Today’s rapidly changing crypto markets offer a range of yield generation opportunities for investors who wish to generate returns on investment in addition to capital appreciation.
Read on to discover five ways to earn a return on your crypto investments.
Staking of parts
When it comes to generating a return on your digital assets, coin staking is usually one of the first options for crypto investors.
In crypto markets, staking refers to the process of locking your coins to support a Proof of Stake (PoS) based blockchain network and earn rewards in the form of newly minted tokens.
The PoS consensus mechanism was developed in 2012 by Sunny King as an alternative to the proof of work (PoW) concept to address the environmental sustainability and scalability issues surrounding the latter. (Learn more: “Fiat-like” proof-of-stake chains favor centralization and rich players)
In the PoS concept, crypto holders are able to wager a certain amount of funds on the blockchain in order to validate transactions. There is usually a minimum amount of coins you can bet. Additionally, crypto investors can validate bulk trades depending on the amount of coins they have. The more coins an investor has, the higher the rewards earned.
Examples of popular staking coins include Algorand (ALGO), Cosmos (ATOM), Tezos (XTZ), and Tron (TRON), while Ethereum (ETH) is also switching to the PoS algorithm and already offering staking on its beacon chain. Staking APYs (annual percentage returns) typically range from 3% to 10%, depending on the asset.
In addition to staking coins in PoS-based crypto networks, cryptocurrency holders can also stake tokens on Decentralized Finance (DeFi) platforms to earn a return on their holdings.
For example, you can bet CAKE tokens on the decentralized exchange powered by Binance Smart Chain CrepeSwap, to earn 50% + APY (at time of writing) on your tokens.
Before the emergence of DeFi, virtually all crypto platforms operated under a centralized funding (CeFi) model. This means that a single entity was in charge of operating the platform.
In addition to platforms for trading in crypto-assets, crypto-currency lending markets have sprung up to allow crypto-holders to lend their digital assets to earn interest.
By using CeFi lending apps, you earn crypto yield when borrowers pay interest on the digital assets you lend them. The platform you use handles all the payments and matches borrowers and lenders, so you just have to worry about the interest payments you get.
Examples of major CeFi lending platforms include BlockFi, Nexo, and Ledn, and APY can go from a few percent to double digits.
The big downside to centralized lending apps, however, is that you have to trust a third party with your coins and you may need to go through a KYC (know your customer) process.
The decentralized alternative to the CeFi loan is the DeFi loan. The DeFi market has grown rapidly over the past two years, making it a multi-billion dollar crypto subsector today.
DeFi Loan allows crypto holders to earn interest by lending their crypto to others through decentralized lending pools, such as Compound (COMP) or Aave (AAVE). On loan dapps (decentralized apps), smart contracts to match lenders and borrowers without the need for credit checks, and collateral is posted to reduce the risk of default.
DeFi loan rates can vary widely depending on the platform and the asset being loaned. For US dollar-backed stablecoins, for example, you can currently earn between 0.5% and 7% on major DeFi lending platforms.
The main disadvantage of DeFi loans is that DeFi protocols have a habit of succumbing to hacks which result in loss of funds. Sticking to the most established DeFi lenders is probably a wise choice for investors looking to earn a return in the DeFi lending markets.
Yield farming is another popular way to earn crypto yield. While all crypto yield methods are risky, yield farming is arguably the riskiest on the list. However, it also has the highest APYs.
Yield farming or cash mining is a concept where crypto holders can stake all or part of their digital assets into a DeFi lending or trading pool, thereby providing cash and in return receive cash. Liquidity Pool Tokens which can then be wagered into a Yield Farm to earn additional return on top of the Liquidity Pool Fee.
Popular yield farms include Sovryn, SushiSwap, PancakeSwap and Aspire, and APY can enter all three digits.
Staking of NFTs
You might not know it, but you can also earn a return by staking Non-fungible Tokens (NFTs).
The NFT industry has experienced a massive boom since the start of the year, so it shouldn’t be too surprising that developers have found ways for NFTs to deliver a return to holders.
Although NFT staking (or NFT farming) is a very new concept, there are already a handful of dapps that allow you to stake your non-fungible tokens to receive staking rewards in the form of protocol tokens.
Staking NFTs is similar to Yield Farming, the main difference being that the latter requires depositing digital assets into a cash pool and earning token rewards, while the former involves the use of NFTs.
While earning a return on your crypto can potentially be lucrative, it is also risky. Invest only what you can afford to lose and do your own research on the assets and platforms you plan to use in your quest for yield.
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