What Are the Top 3 Things People Get Wrong About APY in Crypto?

1. APY is Only Available Through Centralized Exchanges

Most people new to crypto will first come across APY offerings through one of the many centralized exchanges that they use to start purchasing crypto. This is not necessarily a negative thing, as centralized exchanges can often be more stable in their rates compared to DeFi APY programs that are determined solely by the state of the market.

In addition, centralized exchanges have the advantage of being larger and can simplify the process, which is a significant advantage for many users new to crypto.

The main disadvantage to using a centralized exchange is that most require custodial wallets. This becomes problematic if the exchange becomes insolvent, files for bankruptcy, or collapses for another reason. The user’s funds can be potentially used as collateral or made inaccessible to the user. Remember, not your keys, not your crypto.

DeFi (Decentralized Finance) has accelerated the growth of APY offerings and has the added benefit of not requiring a custodial wallet. While users can earn additional interest by locking their crypto into a set term in DeFi, the assets are typically locked in a smart contract vs. an exchange’s centralized storage.

The main disadvantage of using DeFi for APY is that the rate of return is not as predictable as a centralized exchange. No centralized entity defines the APY rate, so the rates are set by algorithmic formulas based on borrowing and lending levels. The more people borrow, the higher the return on the APY rates. Conversely, the less people borrow, the lower the APY rate.

There’s also staking, which let’s users lock up their crypto to help secure the respective blockchain an earn an APY in return.

2. Earning APY is Risk-Free

Anything that claims to be risk-free in crypto should be treated as highly suspicious and heavily researched before engaging with it. Similarly, if there is an APY offering out there with unsustainable levels of high returns, it should be a red flag to users.

Thousands of new crypto projects launch every year, and while APY programs are exciting and unique, they are still in their infancy and easy for bad actors to take advantage of. Whether a malicious scam or founder incompetence, if an APY earning program collapses, it is often the users that lose out the most. This exact situation played out in the summer of 2022 with the Celsius Network.

The Celsius Network acted as a cryptocurrency lending company with some of the highest APY programs on the market. It was a centralized network that operated similarly to a traditional legacy fiat bank; only it did so for crypto. Rates of return were as high as 20% on stablecoins and attracted retail and institutional investors.

Unfortunately, on June 12th, 2022, Celsius halted withdrawals from its platform, citing “extreme market conditions.” A month later, Celsius would file for bankruptcy with users’ funds remaining frozen and inaccessible.

3. APY Rates Are Stable

While DeFi protocols typically operate on flexible APY rates, it is also not uncommon to see centralized exchanges alter and change theirs. Users usually understand the fluctuation in DeFi APY rates due to how they operate. Still, centralized exchanges often face customer backlash when their rates change, often abruptly and without warning.

However, when centralized exchanges typically change their APY rates, it is usually done to make their business model more sustainable, and announcements are made suddenly to avoid the chance of insider trading.

Crypto.com is one of the largest cryptocurrency exchanges on the market. It boasts over 50 million users, 250 coins and tokens, and a host of other features. On May 1st, 2022 the company announced an abrupt change to their flagship visa rewards program.

It was a tiered system that incentivized users to stake the Crypto.com native CRO tokens to access higher rewards and APY. Initially, Crypto.com wanted to remove staking rewards at all levels, but customer backlash caused the company to reverse course to the current new levels.

The changes caused a heavy sell-off of the native CRO, which became problematic for users who had initially staked expecting high APY rates only to have their tokens inaccessible until their staking period ended. They could not withdraw their tokens as they watched the value of CRO tumble and their APY rates get slashed.

Final Thoughts: Be Careful Out There

After myth busting here in this article, we know that APY rates are not stable or risk free. There are a couple of extra pieces of advice to help round off your yield generation strategy.

If a company or smart contract is showing warning signs of failure, then it might be time to get your coins into a wallet you control. A 5% APY is not worth the risk of a 100% loss. The second is don’t put all of your eggs in one basket. You don’t want your entire stack compromised from the failure of a single company.

Now that you’re armed with all of this knowledge, you should be much better prepared to earn yield on your cryptocurrency.