What Are the Top 3 Ways to Earn Yield in Crypto?

Generating Yield with Centralized Finance

In the world of traditional, centralized finance, generating yield is fairly straight forward. In order to generate yield, we have a plethora of well defined options available to us.

Options such as savings accounts, dividend yielding stocks, government or institutional bonds, or even private lending markets. We’re told to store our dollars in savings accounts that return 0.03% on the average American checking account. That means we double our money every 2,400 years. We’re told to blindly invest in the S&P and enjoy returns of about 8% every year. The most advanced among us might take on debt to invest in real estate markets, generating yield from charging rent.

The issue here is that each of these options really only apply to the most financially privileged among us. Not everyone has access to a savings account, let alone an account where they can buy stocks. The issue with generating yield within centralized finance is the size, reliability, and accessibility of the yield. The hard fact of the matter is that centralized finance was not built for everyone.

Generating Yield with Decentralized Finance

Regardless of who you are, and irrespective of what your portfolio looks like, your options in the centralized finance world are well known. In the decentralized finance space, innovation is moving rapidly and we’re only at the beginning.

Decentralized finance, or DeFi, is at its core, a modern alternative to the world of centralized, traditional finance that is native to the internet. As ethereum.org would say:

“DeFi is an open and global financial system built for the internet age”

Traditional finance is exclusive, DeFi is inclusive. Centralized finance, or CeFi, is closed by nature, and includes tiers that require ever-increasing permission. DeFi on the other hand, is a global, open, and permission-less alternative built on the back of open-source technology that anyone, anywhere has access to.

DeFi facilitates the creation and expansion of products and applications that allow you to borrow, invest, trade, and save, all outside of the exclusive traditional finance space.

DeFi, by nature, reinforces personal responsibility. It allows for full visibility and control of your wealth. If we’re going to take full responsibility (and custody) of our wealth as sovereign individuals, we need an operating manual. We need to verify (not trust) that the applications we’re using and incorporating into our new financial lives are safe and secure, and we need to know the safest ways to earn while doing so.

Three Ways to Generate Yield in Crypto

The cryptocurrency space has exploded. According to experts in the field, we could be looking at a $40T dollar marketplace in 5 years.

With that comes new, and endless opportunities to lend, borrow, earn interest, and invest. Citizens of unstable nations can escape the inflationary pressures of their national currency and can reduce the effects of corruption by greedy governments. Companies can ‘stream’ value directly to their employees or collaborators in exchange for their hard work, and we can learn how to earn passive income on our holdings.

Let’s take a look at 3 ways to generate yield in crypto:

Lending Your Crypto

By now we’ve all heard the term ‘HODL’. Generally, buying spot or dollar-cost-averaging over time, and then holding our assets forever is seen as the ultimate use of crypto assets like bitcoin. Not only is this because their long-term value is part of it’s design and attraction, but because it works as a hedge against inflationary policies like the infinite money printer that is government intervention.

Those who see HODLing as too passive are seeking other means of generating returns. They’re putting their assets to work by lending them on platforms like BlockFi, Nexo.io, Celsius Network, Crypto.com or Gemini Exchange. Lenders collect interest over time by locking in their loaned coins for an established duration.

This is a fascinating opportunity to extend the reach of DeFi because it doesn’t just apply to Bitcoin or Ethereum. Earning significantly higher interest on dollars, for example, is now possible through earning interest on assets like USD backed stablecoins. BlockFi, for example, is returning 8%+ to holders of dollar backed cryptocurrencies on their platform, according to Scott Debevic.

Returns on crypto lending can be higher than some traditional finance vehicles because the risks could be seen as greater. In essence, we’re lending our coins to the network in exchange for value, and the anticipation that the network will take care of our assets. This is very different from holding your assets in a software wallet or in cold storage, but the risk-reward calculus can be meaningful.

Liquidity Mining 

Innovation is a key component of DeFi. In this brave new world, there will be winners and there will be losers, but the broad strokes of ideology remain the same: inclusivity, peer to peer, decentralization and extreme ownership. This makes it hard to always draw straight lines back to the traditional world of centralized finance.

One such innovation is liquidity mining. Investors can pool assets, essentially combining loaned coins together for use on decentralized exchanges like Uniswap. From there, lenders collect a small percentage of that exchange’s trading fees. As Natalie Lu of Lightspeed Ventures puts it liquidity mining is…

“…offering tokens to an exchange that lends them to others, offering you a percentage of their returns.”

Staking 

One of the most popular methods of generating yield in the crypto space is staking. Staking is when investors lock-in a certain amount of assets to support the overall integrity and function of the network itself. They are paid in new coins, earning interest on their original stake.

For example, Crypto.com makes this process really easy with their underlying token, CRO. Staking a specific amount of CRO over an established time frame allows you to unlock rewards like credit cards that earn you purchase interest in crypto, at a defined rate based on the level of card you’re using. Staking more CRO equals a higher interest rate and perks associated with a higher level card.

If done safely, and correctly, staking is a win-win. Dedicated users get rewarded for contributing to the authenticity and the integrity of the network, and the network itself gets to put these assets to work on behalf of the whole. It’s one part of the truly beautiful lifecycle of decentralized finance.

Other crypto exchanges like Kraken and Coinbase also support staking various cryptocurrencies.

Outlook on Generating Yield with Cryptocurrency

As decentralized finance continues to grow, we’re going to see new and improved ways to generate yield in the cryptocurrency space.

The products that stand the test of time and attract more users will undoubtedly be those that also contribute to the strength of the networks themselves. Positive feedback loops that incentivize the user to add value to the network, only to have that value returned to them in the form of yield. Traditional finance has largely been a zero-sum game. There are winners, there are losers, and there are those who are simply never invited to the party.

DeFi, over time, will be accessible to everyone with an internet connection. With that connection, comes the opportunity to lend, borrow, invest, stake, save, and more, in the most inclusive monetary network ever created.