2020 has been a big year for crypto, though mostly due to unfortunate reasons. The COVID-19 pandemic caused a global economic meltdown earlier this year. Businesses shut down, people lost their jobs, and governments were caught unprepared.
In the midst of this desperation, people began turning to digital currencies, just as Satoshi Nakamoto, Bitcoin’s creator, expected they would all those years ago. Many started looking into different ways to hodl crypto, and once they got their hands on some — they then started looking into how to make money with these assets.
However, a lot of these people do not have the time to trade, or they cannot afford to wait for long-term investments to pay off. This is why they look for ways to earn passive crypto income, and potentially even count on these earnings to survive each new month in these uncertain times. As a result, the ever-growing crypto community has multiple other ways to earn interest on crypto, which is what we will talk about today.
How to Make Money with Cryptocurrency?
DeFi (decentralized finance) has emerged as the leading field offering many methods to earn interest on crypto.
The DeFi sector of the crypto industry allows digital currency users to enjoy decentralized banking services, which are similar to what traditional banks have to offer. The only difference is that these services are offered without a central authority, and users do not have to meet many strict criteria to participate.
DeFi is available to everyone, including those considered unbanked or underbanked such as people living in developing countries. It is easily accessible, and it offers a variety of services that could help those who are invisible to traditional banks receive the same benefits as everyone else.
Additionally, with DeFi being a part of the crypto industry, it also comes with increased security, transparency, immutability, and other benefits of distributed ledger technology (DLT).
Let us explore different methods of earning interest within the emerging DeFi sector of the crypto industry. There are several ways to earn more crypto without having to buy it. These include concepts like staking, yield farming, crypto lending, and compounding your crypto.
1) Staking
Staking is a method of earning interest on unused crypto assets that although somewhat similar to mining, does not require excessive energy or electric bills.
Instead, staking involves holding users’ funds inside a cryptocurrency wallet. By doing this, users support the operations and security of a specific blockchain network. Basically, they lock up their coins and receive rewards in return.
How to Make Money Staking?
A user can generally stake either using their own private wallets or through certain exchanges.
If this method seems simple, that’s because it is. Users’ own crypto wallets act as a crypto interest accounts, and they get to earn money simply by depositing coins and not using them. That’s all there is to it.
This is possible due to the Proof-of-Stake (PoS) consensus mechanism. It is a method that allows a blockchain to use an energy-efficient process to add new coins into circulation while still remaining decentralized. The process is similar to mining because PoS chains also produce and validate blocks but rely on staking instead.
To put it simply, users stake their coins, and in doing so, they become potential validators of blocks. The protocol randomly selects validators at specific intervals. Once validators are selected, they create a new block. Participants with more funds locked up in their wallets are more likely to be selected. The more money the user has, the more money they get to earn.
Just as with traditional crypto mining, money is earned as a reward for maintaining the blockchain. However, these rewards are calculated differently for each blockchain. There is no universal formula that applies to every staking protocol in the crypto industry.
2) Yield Farming
The second way to earn cryptocurrency from DeFi is through yield farming, a practice that investors use to earn rewards through liquidity mining.
This is done with ERC-20 tokens and stablecoins. Once again, the only thing that users need to do is to lock up their coins and offer them to the underlying mechanism that operates the liquidity pool and pays rewards. Liquidity pools are pools of tokens locked in smart contracts. They facilitate trading by offering liquidity. Liquidity pools are mostly used by decentralized exchanges (DEXes).
Yield Farming vs. Staking
This concept is very similar to staking. However, there are some differences. For example, yield farming differs from staking in that yield farmers typically move their crypto from one trading market to another. This is done because different markets or pools offer different yields. Farmers are always looking for the market that offers the highest yields in order to earn as much as possible. Staking, on the other hand, is tied to a specific project where stakers wish to support the project’s network and earn rewards in exchange for doing so long term.
Once farmers find a pool and deposit their tokens, they get paid in transaction fees proportional to their contribution to the pool. They also receive payments in a specific reward token created by the decentralized exchange. Of course, the value of this token is entirely dependent on the market.
Yield Farming vs. Lending Pools
This may also sound similar to lending pools, yet these two concepts are not the same. Lending pools do not make funds available for people to trade. Instead, borrowers can take funds from the lending pool as long as they add some collateral.
Simply put, lending pools allow loan providers to earn interest by providing loans that must be overcollateralized. Yield farming lets farmers earn interest through reward tokens and trading fees that come from those who trade against assets in these liquidity pools.
3) Crypto Lending/Crypto Loan
As the name suggests, crypto lending is the process of lending digital coins and tokens to another individual in the form of a loan. This is by far the easiest concept to understand as most people already know how bank loans and credits work.
How does Crypto Lending work?
It works pretty much the same in the crypto industry, except for the fact that there are no actual banks involved or any other centralized institutions. With 3rd parties cut out of the deal, users lend and borrow funds directly from one another. Lenders, of course, receive some interest payments for the funds they make available.
So, let’s say that a crypto user has a certain amount of money in crypto, and they don’t plan on using it for a while. They can then go to a crypto loan site, create an account, deposit their funds, and lend it to someone who needs the money, with interest. That’s it.
Because the user is lending with interest, they get to earn money once the borrower pays back, ending with more than what they started.
Borrowers must pay their loans with the additional interest. However, as mentioned above, some lending services or lending pools will require a borrower to put up collateral as well. The exact terms and conditions for borrowers will vary across the multiple available sites and platforms.
4) Compound Your Crypto
Lastly, users can earn compound interest on their crypto. This is not a practice that is unique to DeFi in particular.
So, what does it mean to compound crypto?
Earning compound interest is easily among the most powerful financial moves that can be made by businesses and individuals alike. It is also something that anyone can do with both crypto and fiat. However, be advised — like most other methods of earning interest, it will require time and patience.
Generally, if users aim to earn compound crypto interest, they will have to wait for a longer period. This can last anywhere from a few months to years or even decades.
It is a process where the user locks up their coins and earns a bit of interest on them over a certain period. The interest is then added to their initial deposit or principal, and interest can now be earned on the larger sum. Let us explain this in an example.
How to calculate my compound interest?
Let’s say that the user owns 1 Bitcoin, and they go to a platform that allows them to earn up to 6% interest that compounds on a monthly basis. That means that in a month, the user will own 1.005 BTC, having earned 0.005 BTC (6%) the first month.
They will then start their next month with 1.005, instead of the original 1 BTC. In essence, with each passing month, the amount on which the interest is earned increases. If we assume that the user will leave the money untouched for 12 months under the conditions we described, after one year, they will own around 1.062 BTC. The longer they wait, the more money they earn.
Calculating compound interest is easy, and anyone can do it by using a cryptocurrency compound interest calculator. Similar cryptocurrency earning calculators exist for other methods, all available online for free.
Conclusion
There are many different ways to earn interest on crypto these days, and they all yield different amounts depending on the coin that is used, the method, the deposited amount, or the length of time that the users are willing to wait.
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Good information