How Can I Earn Interest or Rewards on My Crypto?

What Is Interest?

The concept of earning interest has been around since the inception of modern banking. Interest can incentivize individuals and businesses to lend money and generate a return on funds that might otherwise sit idle. For borrowers, interest applies as a percentage of the loan they receive from a lender. Borrowers typically make principal and interest payments to the lender at an annual interest rate, and the interest can apply for a variety of terms, lasting months or even decades. Individuals and businesses can also earn interest on their surplus funds by depositing them into savings accounts or investment instruments like guaranteed investment certificates (GICs) and bonds.

How to Earn Interest on Crypto

Although many traditional financial concepts apply to the crypto ecosystem, the decentralized nature of blockchain technology introduces alternative interest-earning opportunities such as lending and yield farming.

Crypto Lending Platforms

Crypto lending follows many of the same principles that underpin conventional markets. Those with surplus crypto holdings can choose to lend their crypto out to borrowers and earn interest. However, while traditional lending occurs exclusively in centralized markets, crypto lending is supported by both centralized and decentralized finance (DeFi) platforms.

Centralized Finance (CeFi): Centralized crypto lending occurs on platforms like BlockFi, Gemini, and Crypto.com — online entities that utilize intermediaries. With Gemini Earn, you can lend your crypto to certain institutional borrowers and earn up to 7.4% APY (Annual Percentage Yield) on more than 35 cryptos. Crypto.com also offers an interest-earning program that lets you earn interest on over 30 cryptocurrencies and stablecoins. BlockFi offers a BlockFi Interest Account (BIA), where you can earn interest on your crypto as well. These companies adhere to Know Your Customer (KYC) and Anti-Money Laundering (AML) protocols in their roles as fund custodians. For many, these platforms are attractive because they are often insured, and it's usually possible to negotiate loan terms and rates. For lenders, centralized crypto lending platforms generally offer competitive interest rates in comparison to their decentralized counterparts.

Decentralized Finance (DeFi): Within the realm of DeFi, there are decentralized crypto lending platforms that offer interest on cryptocurrency deposits like bitcoin (BTC) or DAI. The Maker lending platform lives on the Ethereum blockchain and operates autonomously to issue DAI stablecoins pegged to the U.S. dollar. Operating as a decentralized autonomous organization (DAO), Maker receives deposits as collateral and automatically issues DAI loans without KYC or further intermediary involvement. Users can then use their DAI to invest in other markets to generate a return.

Similarly, the Compound crypto lending protocol operates as a liquidity pool, allowing users to borrow against it. Unlike Maker, Compound’s smart contracts algorithmically govern loan interest rates. For those who choose to fund liquidity pools, yield farming presents another opportunity to earn interest on crypto.

What Is Yield Farming?

The rise of DeFi has given investors the ability to move digital assets between several different protocols, opening up the potential for amplified returns. This practice, known as yield farming or liquidity mining, involves moving cryptocurrencies between liquidity pools on platforms like Aave, Compound, and Curve. Liquidity pools are Ethereum smart contracts that function as marketplaces where users can exchange, borrow, or lend crypto. These pools utilize algorithms instead of traditional order books to dictate crypto market prices.

The process of yield farming typically involves the following steps:

1. An investor adds funds to a liquidity pool, becoming a liquidity provider (LP) in that marketplace.

2. The investor receives liquidity provider (LP) tokens representing their original investment and any fees (interest) generated by the liquidity pool.

3. In many instances, the investor can invest their LP tokens in another liquidity pool, amplifying their returns.

Yield farming differs from taking a long or short position in cryptocurrencies like BTC or ETH in that it’s specific to decentralized, non-custodial money market protocols. While the practice of yield farming can in many cases generate much higher returns than traditional alternatives, DeFi platforms operate in an emerging market that can be complex and unpredictable. Further, the lack of regulatory oversight and deposit protections across DeFi protocols may open users up to legal and security risks, and requires heightened due diligence. However, the relative absence of a central authority means smart contracts can dictate payouts and automate transactions under set conditions, which can in many cases help mitigate counterparty risk.

Earning Crypto Rewards

Entities that participate in securing specific blockchain protocols can earn crypto rewards for their efforts. This process is known as crypto mining on Proof-of-Work (PoW) protocols and staking on Proof-of-Stake (PoS) networks.

Validating via Crypto Mining

Cryptocurrency mining is the process of using computational power to validate transactions before they’re added to the blockchain. Each time a miner successfully validates a block of transactions, the network mints new “virgin” cryptocurrency as a reward. Miners can hold these crypto rewards or exchange them for other crypto or fiat currencies.

Crypto Staking Rewards for Validators

Crypto holders can lock their assets in smart contracts to receive crypto staking rewards from the underlying blockchain protocol. In doing so, they become network validators. Similar to how banks reward customers with interest on their savings, blockchain networks reward validators for their participation in the ecosystem, which helps generate new blocks on the blockchain. Many users choose to stake directly on blockchain protocols like Cardano, EOS, and Polkadot. However, staking services are also available on exchange platforms like Binance, Gemini, and Kraken or within wallets like Ledger and Exodus.

Crypto Credit Cards and Crypto Debit Cards

Crypto reward cards function much like conventional credit cards that integrate "cash back" offers or points programs. Until recently, most crypto debit cards (like those from Coinbase and Fold) issued rewards as points or miles, not as cryptocurrency. However, new offerings like the Bitcoin Rewards Card from BlockFi are partnering with established financial institutions to facilitate crypto-denominated rewards. In this case, card holders receive 1.5% of purchases back in bitcoin.

Similarly, Crypto.com offers the Crypto.com Visa Card. This crypto rewards credit card offers up to 100% reimbursements for several streaming services and up to 10% cash back on other purchases (depending on card tier). These tiers are determined by the amount of CRO coin a user has staked. Staked CRO is usually held for a six-month lock-up period, during which users can earn up to 12% APY.

Gemini has announced a forthcoming crypto rewards credit card in partnership with Mastercard that lets you earn up to 3% back on dining, 2% back on groceries, and 1% back on other purchases in bitcoin or other cryptocurrencies.

Affiliate Program Crypto Rewards

To generate public interest, many crypto platforms have introduced referral programs. For example, the Binance exchange offers the Binance Affiliate Program, while Gemini, Paxos, Trezor, and Coinbase all have similar offerings. These rewards are often redeemed via affiliate links, referral bonuses, or other discounts. Users should always perform due diligence to help ensure they're supporting projects built on solid fundamentals.

Crypto Rewards and Interest Risks

Although there are several ways to earn crypto rewards and interest, users should always consider the potential risks. In the event funds are lost, decentralized platforms often lack the deposit protections available in conventional markets. On platforms that promise high returns, there is an especially high risk profile.

• Misleading Returns: Some crypto lending platforms and liquidity pools promise artificially high returns that entice investors to purchase crypto assets with little value. Although investors may earn high returns in the short term, the underlying asset may be highly volatile, negating these gains.

• Locking in Funds: Some lending and staking platforms require users to lock in their crypto assets for a set period. The resulting lack of liquidity can expose investors to market conditions that may negatively impact their position — for example, a drop in the asset market price.

• Smart Contract Vulnerabilities: Although the vast majority of smart contracts function as they should, some will inevitably have vulnerabilities. As a result, locking up tokens in a staking protocol or liquidity pool exposes investors to the potential of their funds becoming lost or stolen.

• Accessibility: Not all investors are well-versed in the realm of crypto assets, and even less so in the complex world of DeFi. Until these platforms become more accessible, navigating the current ecosystem tends to require substantial technical knowledge.

Pros and Cons of Generating Passive Income From Crypto

Generating passive income from crypto has become increasingly popular as the blockchain ecosystem expands. However, crypto hobbyists and investors should always consider the risks associated with each of these potential options. Although high returns remain attractive, conducting due diligence can be especially important on decentralized platforms.