Guide to crypto lending, staking and HODLing
There are plenty of ways to make money from growing your crypto portfolio through crypto lending, HODLing, mining, etc. However, one can grow crypto through staking, airdrops, interest accounts and gaming as well.
Here we’ll be explaining some basics of growing your crypto but don’t forget – before any new investment, be sure to DYOR (Do Your Own Research) as well.
Crypto lending could enable you to generate an extra revenue stream without much effort.
Basically, if you already have some cryptocurrencies stashed in your wallet, you can lend them to other crypto users or platforms.
DeFi protocols have become massively popular nowadays. And why wouldn’t they? Via DeFi protocol, an average user can get an instant loan without having to wait in a queue, read small letters on 100-page agreements, sign tons of documents, or find three bondsmen and put the second mortgage on the house.
On DeFi platforms, so-called smart contracts replace third parties and enable users to lend and borrow digital assets from each other.
Smart contracts are smartly coded transaction protocols meant for automatically executing, documenting or controlling operational processes (i.e.borrowing or lending money) as per the signed terms of a contract or an agreement. No human intermediary is necessary as the whole is fully automated.
To completely secure your investment, you can lend out stablecoins and generate around 1 to 11% APY.
However, it’s important to understand what collateralized loans are. Basically, they’re making sure a borrower doesn’t just take your money and run.
Most crypto lending platforms are, therefore, dealing with over-collateralized loans. It means that a certain lending protocol needs you to collateralize your loan with some crypto minimum. (e.g. 150% of ETH). If a borrower takes $1,000, he automatically locks no less than $1,500 worth of ETH as collateral.
This is to make sure the lent funds are safe even if the borrower cannot pay back the loan. You can lend your crypto in multiple ways.
Decentralized protocols will lend your cryptocurrencies for a set interest rate and it will generate interest for you. Because there are no intermediaries, you get bonds (usually tokens) through the smart contract and they act as proof of the amount you lent.
However, if this sounds too complicated, you can always choose to lend your crypto through centralized platforms. However, that would mean you’re not really the crypto owner and you could even pay a service fee.
One of the simplest ways to increase your crypto portfolio is crypto staking.
Staking offers an exciting opportunity to receive rewards for participating in blockchain validation. However, while it may seem simple and easy to get involved, staking is more complex behind the scenes and introduces unique risks.
One of the factors that differentiate cryptos from fiat money is that the people who use them are the ones operating them. Bitcoin, for example, completely depends on its numerous network participants (nodes) to work in balance via consensus protocol called proof-of-work.
What is a Proof of Work?
Those who run fully operating Bitcoin nodes a.k.a. miners, put all recent transactions in the form of a block of data and repeat the process every ten minutes (so-called Poisson process). Each block has to refer to the previous block to become verified. After a block is mined, it is not visible right away, and until they find out about it, miners are competing against the new block instead of adding to it.
The Bitcoin network uses a proof of work (PoW) mechanism to achieve the mentioned consensus.
Even though this can sound a bit complicated - the main concept is pretty simple.
We obviously cannot be sure of the exact identity of the miners to decide who will be the next block's creator so we can create a hard-to-solve puzzle that needs a lot of work to be answered but can be verified and checked very quickly. To solve the puzzle, miners have to find the right hash (a unique code for a text or data file). They have to spend a decent amount of their resources on hardware components and electricity for that manner, but the award for each new block they find is – a Bitcoin.
What is Proof of Stake?
Popularized back in 2011, the Proof of Stake (POS) consensus algorithm was presented as the solution for all the problems Proof of Work might have had.
The PoS consensus mechanism eliminates the high computational and energy requirements of the PoW. This upgrade in the consensus mechanism has been dubbed Ethereum 2.0 as it enables Ethereum network nodes to comply with the state of all previously recorded information on the Ethereum blockchain and avoid possible economic attacks.
Proof of stake demands that miners invest in and hold on to some store of value without the immediate need for spending energy in order to vote.
The PoS algorithm uses a pseudo-random selection process to choose a node that will validate the following block regarding various factors such as the staking age, randomization, and the node's wealth.
During the so-called Defi Summer of 2020, yield farming became pretty popular while crypto participants hurried to become “yield farmers.”
Some DeFi protocols kept rewarding their early adopters with retrospective airdrops, giving users free tokens with a high Annual Percentage Yield (APY) as gratitude for using the protocol first. They were also urging the next phase of the platform’s growth with liquidity mining programs.
Crypto APY is a number high enough to attract yield farmers and liquidity providers to one platform over another.
The word HODL (from the English HOLD, but misspelled refers to the decision to acquire an asset and keep it in the longer term).
The whole strategy is based on buying cryptocurrencies at low prices so that you can earn gains when, in the future, the value of this cryptocurrency increases.
Analysis show that HODL came out to be one of the most profitable investment strategies, especially when it comes to Bitcoin HODL-ers.
Author: Teuta Franjkovic
A sincere writer with a strong will to share knowledge on all things blockchain, crypto, metaverse and DeFi. Starting out as a writer with Cosmopolitan, Teuta has risen through the ranks of business journalism, editing newspapers and websites within the fintech industry for over 15 years. She holds a double MA in Public Politics and Entrepreneurship.