High yield crypto, also known as yield farming, is a relatively new concept in the cryptocurrency world. It is about lending or staking your wealth in a decentralized finance (DeFi) protocol to earn a high return on investment.
One of the main advantages of yield farming is the potential for high returns – some annualized returns exceed 100%. However, there is also a high risk. The crypto market is speculative; The value of assets can fluctuate significantly over a short period of time.
However, yield farming is just one way to get a high yield from your crypto. Many DeFi platforms have created innovative products to help crypto holders generate high yields and returns.
Below are some popular investment strategies.
3 ways to get high returns from your cryptocurrencies
staking crypto
Staking is one of the most popular ways to get a return on your crypto. Simple and beginner-friendly, staking involves locking a portion of your cryptocurrency on a blockchain network or exchange to earn returns.
For context, many blockchains (Ethereum, Polkadot, and Solana in particular) use the Proof of Stake (PoS) mechanism to validate transactions on their network. When you stake your cryptos, your stake helps improve the security of the network when verifying transactions.
When validators use their tokens, they are encouraged to validate transactions and earn rewards for “playing by the rules.” At the same time, they are also discouraged from taking adverse action against the network given the risk of losing their tokens (known as “slashing”). As payment you will receive newly minted tokens.
Staking your crypto is a great way to earn passive income while holding on to your wealth. Think of it as the DeFi analog of earning APY on your savings account. While savings accounts typically earn around 0.3%, crypto staking typically yields between 3% and 13%, depending on the cryptocurrency you stake.
Observe: Crypto staking can be quite risky and you may lose some of your tokens due to cryptocurrency volatility.
3 types of crypto staking
Staking on an exchange
This includes using your cryptocurrency on a decentralized or centralized exchange such as KuCoin, Coinbase, and Gemini to earn a commission. Tokens include Tezos, Cosmos, Ethereum and Cardano. The more you bet, the higher your return.
Remember that in most cases you will have to freeze your assets for a set minimum period of time. Some protocols allow you to withdraw your tokens at any time. Crypto exchanges can also charge you fees.
Staking in a staking pool
Unlike exchanges, this method allows you to directly participate in a pool.
The staking pool is operated by a validator who sets up a validation node. Your tokens help increase the chances of your validator’s node being selected to validate a block on the network. You earn returns when the validator is rewarded for their validation.
This method allows you to keep your tokens and there is no minimum lock time. While there may be a fee, this can be lower than using an exchange as there are no intermediaries.
Staking as a validator
This type of staking is complex and reserved for experienced investors. As opposed to staking in a pool, you become the validator and set up your staking infrastructure (nodes) for selection by the network.
Setting up your node requires special equipment and software. This could cost you tens of thousands of dollars. And you can also be fined and cut your earnings if your validator encounters technical difficulties.
2. Lend crypto
Another popular way of earning returns is by lending your crypto assets. With crypto lending, you invest your tokens on a crypto lending platform and earn returns as borrowers pay interest. For borrowers, this is a good alternative to securing bank loans as they don’t have to jump through the hoops of borrowing from traditional banks.
2 types of credit
CeFi Credits
This involves locking your cryptocurrencies on a centralized finance platform (CeFi) like Coinbase and Ledn (which also support crypto asset trading). When you lend tokens or stablecoins on CeFi platforms, you give up ownership for a period of time. The platform then lends your money to interested borrowers while you wait for your return.
Although it is a lower-risk method of generating income, the disadvantages include:
- You may need to perform a KYC check
- You submit your funds to the Centralized Exchange (CEX) which may not be trusted
- The borrower could default on repaying the loan
DeFi Lending
DeFi lending is peer-to-peer lending of your tokens directly on a decentralized exchange’s lending pool – as opposed to using a third party as an intermediary (CEX). The great importance of this type of lending is that crypto holders earn higher returns by bypassing third parties. But higher APYs can increase risks as DeFi lending protocols are vulnerable to hacks.
Other advantages are:
- No KYC checks
- Slightly more secure as borrowers post collateral before accessing loans
- Smart contracts give your money back instead of a third party
Regardless of the platform, your funds are not FDIC insured. Therefore, it is advisable to lend about the top logs. Two of the most popular are Aave and Compound. Some protocols offer variable interest rates while others offer fixed interest rates.
3. Yield farming
Of all the methods mentioned, yield farming involves the highest risk, but promises the highest return.
Yield farming is a mix of staking, lending, borrowing and/or as a liquidity provider in a liquidity pool to generate higher returns. Yield farmers are constantly moving their crypto assets across different platforms to maximize yield. This can be very time consuming; You also need to be tactical as you need to be constantly tracking your positions, employing different trading strategies and making sure you are placing your cryptocurrency on the right platform.
One of the most important things to consider when doing yield farming is smart contract review. A smart contract is a self-executing contract that has the terms of the agreement between the buyer and seller written right in the code. Therefore, it is important to ensure that the smart contract has been audited by a reputable third party to ensure it is secure and working as intended.
The good thing about yield farming is that you use different yield acquisition strategies, so losses from one may not affect the others.
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