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 yield farming.

(H3) 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:

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

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

• 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. Individuals can also earn rewards through crypto credit cards and referral programs in the form of “crypto-back” or bonuses. 

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 likeThe Gemini Credit Card®*  partner  with established financial institutions to facilitate crypto-denominated rewards. In this case, cardholders receive 3% back on dining, 2% back on groceries, and 1% back on other purchases in bitcoin or other cryptocurrencies.

*Issued by WebBank. Subject to cardholder Terms and Conditions. Subject to Rewards Program Terms.

Affiliate Program Crypto Rewards

To generate public interest, many crypto platforms have introduced referral programs. For example, Gemini  offers the Gemini Referral Club, while Binance, 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.

Potential Risks of Earning Crypto Rewards and Interest 

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.