interest payments. Another method is 'yield farming' or 'liquidity mining', where users are able to generate interest and or rewards for providing crypto for liquidity purposes.
While defi can provide users with high interest rates, it is generally considered high risk. There are many issues that can occur, defi platform smart contracts may posses bugs that can be exploited by hackers; smart contracts are not necessarily easy to read.
In addition, defi assets can be subject to impermanent loss where assets put up for yield farming can lose considerable value once deposited (LP tokens make up multiple tokens which can lose value despite interest remaining high).
All in all, defi can provide high rewards for high risk; for those who are not accustomed to the industry, it is definitely something to be especially wary of. With this said, there are a number of defi platforms that have made it more easy to get exposure to defi; SwissBorg being one of these.
Some defi platforms include Uniswap, Aave, Pancakeswap, Sushiswap.
The interest generated varies widely between platforms and tokens.
Cefi (Centralised Finance)
Centralised Finance, or cefi, is a lot more simple to explain than defi. In the crypto space, it is simply a provider offering a service or product. Centralised finance is not limited to the crypto industry, and banks are traditionally considered part of cefi.
Cefi providers vary in their offerings when it comes to generating yield, in that they have different models for interest generation and provide varying interest on different conditions of use. One of the most common cefi model revolves around a provider using the loan/borrow model, where funds can be borrowed from or deposited on the platform; borrowed funds pay interest and this can feed the interest generated on deposited crypto, although it depends on the backend model being used. Some providers may loan deposited money out to other companies.
Users may chose to take loans out from these platforms in order to leverage their position, if they believe the price of their crypto may increase. Alternatively, with more liquidity, this crypto can be traded without having to sell off your underlying position by putting up crypto as collateral for the initial loan.
Cefi can come with benefits in that if you have trust in the platform you use and the platform has adequate risk management strategies in place, there is arguably a lower risk than many defi strategies.
However, there is still risk given your crypto is not necessarily insured, companies may also use suspicious backend models such as rehypothecation where deposited crypto is recycled. Lastly, cefi platforms generally provide far lower interest rates than some defi platforms.
Examples of well known cefi platforms include: Celsius, BlockFi, Nexo, Gemini and CoinLoan.
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