Tired of just hodling your crypto? Want to turn your bags into a passive income stream? Beyond hodling lies a world of rewards, discover how to claim yours!
Most cryptocurrency investors separate their holdings into two distinct baskets: short-term plays and long-term holds.
As you might expect, assets intended for a short-term play are rarely held for long. But assets that you intend to hold for a long time (i.e. irrespective of its price action) can be used to generate an additional yield — beyond the standard capital gains.
By doing more with your idle assets, you can improve capital efficiency and your returns. Here, we look at five ways you can earn an additional yield on assets you plan to HODL for some time.
Stake Long-Term Holds
Many blockchain platforms operate using a Proof-of-Stake (POS) consensus mechanism that requires users to stake their tokens or delegate their stake to a node holder to receive a share of the block rewards.
Indeed, three of the top 10 altcoins by market capitalization operate using this system — allowing users to earn 3-7% APY (at current rates) on their staked balance each year. This is paid in the same cryptocurrency that was staked, allowing users to compound their interest easily.
Besides this, many individual blockchain projects offer a staking program. Unlike blockchain-level staking programs, these are typically smart-contract powered and are simply designed to reward users for their holding tokens long term (and reducing the circulating supply). These can offer much higher rewards, but generally at the cost of increased token volatility.
These typically enforce a fixed lock-up period, e.g. 30, 60, 180 days, etc., with longer lockup periods offering the highest rewards. For blockchain-level staking opportunities, liquid staking solutions like Lido and Rocket Pool can be used to maximize capital efficiency by avoiding lock-in periods.
Learn how to stake Ethereum with Lido!
From a security standpoint, blockchain-level staking is generally considered to be extremely safe. But individual project-level staking programs can be less secure since smart contract vulnerabilities are a potential concern.
With that in mind, consider exploring whether your long-term holds have a staking program. This can help you grow your balance over time while you wait for the right exit conditions.
Become a Liquidity Provider
Decentralized exchanges (DEXs) have become a staple among cryptocurrency traders and investors that seek to avoid the limitations of centralized alternatives.
Being decentralized, these platforms need a way to source the liquidity that users use to trade. In most cases, DEXes operate a permissionless pool system, where two or more assets can be deposited and used for trading liquidity. The users that contribute this liquidity are known as liquidity providers, and they earn a fraction of the DEX trading fees for their contribution. These are equivalent to the dedicated “market makers” found on centralized platforms.
Learn more about automated market makers (AMMs).
Today, there are dozens of DEXes available across the most popular layer 1 and layer 2 platforms — most of which support permissionless liquidity provision. These include both stablecoin and volatile asset pools, e.g. USDC/USDT or WETH/WBTC respectively.
With that said, it’s important to consider the risk of impermanent loss (ILs). A number of DEX platforms now claim to have eliminated or reduced IL — such as DODO and SmarDex — but these claims are typically less well-established and battle-tested. ILs are less of a concern when depositing to stablecoin-only pools.
The potential yield varies by platform and pool but generally falls somewhere between 1-10% per year.
Join a Yield Farm
After contributing funds as a liquidity provider, it is possible to further improve your capital efficiency by staking your LP tokens in a yield farm.
As the name suggests, these are platforms that allow you to “farm” additional yields by staking your LP tokens. This yield is provided on top of the gains you make in the form of trading fees on your liquidity and is usually provided in the form of the DEX or yield farm’s native governance or utility token.
For example, PancakeSwap users can stake their LP tokens in one of its farms to earn further yields in the form of $CAKE. Most popular layer 1s (and some layer 2s) now have a variety of yield farms to choose from.
It is a common strategy to liquidate the yields offered by these farms and then use this to bolster the original liquidity and farm position – thereby compounding the returns. Newer yield farms typically offer higher rewards, but this comes at the cost of increased risk.
Remember to only use platforms with a valid security audit.
Use a Crypto Savings Account
Much like regular banks typically offer interest in fiat deposits held in savings accounts, a variety of similar platforms now exist for crypto deposits.
These allow users to earn a yield on their idle digital asset, usually with no minimum lock-in period — meaning you can withdraw your funds and any interest at any time.
Crypto savings platforms are typically centralized and most require customers to complete know-your-customer (KYC) verification to create an account. Depending on their region or chosen asset(s), customers may be subject to minimum and/or maximum deposit restrictions.
Typically, these platforms lend out user funds to over-collateralized institutional borrowers, sharing most of the fees with depositors and keeping a fraction to fund their operating costs.
It should be noted that many of these platforms have failed in recent years, including the likes of Celsius and Voyager. But a handful has managed to weather the storm and remain operating for several years.
To keep track of the latest savings accounts and sort opportunities by potential yield, check out CoinMarketCap Interest.
Become a Lender
Decentralized finance (DeFi) has enabled the development of a variety of permissionless equivalents to traditional financial services.
Open lending platforms are among the most popular, due to the clear benefits they offer over centralized platforms — such as better interest rates, improved accessibility and a lack of credit checks (due to over-collateralization).
Now, practically anybody can become a lender by contributing to a permissionless lending pool via one of these platforms. Borrowers can then take out a loan using a fraction of the funds held in this pool, paying an interest rate that is then shared among the lenders based on their share of the pool.
Depending on the platform and asset you choose to lend out, it’s possible to earn anywhere from just a fraction of % APY to over 10%. Many open lending platforms require over-collateralization and will automatically liquidate borrower deposits if their long-to-value ratio (LTV) exceeds limits.
That said, like most DApps, open lending platforms are subject to smart contract risks. As such, you might consider prioritizing platforms that are proven secure over those that offer the best yields.
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