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How to Earn Interest on your BTC?

How to Earn Interest on your BTC?

Many people hold BTC in their wallets, but don't earn interest on top of it. Fortunately, several products exist that offer yield on users' BTC. These products are similar to the banks' saving...

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Edits on 23 Aug, 2022
Pavel Nikolaenko
Pavel Nikolaenko edited on 23 Aug, 2022
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How to Earn Interest on your BTC?

Many people hold BTC in their wallets, but don't earn interest on top of it. Fortunately, several products exist that offer yield on users' BTC. These products are similar to the banks' saving...

Pavel Nikolaenko
Pavel Nikolaenko edited on 23 Aug, 2022
Edits made to:
Article (+5169 characters)
Article

Introduction

Many people hold BTC in their wallets, but don’t earn interest on top of it. Fortunately, several products exist that offer yield on users’ BTC. These products are similar to the banks’ saving accounts, where the bank gives some interest on customers’ fiat holdings. Getting extra yield on BTC sounds attractive, especially for users who are bullish on BTC in the long run and don’t want to sell their BTC (statistic data shows that over 60% of BTC market cap has been held for more than one year).

The existing products that generate yield on BTC are categorized under centralized and decentralized. Centralized solutions offer higher interest rates, however, they have the custody of users' assets. In the following, we analyze each of these solutions.

Centralized Products

The main centralized products that generate yield on BTC are lending applications. Users deposit their BTC in these apps to earn interest. Usually, the company behind the application works with other institutions (Hedge-funds, market makers, etc.) and gives them crypto loans. They charge interest from those institutions and distribute part of it between BTC suppliers.

The most important thing about these products is their security, i.e, how they manage custody of users' assets. Famous CeFi applications such as Celcius, Nexo, and BlockFi use third-party custodial solutions such as BitGo and Gemini to ensure the safety of users’ assets. Also, some of them use third-party wallet trackers to ensure users that the deposited assets are safe and the company does not misuse assets.

The main advantage of centralized products is the high-interest rates they offer. For example, Nexo’s interest rate on BTC is around 8%.

The first thing that users should be cautious about is the legitimacy of the company. Some products offer high-interest rates, however, they use the Ponzi scheme (the famous example was Bitconnect). Second thing is that some CeFi products give under-collateralized loans to their customers, which introduces some risks when the market is volatile.

Decentralized Products

To earn interest on BTC, users can deposit their BTC in 3 types of decentralized applications: Defi lending protocols, DEXs, and yield aggregators. The main advantage of using these protocols are decentralization and transparency. Users supply their assets into a decentralized system instead of giving them to a trusted entity. Also, the process is fully-transparent, i.e, users know how the product manages their deposited assets.

DeFi Lending dApps. These dApps are similar to CeFi lending applications where users deposit BTC to earn interest on it. The protocol lends supplied assets to other users who want to borrow them. The borrowers pay interest on their loan and paid interest is distributed among lenders.

The advantage of DeFi lending is the transparency of the lending and borrowing process. Lenders can easily track whether the protocol is able to give their supplied assets back.

The main disadvantage of decentralized protocols is the interest rate which is quite low in comparison to centralized solutions. For example, Aave’s interest rate on BTC is around 0.1% (compare it with CeFi lending apps). The adoption of CeFi lending products by large institutions is the main reason behind that difference, which is the result of government regulations.

Similar to any other dApp, there is a risk that a dApp gets hacked and users lose their money. Users should only trust dApps that have been audited by well-known firms.

DEXs. Users can provide liquidity for a DEX to earn liquidity fees. For example, users can provide liquidity for BTC-ETH pair in Uniswap and collect some exchange fees. The risk of providing liquidity for such two-sided pools is impermanent loss. Impermanent loss happens when the final value of the user’s assets when withdrawing from a liquidity pool is lower than when hodling the same asset the whole time. Some products such as Balancer and Bancor that have single-sided liquidity pools to solve this issue. In these solutions, there is no impermanent loss for the liquidity providers.

Another option for users is to provide liquidity for curve-like pools. In these pools, two assets that have roughly equal values are traded. As an example, users can provide liquidity for the WBTC-RenBTC pool on Curve to get exchange fees. This option has a low impermanent loss, which is suitable for users who want to hodl BTC.

Yield Aggregator. These applications use multiple strategies to generate yield for suppliers. For example, a user can deposit BTC in Yearn BTC vault to earn interest on it. The vault moves supplied BTC in multiple protocols (including lending protocols and DEXs) to generate yield for users.

Summary

Users can earn interest on their BTC using centralized or decentralized products. Centralized products offer better interest rates for users but come with centralization and a lack of transparency. DeFi products are a better choice for users who want more control over their assets and to keep their identities anonymous. For using DeFi dApps, users should use a bridge to move their BTC from Bitcoin to the blockchain that hosts the desired dApp.

Pavel Nikolaenko
Pavel Nikolaenko edited on 23 Aug, 2022
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How to Earn Interest on your BTC?

Many people hold BTC in their wallets, but don't earn interest on top of it. Fortunately, several products exist that offer yield on users' BTC. These products are similar to the banks' saving...

Pavel Nikolaenko"Created via: Web app"
Pavel Nikolaenko created this topic on 23 Aug, 2022
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 How to Earn Interest on your BTC?

Many people hold BTC in their wallets, but don't earn interest on top of it. Fortunately, several products exist that offer yield on users' BTC. These products are similar to the banks' saving...

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