In previous weeks we have learned about crypto, wallets, NFTs, and a few of the risks associated with a brand new form of decentralized currency. This week its time to learn how buying and holding – commonly referred to online as ‘hodling’ can be used to increase your profits. There are 5 common ways a crypto user can earn a yield on tokens and coins they already own.
- Staking coins
When it comes to earning yield on your digital assets, staking coins is typically among the first options for crypto investors. In the crypto markets, staking refers to the process of locking up 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 as an alternative to the proof-of-work (PoW) concept to address the environmental sustainability issues surrounding the latter. In the PoS concept, crypto holders are able to stake a certain amount of funds on the blockchain in order to validate transactions. The more coins staked by an investor, the higher the rewards earned.
- CeFi lending
Before DeFi emerged, essentially all crypto platforms operated under a centralized finance (CeFi) model. That means one single entity was in charge of operating the platform. In addition to platforms that allow for the trading of cryptoassets, crypto lending marketplaces emerged to enable crypto holders to lend their digital assets to earn interest.
Using CeFi lending apps, you earn crypto yield when borrowers pay interest on the digital assets you are lending to them. The platform you are using handles all the payments and matches borrowers and lenders so you only have to concern yourself with the interest payments you are receiving.
- DeFi lending
The decentralized alternative to CeFi lending is DeFi lending. The DeFi market has experienced rapid growth over the last two years, making it a multi-billion dollar crypto sub-sector today.
DeFi lending allows crypto holders to earn interest by lending their crypto to others via decentralized lending pools. On lending dapps (decentralized applications – More of which we will talk about next week.), smart contracts to match lenders and borrowers without the need for credit checks, and collateral is posted to reduce default risk.
- Yield farming
Yield farming is another popular way of earning crypto yield. Although all crypto yield earning methods are risky, yield farming is arguably the riskiest on the list. However, it also has the highest APYs.
Yield farming or liquidity mining is a concept where crypto holders can stake some or all of their digital assets in a lending or DeFi trading pool, thus providing liquidity and in return, receive liquidity pool tokens that can then be staked in a yield farm to earn further yield besides the liquidity pool fees.
- Staking NFTs
You can also earn yield by staking non-fungible tokens (NFTs). The NFT industry has experienced a massive boom since the start of the year, so it shouldn’t come as too much of a surprise that developers have come up with ways for NFTs to provide yield 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.
While earning yield on your crypto can potentially be lucrative, it’s also risky. Only invest what you can afford to lose and do your own research about the assets and platforms you plan to use on your hunt for yield. This is not financial advice, and is just for informational purposes. Next issue we will learn a bit more about dapps – decentralized applications how they work, what they do and where to use them.
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