What are the Best Ways to Earn Yield Using Ethereum?

Ethereum is one of the most popular and promising cryptocurrencies available today. Even though it is held by millions of people, few are taking full advantage of the asset and using it to earn anywhere between 2-10% annually. Let’s go through some of the best ways to achieve a high and relatively safe APR with Ethereum.

Ethereum is the digital oil of the cryptocurrency market. With its robust history, active developer community, and massive DeFi ecosystem it is almost guaranteed to survive until the next bear market. Additionally, improvements like the merge, private transactions, and layer 2 rollups will help make the asset even more valuable and prominent in the crypto industry. 

Most Ethereum holders are likely not using their ETH to its fullest potential. Indeed, today's opportunities allow investors to earn a high passive yield on their Ethereum and earn more ETH, which could be worth significantly more in the future. Let’s look at a couple of different ways to do this and the associated risks.

The most common way to earn a solid yield on ETH is by staking it through a liquid staking protocol or exchange. Up until now, Ethereum’s blockchain has been secured through a consensus mechanism known as proof of work, which means that lots of high-powered computers waste electricity and processing power to compete to validate transactions and earn a fee. This Fall, Ethereum will be switching to a new process called proof of stake, which is 99.97% more energy-efficient than proof of work. Anyone who holds ETH can already stake their Ethereum to help secure this new network. Most exchanges, like Coinbase, Binance, and KuCoin, offer ETH staking services and take a fee for convenience. For more advanced users, liquid staking using a DeFi protocol like Lido or Rocket Pool is an option that creates more flexibility, as users can deposit ETH and receive a liquid-staked ETH token, either stETH or rETH, in return. The main risk with staking is the possibility that the custodian or protocol holding your ETH acts maliciously and causes users to lose some of their ETH, however, this would be extremely rare and has not happened thus far. The yield on staked ETH typically falls between 4-6%.

The liquid staking token offers up even more opportunities to compound the yield that investors are earning. For example, the Index Coop protocol has an Interest Compounding ETH token that uses leverage to achieve a 2.5x greater staking return for users. 

In the world of DeFi, there are even more possibilities to earn a yield on ETH. The easiest way is to deposit ETH into an automated money market like Aave or Compound. This offers the lowest yield of any of the methods mentioned today, at around 1% or less, but is simple to set up and has little risk as long as the crypto market does not fall to near worthlessness. 

Another option is to supply liquidity to bridges or decentralized exchanges on Ethereum pairs. For example, Hop Protocol is a decentralized bridge that allows users to move funds between different chains, like Polygon, Optimism, and Arbitrum. By supplying ETH on two different chains, liquidity providers can earn a variable percent based on how much bridging is happening. Some days it can be as high as 10% APR, and others as low as 1%.

For users that do not want to trust bridges with their funds or keep everything on one chain, decentralized exchanges can also have ETH-ETH pairs that can prove lucrative. For example, Curve has a stETH-ETH trading pair that pays around 3% APY, and other exchanges have ETH-ETH pairs that use two different bridged versions of ETH and pay lucrative rates. The main risk with an ETH-ETH pair is that investors have to trust that two independent bridges will be safe from hacks, and the stETH-ETH pair will have minor impermanent losses that will reduce profits slightly.

There are several different ways to earn a relatively high yield on Ethereum. Even though some are simpler and safer than others, each has its own benefits and drawbacks, and the best strategies take advantage of several different ETH yield-generating opportunities to increase diversification and reduce risk. Before investing in any of these opportunities, it is important for each investor to do their own research and ensure that they understand the risks and rewards of these strategies.

By Lincoln Murr

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