Abstract：In just over a decade, cryptocurrency has gone a long way. Bitcoin's brand recognition grows as it continues to deliver on its promise as an effective store of wealth.
Fractional banking's basic principle and passive interest
The use of native tokens and the crypto equivalent of passive interest
How risk is reflected in interest rates;
The difference between Cefi and Defi
In just over a decade, cryptocurrency has gone a long way. Bitcoin's brand recognition grows as it continues to deliver on its promise as an effective store of wealth.
Whether or not they grasp its value proposition, most people are aware of Bitcoin as a currency that can be purchased and traded in the hopes of increasing its value. The fact that Bitcoin and other cryptocurrencies now offer passive interest-bearing prospects - akin to normal banking - for users who just want to hold crypto-assets but gain additional benefits is less well-known.
Fractional Banking vs. Passive Crypto Interest
Anyone who has ever opened a typical savings account, gotten a mortgage, or taken out a loan should understand the basics of interest.
A bank will pay you interest if you deposit savings; the interest rate given increases the longer you are willing to leave your savings untouched.
A bank will lend you money if you need it, but you'll have to pay it back plus interest; the amount of interest depends on whether you secure the loan with an asset (such as a house) and your credit history.
Interest rates are relative to a base rate established by a central bank, which manipulates the rate to stimulate or reduce economic activity in both circumstances. As a result, interest rates are frequently referred to as the cost of money.
When you realize that the central bank authorizes private banks to lend out significantly more money than they have on deposit, things start to become extremely interesting. Fractional banking is the term for this.
Banks, unsatisfied with generating a profit by charging higher interest on loans than on deposits, engage in significantly more complicated ventures, taking on a significant degree of risk with money they don't have on deposit.
The entire system came crashing down during the 2008 financial crisis, at which time banks were bailed out, and interest rates were slashed to try to encourage activity due to the impact on the wider economy.
It's no surprise that banks are viewed with suspicion in this setting. They ruined the economy, were bailed out, and savers are getting poor returns on their money as a result. Opening a bank account or applying for a loan are still time-consuming processes that necessitate a great deal of personal information and permission.
After all, crypto is reconstructing the financial system in a fairer, more transparent way, thus the introduction of crypto-equivalents of traditional banking products shouldn't come as a surprise.
How to Make Money with Cryptocurrency as a Passive Income
Many products - also known as protocols - exist in the crypto business that, like banks, are both interest-bearing (loans) and interest-paying (interest payments) (savings).
Although there is a growing number of passive crypto earning opportunities, it would be erroneous to assume that crypto earning procedures are equal to their traditional financial counterparts.
Cryptocurrency is an attempt to solve the underlying flaws of fractional banking, and it is critical to comprehend the ramifications.
Cefi vs. Defi (Cefi vs. Defi)
Traditional banking, as previously said, is centralized, with the central bank setting interest rates and private banks adhering to a slew of restrictions imposed by associated central authorities on issues such as money laundering and fraud.
The degree to which crypto banking is centralized differs between the two techniques.
CEFI (Centralised Finance Initiative) - Provides cryptocurrency savings and loans within a typical centralised framework, including customer service and a well-defined company structure. Cefi is passive in the sense that you don't have to make daily decisions.
Decentralised Finance, or Defi, provides a greater and more flexible range of financial products for cryptocurrencies, all of which are delivered in a completely decentralized manner via protocols rather than humans. Because the protocols are regulated by smart contracts, all contact is fundamentally defined by code, and active user management is needed.
Defi is clearly riskier than Cefi, but the potential profits may be bigger as a result. Because the focus of this essay is on passive ways to generate income, that is where the focus will be.
How to make money using Defi will be explained in a later article.
The key difference in earning interest on crypto is that there is no central bank determining rates; instead, rates reflect demand for borrowing coins as well as CEFI providers' incentive to recruit new customers.
Because CEFI rates may change due to too many depositors chasing interest and not enough demand for borrowing, or simply because a provider decides to be more conservative in its client acquisition, this is a key factor to consider when thinking about earning passive crypto income.
CEFI rates may alter if there are too many depositors pursuing interest but not enough demand for borrowing, or if a provider decides to be more cautious in its client acquisition.
The Concept of Staking and CEFI
To earn interest, all crypto-earning CEFI products need customers to “stake” their digital assets. Staking is the equivalent of depositing, and it comes in two varieties: Soft Staking and Hard Staking, each with its own set of requirements and perks.
Soft Staking - Funds can be withdrawn at any moment, with daily compounding interest given in either the asset staked or a provider-specific token. In most cases, you can choose between the two alternatives at any moment.
Hard Staking entails locking funds for a specified period of time, with an interest rate proportional to the length of time. You'll receive more interest on your initial investment if you stake for a longer period of time.
Interest is compounded daily and paid out in the asset or a provider-specific token that can be withdrawn.
Hard Staking frequently grants preferred access to additional services, such as discounted crypto purchases, lower trading fees, or access to a pre-paid card that offers cash back on crypto purchases.
Hard Staking companies are effectively taking advantage of a disparity between the rewards available from staking directly with a Proof of Stake cryptocurrency that requires validators and the rate they provide their customers.
When it comes to stakes, there are two options: hard and soft.
The choice between Hard and Soft Staking boils down to a trade-off between Soft Staking's access flexibility vs. the higher rates but lock-up duration limits of Hard Staking.
If you choose Hard Staking and the asset you've staked rises in value during the lock-up period, you'll gain twice: more interest and the increased value.
If you choose to be paid interest in the provider's own token, which rises in value as well, you benefit on three fronts while doubling your overall risk.
You have no choice but to watch your deposit depreciate if the markets start to fall during the lock-in period. You can withdraw the accumulated interest and trade it for a diminishing return, but you have no other options.
Receiving Payment with Native Tokens
Getting paid in a provider-specific token comes with its own set of drawbacks. Because the providers are attempting to incentivize the adoption of native crypto tokens, interest rates are higher.
Native tokens, on the other hand, are highly volatile. Indeed, the relative illiquidity of such tokens - their difficulty in being sold - makes them more volatile than Bitcoin and Ethereum. You are betting on the price of a native token by opting to be paid interest in it, which is no different from speculating on any cryptocurrency:
· What does it offer in terms of value？
· Will the number of users increase？
· Will the provider's business model be altered？ Is it a competitive market？
· Is the service provider safe from hackers？
Cryptocurrency earning rates and providers at the top
One of the most appealing aspects of cryptocurrency's yield-bearing products is that they pay greater interest rates than banks. On the surface, this appears to be good news, but keep in mind that interest rates are the cost of money, or, to put it another way, the rates reflect risk.
Even the most liquid cryptocurrencies (Bitcoin, Ethereum) can drop by 10% or 15% in a matter of hours due to price volatility. As a result, interest rates reflect this, which is why Hard Staking is more expensive.
Partly to offset the danger of it depreciating in value before your fixed-term staking period expires.
By simply staking Stablecoins, you may reduce volatility (we explain what a Stablecoin is here).
Synthetic versions of the USD or EUR have substantially higher interest rates than official fiat ones, but this represents risk.
Cefi providers can charge high interest rates on Stablecoin deposits in part because to increased demand for loans, which is affected by opportunities in the broader crypto economy.
The rates also reflect the possibility that the Stablecoin will fail; keep in mind that, while they sound like their fiat counterparts - USDT, USDC, TGBP - they are not backed by the Federal Reserve or the Bank of England, so you'll have to trust the protocol that underpins them to keep their value stable.
Regulatory problems have been highlighted by active lawsuits against Blockfi and Celsius - on a state-by-state basis - in 2021.
who contend that crypto lending products are securities, and the SEC warned Coinbase that launching a new Lend product will result in a lawsuit.
After explaining how passive interest works, let's take a look at some of the most popular platforms and rates now accessible.
Platforms for centralized earning
Crypto.com is a user-friendly platform with some of the industry's finest rates. Interest is paid weekly in the staked asset, and a variety of crypto coins are supported. On cryptos locked on a flexible, one-month, or three-month basis, annualized rates of 1.5 percent, 3 percent, and 4.5 percent are available, while supported stablecoins offer rates of 6 percent, 8 percent, and 10%. When users stake the platform's cryptocurrency, earning crypto interest becomes even more profitable.
Binance, one of the most popular digital asset exchanges in the world, offers a variety of yield-bearing financial products with competitive interest rates. The APY varies based on the product's risk profile, with Flexible Savings accounts paying 1.2 percent (BTC) to 6.5 percent (1INCH) and Locked Savings on stablecoins paying 7% after 90 days of staking.
Users can earn up to 9.3 percent APY (on USDT) with a BlockFi Interest Account, with interest accrued daily and paid monthly. In addition, the platform gives 8.6% on GUSD, PAX, and USDC, 5.25 percent on ETH, and 6% on BTC. Users can choose whether they want their interest payments to be paid in bitcoin, ether, or stablecoin, which is an interesting feature.
Celsius, led by an outspoken CEO in Alex Mashinsky, offers crypto loans with interest, but sets itself apart by reinvesting profits in the community. They recently secured further funding, valuing the site at over $3 billion, after paying out $250 million in interest to customers. You may earn interest on a variety of coins, including Tether at up to 13.3 percent, Bitcoin at 6.2 percent, and Ethereum at 6.35 percent.
· For information on how to open a CEFI account and earn passive crypto interest, go here.
· Instructions on how to get started with DEFI may be found here.
Platforms for earning money that are not centralized
Compound is a self-contained algorithmic system endorsed by Coinbase. Interest rates are “floating,” which means they fluctuate frequently based on supply and demand.
ETH, DAI, UNI, BAT, and WBTC are among the supported tokens, with USDC currently offering the best APY of 9.8%.
dYdX offers interest rates as high as 11.31 percent and supports many of the same assets as Compound (USDC). Interest is paid continuously because there is no lock-up period, and users can close their positions and withdraw funds whenever they want. Interest also compoundes over time, so if the value of your share rises, you'll earn interest on that amount rather than the principal.
Aave is a defi lending technology that offers a plethora of passive crypto income opportunities. Users can choose between fixed and variable interest rates, as well as stake the native token (AAVE) to gain protocol fees and other benefits.
Depositors also get a cut of the revenue from the platform's fast loans.
How can you pick the most trustworthy earning platform？
It can be tough to decide which protocol to employ when there are so many options. It's a matter of assessing the risks and having a clear aim in mind, just like anything else.
The more established platforms that safeguard customer cash are, of course, the least dangerous ones. In general, this refers to centralized firms such as Coinbase and Binance. Emerging platforms with super-high APYs, especially those that are decentralized and involve smart contract risk, should be approached with caution.
You could be perplexed by the distinction between centralized and decentralized alternatives. Custodians run centralized platforms and are in charge of their own systems.
Smart contracts, on the other hand, operate decentralized platforms, automating the distribution of loans and interest rate payments based on market forces. There is no such thing as an executive board.
While defi lending techniques offer more appealing rates, they come with a higher risk because the smart contract could have an underlying fault. There is no redress or avenues of protest if something goes wrong and you lose your money.
Nonetheless, many consumers wishing to earn income on their crypto like defi's transparent, non-custodial character, as opposed to centralized alternatives' onerous KYC requirements. Furthermore, users can keep control of their private keys on decentralized networks.
To summarize, passive crypto earning opportunities enable consumers to reap the benefits of securing their digital assets. There is a danger – but also a benefit – because of the volatility of cryptocurrencies, fixed staking periods, and floating interest rates (in defi). As a result, it's critical to conduct due diligence and evaluate and contrast the rates and hazards associated with each platform. It's also a good idea to keep up with the ever-changing regulatory restrictions governing crypto lending.
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