High yield crypto, also known as yield farming, is a relatively new concept in the world of cryptocurrency. It involves lending or staking one’s assets in a decentralized finance (DeFi) protocol in order 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’s also a high level of risk. The crypto market is speculative; the value of assets can fluctuate wildly in a short period of time.
Yield farming is only one way to earn high yield on your crypto, however. Many DeFi platforms have built innovative products to help crypto holders earn high yields and returns.
Below are a few popular investment strategies.
3 Ways to Earn High Yields on Your Cryptocurrencies
Staking is one of the most popular ways to earn yield on your crypto. Easy and beginner-friendly, staking entails locking up a portion of your cryptocurrency in a blockchain network or an exchange to earn returns.
For context, many blockchains (notably Ethereum, Polkadot, and Solana) use the Proof of Stake (PoS) mechanism to validate transactions on their network. When you stake your crypto, your stake helps enhance the security of the network in verifying transactions.
When validators stake their tokens, they are encouraged to validate transactions and earn rewards for “playing by the rules.” Simultaneously, they're also discouraged from taking adverse actions against the network, given the risk of losing their tokens (known as "slashing"). As payment, you get newly minted tokens.
Staking your crypto is a great way of earning passive income while holding onto your asset. Think of it as the DeFi analog to earning APY on your savings account. While savings accounts typically earn around 0.3%, crypto staking typically yields between 3%-13%, depending on the cryptocurrency you stake.
Take note: crypto staking can be quite risky and you can lose a portion of your tokens due to the volatility of cryptocurrencies.
3 types of crypto staking
Staking on an exchange
This involves staking 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 stake, the higher yield you’ll earn.
Keep in mind that most times you’ll have to lock up your asset for a minimum set time. Some protocols allow you to withdraw your tokens at any time. Also, crypto exchanges may charge you fees.
Staking in a staking pool
Unlike exchanges, this method allows you to directly stake in a pool.
The staking pool is run by a validator, who sets up a validation node. Your tokens help increase your validator’s node’s chances of being selected to validate a block on the network. You earn yield when the validator gets rewarded for their validation.
This method lets you keep your tokens, and there’s no minimum lockup time. While you may be charged a fee, they may be lower than staking in an exchange as there are no middlemen.
Staking as a validator
This type of staking is complex and reserved for more experienced investors. As opposed to staking in a pool, you become a validator and set up your staking infrastructure (node) for selection by the network.
Setting up your node requires you to get specialized equipment and software. This could set you back some tens of thousands of dollars. And you may also be penalized and see your earnings cut if your validator experiences technical difficulties.
2. Lending crypto
Another popular way of earning yield is by lending your crypto-assets. Crypto lending entails investing your tokens on a crypto-lending platform and earning yield when borrowers pay interest. For borrowers, this is a good alternative to securing bank loans as they don’t have to jump through hoops of borrowing funds from traditional banks.
2 types of lending
This entails locking up your cryptocurrencies on a centralized finance (CeFi) platform like Coinbase and Ledn (which also support the trading of crypto-assets). When you lend tokens or stablecoins on CeFi platforms, you give up ownership for a set period of time. The platform then lends your funds to interested borrowers while you wait for your return.
While a lower-risk method of earning yield, downsides include:
- You may have to perform a KYC check
- You’re relinquishing your funds to the centralized exchange (CEX), which may not be trustworthy
- The borrower could default on paying back the loan
DeFi lending is the peer-to-peer lending of your tokens directly in a decentralized exchange’s lending pool— as opposed to using a third party as an intermediary (CEX). The major significance of this type of lending is that crypto holders get higher returns due to bypassing third parties. But higher APYs can increase risks as DeFi lending protocols are prone to hacks.
Other benefits include:
- No KYC checks
- Somewhat safer, as borrowers deposit collateral before accessing loans
- Smart contracts return your funds instead of third parties
Regardless of platform, your funds aren’t FDIC insured. Thus, it’s advisable to lend through the top protocols. Two of the most popular include Aave and Compound. Some protocols offer variable interest rates while others offer fixed interest rates.
3. Yield farming
Of all the methods addressed, yield farming carries the highest risk level but promises the highest yield.
Yield farming is a mix of staking, lending, borrowing, and/or acting as a liquidity provider in a liquidity pool to earn higher yields. Yield farmers constantly move their crypto-assets across different platforms to maximize yield. This can be very time-consuming; you also have to be tactical, as you’ll have to constantly track your positions, apply various trading strategies, and ensure you’re placing your crypto on the right platform.
One of the most important things to consider when yield farming is smart contract auditing. A smart contract is a self-executing contract with the terms of the agreement between buyer and seller directly written into the code. Therefore, it's important to ensure that the smart contract has been audited by a reputable third-party to ensure that it is secure and functions as intended.
The good thing about yield farming is that you’re applying different yield-earning strategies, so losses from one may not affect the others.