Key takeaways
- Earn passive income by securing blockchain networks, with restaking allowing multiple rewards on staked assets.
- Deploy assets in DeFi lending markets or DEX pools to generate yield from interest or trading fees.
- Advanced strategies like liquid staking, options and tokenized real-world assets offer stable and diversified yield opportunities.
- Each yield method has varying risks, and diversification across multiple strategies can help maximize returns while mitigating losses.
Are you hodling your crypto and wondering how to make it work for you?
Instead of just sitting on your assets, you can put them to work and earn passive income through various yield-generation strategies. Whether you’re into staking, lending, liquidity provisioning or more advanced strategies like restaking and covered calls, there’s something for everyone.
Let’s break it down.
1. Staking and restaking
Staking is one of the easiest ways to earn passive income on cryptocurrencies. This is typically only possible with proof-of-stake (PoS) chains like Ether (ETH) or Solana (SOL).
Staking has several variants, and here are some of the options.
Native staking
It is a straightforward way to earn passive income in crypto. It involves locking up your tokens like ETH, SOL or Cosmos (ATOM). This helps users to support the blockchain’s security and consensus mechanism. The problem staking solves is twofold: It secures the network while rewarding participants with staking yields.
Without staking, proof-of-stake (PoS) networks wouldn’t function effectively. Over the past few years, staking has grown massively, with Ethereum alone having over $100 billion staked post-Merge and platforms like Solana and Cosmos continuing to see high participation rates.
The reason staking is such an attractive yield opportunity is its relatively low-risk nature. It provides stable and predictable rewards, with Ethereum offering around 3%–4% annual percentage yield, Solana around 7%, and Cosmos often exceeding 15%. The main drawbacks are fund lockups, potential slashing risks and exposure to network-specific issues.
Liquid staking
Liquid staking is an ideal option for those who want to stake but still maintain liquidity. Liquid staking platforms like Lido allow users to stake their crypto and receive a liquid derivative (such as stETH for Ethereum or mSOL for Solana) in return.
These derivatives can then be used in decentralized finance (DeFi) protocols for additional yield opportunities, making liquid staking a much more flexible alternative to traditional staking.
The liquid staking market on Ethereum, for instance, has been on the rise over the years, with nearly $39 billion worth of ETH staked in liquid staking protocols.
Liquid staking solves the liquidity problem inherent in native staking, allowing users to earn staking rewards while keeping their assets active in the DeFi ecosystem. The sector has seen explosive growth, with Lido alone holding billions in staked assets.
Liquid staking offers a lucrative yield opportunity because it combines staking rewards with additional DeFi strategies, maximizing returns. However, risks include derivative depegging, smart contract vulnerabilities and reliance on third-party protocols.
Restaking
Restaking takes staking to the next level by allowing assets to be staked multiple times for additional rewards. This is true for both rewards and risks. EigenLayer on Ethereum has pioneered this concept, enabling users to restake ETH and earn additional rewards from securing external networks and applications.
The primary problem restaking solves is increasing network security without requiring additional asset commitments, essentially recycling staked assets for multiple uses.
Since its introduction, restaking has rapidly gained traction, with billions in total value locked (TVL) and a growing number of protocols integrating EigenLayer’s framework. Yields from restaking can be significantly higher than traditional staking, sometimes reaching 10%–20% APY.
The increased complexity and additional slashing risks make it a high-reward but high-risk opportunity, best suited for those willing to take on extra technical risk.
2. Lending: Earn interest on your crypto
Crypto lending is a well-established yield strategy, allowing users to deposit assets into lending platforms like Aave in exchange for interest. Variable rate lending operates on supply-and-demand principles, with rates fluctuating between 1% and 10% APY. Meanwhile, platforms like Maple Finance offer fixed-rate lending, which provides more predictable returns, often between 5% and 20% APY.
Lending solves the problem of idle capital by putting it to work for borrowers who need liquidity. Over the years, lending protocols have grown tremendously, with Aave and Compound alone managing billions in lending volume. Lending is an ideal yield opportunity because it offers flexible returns with the option of either variable or fixed rates.
However, it carries risks such as borrower defaults, smart contract vulnerabilities and liquidation risks for borrowers who use collateralized loans.
3. Liquidity provisioning
Liquidity provisioning is one of the highest-yield opportunities in crypto but also comes with unique risks. It involves depositing tokens into liquidity pools on decentralized exchanges (DEXs) like Uniswap, Orca and Drift. In return, liquidity providers earn a share of the trading fees and additional incentives.
The main problem liquidity provisioning solves is enabling decentralized trading by ensuring there’s enough liquidity in the market. Automated market makers (AMMs) and dynamic liquidity market makers rely on liquidity providers to function. Since the rise of DeFi, liquidity provisioning has grown significantly, with Uniswap alone handling billions in daily trading volume.
Yields in liquidity provisioning can range from 5% to 100%+ APY, depending on trading volume and incentives. The biggest challenge, however, is impermanent loss, which occurs when the price of assets in the liquidity pool shifts significantly. Smart contract vulnerabilities and market volatility also add risk, making it a high-reward but more complex yield strategy.
4. Real-world assets (RWAs)
For those looking to deploy their stablecoins into yield-bearing assets with a more predictable income, real-world assets (RWAs) provide an attractive option. RWAs represent tokenized versions of traditional financial assets such as bonds, treasury bills and real estate, offering fixed income returns directly onchain. Platforms such as Ondo Finance, Goldfinch and Maple Finance have pioneered this space by bridging institutional-grade assets to DeFi investors.
For instance, the tokenized treasury market has grown to $4 billion in the last couple of years.
RWAs offer a great yield opportunity for those who prefer lower volatility and stable, fiat-denominated returns. However, they come with risks such as counterparty risk, regulatory uncertainty and reliance on offchain issuers.
Despite these challenges, the tokenization of real-world assets is expected to grow substantially as institutional adoption increases, providing a reliable fixed-income alternative for stablecoin holders.
5. Advanced yield-generation strategies
Crypto yield generation has evolved beyond traditional staking, offering innovative ways to earn returns through strategies like tokenizing future yields and hedging against volatility. These methods involve splitting assets, leveraging decentralized finance protocols, and using derivatives to generate stable income.
Pendle and Ethena are examples of DeFi protocols that offer innovative yield-generation strategies, each with unique approaches to maximizing returns through tokenization and market-neutral strategies.
How Pendle enables innovative DeFi strategies
Pendle is an innovative protocol that allows users to tokenize and trade the future yield of their assets. It essentially splits yield-bearing tokens into two components: the Principal Token (PT), which represents the underlying asset, and the Yield Token (YT), which gives access to the asset’s future yield. This separation enables users to lock in fixed returns by purchasing PT at a discount or take speculative positions on yield rates by trading YT.
Here’s how it works:
- Users deposit yield-bearing assets (like stETH or USDt) into Pendle, which issues PT and YT tokens.
- These can be held, sold or leveraged in DeFi strategies. Users can earn 10%–50% APY, depending on the asset and market conditions.
- Traders looking for stable income can buy PT at a discount for fixed yield, while those seeking high returns can speculate on YT.
None of these yield strategies are without their risks. Liquidity constraints and potential fluctuations in yield token prices are risks to watch out for with the Pendle strategy.
How Ethena uses delta-neutral strategies to provide stable yields in DeFi
Ethena is a decentralized synthetic dollar protocol that aims to provide stable and high-yield opportunities using delta-neutral strategies. Unlike traditional yield methods, Ethena generates yield through a combination of perpetual futures hedging and onchain collateral management.
Ethena takes deposits in ETH or stables, uses perpetual futures to hedge against price volatility, and generates yield from funding rate arbitrage. Returns can exceed 20% APY, often surpassing stablecoin lending rates. Ethena provides a market-neutral yield, making it an appealing alternative to traditional DeFi lending.
However, this strategy relies on derivatives markets, which carry counterparty risks and potential liquidation exposure. These two protocols offer unique ways to generate yield by leveraging DeFi’s innovative mechanisms, making them great options for users seeking more advanced yield strategies.
Yield generation in crypto offers various options, ranging from low-risk staking to higher-reward strategies like liquidity provision and platforms such as Pendle and Ethena. Each comes with its own risks and potential returns, so it’s important to align your strategy with your risk tolerance and capital.
Diversifying your approach can help balance returns and reduce risks. As the DeFi landscape evolves, new opportunities will arise, so it’s crucial to stay informed and experiment thoughtfully
This article does not contain investment advice or recommendations. Every investment and trading move involves risk, and readers should conduct their own research when making a decision.