Ask CryptoVantage: Is There a Legit Way to Earn Yield in Crypto?

What is Yield?

First, let’s define yield.

In finance, yield describes the amount of money generated on an asset over a designated period. It expresses the income realized based on the initial investment and its current market value. The specified period could be monthly, quarterly, and so on, but it is primarily annual.

Yield is heavily associated with risk, with high risk often corresponding to increased yield potential.

That description succinctly encapsulates the very nature of crypto investing where the value of a cryptocurrency can plummet suddenly or a DeFi platform simply fails.

Legit Ways to Earn Yield in Crypto

Unlike other ways of earning with crypto, such as arbitrage or day trading, yield represents investments that allow you to make money while you sleep. Let’s discover some ways to earn yield in the world of crypto.

#1. Yield Farming

Don’t let the lingo confuse you. Stripped down, yield farming is when you lend your crypto to a DeFi protocol in exchange for more crypto. Usually, the protocol will lend money to investors who want to enter and exit market positions. The protocol then rewards you with a portion of fees, interest, and the platform’s token.

Yield farming was introduced by DeFi protocol Synthetix but only exploded when Compound began distributing its native token COMP to users who locked their crypto on the platform.

Yield farming has become such a runaway hit thanks to the allure of free tokens and attractive interest on crypto deposits.

Although it cooled a bit during 2022’s unrelenting bear market, the practice remains a legit way to earn yield with crypto, with several new companies and OGs such as Compound, Synthetix, Aave, and Curve offering the service.

Yield farming isn’t all wealth and riches, however. We’re talking about risks such as impermanent loss, smart contract failure, rug pulls, and more. The yield potential, however, could be a consolation for people who want to dip their toe.

#2. Staking

Crypto staking means putting up your crypto to work for you. Blockchains that use proof-of-stake consensus (PoS) mechanisms allow you to stake their native cryptocurrency and become a validator upon which you become eligible to earn interest.

Ethereum is the highest-profile PoS blockchain after its historic migration to PoS in September 2022. To qualify as a validator on Ethereum, you must deposit 32 ETH.

Enter staking pools. These allow investors who can’t raise the required amount to stake in a blockchain, with earnings divided proportionally. Several exchanges support pool staking, such as  Binance and Coinbase.

More cryptocurrencies you can stake include:

• Tezos (XTZ)
• Solana (SOL)
• Polkadot (DOT)
• Cardano (ADA)
• Cosmos (ATOM)
• Tether (USDT)
• Binance (BNB)
• Polygon (MATIC)

While it’s not without risk, crypto staking provides an opportunity to earn decent yields that are light years ahead of the paltry gains of conventional finance instruments. Per data from Staking Rewards, the vast majority of crypto assets have an annual yield north of 11%.

#3. Providing Liquidity

Contributing to a liquidity pool is a popular yield strategy on Decentralized exchanges like Uniswap or 1inch.

It sounds complicated but it’s really just creating a market for people who want to swap between two tokens.

For instance you could contribute $100 Ethereum and $100 USDC into a pool on Uniswap. The pool will help users on Uniswap trade their Ethereum for USDC or vice versa.

Liquidity providers reap the benefits of each transaction by getting to take a percentage of the fees charged on each swap.

There are some dangers to providing liquidity (such as smart contract bugs and impermanent loss) but it remains a reliable way of earning a significant yield on decentralized exchanges.

The popular platforms for providing liquidity are all the biggest decentralized exchanges such as:

• Uniswap
• 1inch
• Trader Joe
• Pancake Swap
• Orca
• Convex

#4. HODLing

Now for our last entry we’re going to add one that isn’t really earning a yield in the traditional sense.

HODLing is a concept that shot to crypto infamy and usage when a drunk user misspelled “hold” and, by doing so, bestowed on digital asset investors a moniker for a powerful investment strategy.

HODLers sidestep fear, uncertainty, and doubt (FUD), and fear of missing out (FOMO). They possess “diamond hands,” the opposite of “weak hands” — mainly investors who sell at the slightest sign of market turbulence.

HODLing does not provide a yield but it worked out a lot better than chasing huge yields on sites like FTX or Celsius. Sometimes simply holding your assets on a personal wallet will lead to the biggest gains, regardless of any yield.

As NYU business professor Scott Galloway put it, “The smartest people in finance do one thing: they buy a basket of stocks (ETFs, MFs)…and they don’t look at it again.” Replace ETFs and MFs, and the statement is true.

One Risky Method: Lending

Crypto lending is a DeFi product that lets you deposit crypto in a crypto lending service and earn yield. The deposited money is lent out to borrowers, who pay it back with interest.

Crypto lenders can either be centralized or decentralized.

Unfortunately lending has led to some of the biggest disasters in crypto with entities like Celsius Network, BlockFi and Voyager all going bankrupt after lending out customer’s funds and losing them to the market. It’s a giant black eye for the entire industry.

On the other hand decentralized lending such as what’s found on Compound and MakerDAO has been fairly successful and managed to weather the storm over the last few years.

It’s an interesting that’s worth keeping an eye but it’s important to understand the considerable risk it entails.

Closing Thoughts: Be Careful Chasing Yields

It’s exciting that there are several legit ways to earn yield with crypto. Crypto has evolved from mere speculative trading to DeFi and innovative ways to build wealth. There’s just one caveat: while those ways can make you bank, they can also lose you money just as fast.

If you decide to put your money anywhere, always remember two things: do your due diligence and invest money you can afford to lose.