What is the best way to earn yield using Ethereum?

Ethereum is one of the most popular and promising cryptocurrencies today. Although it is held by millions of people, few are making full use of the asset and using it to earn 2-10% per year. Let’s go through some ways to earn a high and relatively safe annualized percentage rate (APR).

Ethereum is the "digital oil" of the cryptocurrency market. With its long history, active developer community, and large DeFi ecosystem, it will undoubtedly survive the next bear market. In addition, improvements such as mergers, private transactions, and Layer 2 Rollups make Ethereum's position in the crypto market even stronger.

Most Ethereum holders may not be making full use of their ETH. In fact, investors have the opportunity to earn high passive yields on their Ethereum and earn more ETH, which will continue to increase in value in the future. Here are a few different ways to do this and the associated risks.

The most common way to earn a steady yield on ETH is by staking it through a liquid staking protocol or exchange.

Until now, Ethereum's blockchain has been secured through a consensus mechanism called proof-of-work, which means that many high-performance computers consume electricity and computing power to compete to verify transactions and earn fees. This fall, Ethereum will switch to a new process called proof-of-stake, which is 99.97% more energy-efficient than proof-of-work. Anyone who holds ETH can stake their ETH to help secure this new network.

Most exchanges, like Coinbase , Binance, and KuCoin , offer ETH staking services and charge a fee for the convenience. For more advanced users, liquidity staking with DeFi protocols like Lido or Rocket Pool is a more flexible option, as users can deposit ETH and receive liquidity staked ETH tokens (stETH or rETH) in return. The main risk of staking is that the custodian or protocol holding your ETH may act maliciously and cause the user to lose some of their ETH, but this is extremely rare and has not happened to date. The yield on staking ETH is usually between 4-6%.

Liquidity staking tokens offer more opportunities to increase returns for investors. For example, the Index Coop protocol has an interest-compounding ETH token that uses leverage to achieve a 2.5x return on equity for users.

In the world of DeFi, there are many more possibilities to earn yield on ETH. The simplest way is to deposit ETH into a lending platform like Aave or Compound . This offers the lowest yield of any of the methods mentioned in this article, around 1% or less, but the setup is simple and the risk is low as long as the crypto market does not fall to almost worthless.

Another option is to provide liquidity to a cross-chain bridge or decentralized exchange that bridges with Ethereum. For example, Hop Protocol is a decentralized cross-chain bridge that allows users to transfer funds between different chains, such as Polygon, Optimism, and Arbitrum. By providing ETH on two different chains, liquidity providers can earn variable percentages based on the bridging that occurs, with annual interest rates sometimes as high as 10% and others as low as 1%.

For users who don’t want to use funds for a bridge or put all their funds on one chain, it is also possible to earn interest through decentralized exchanges. For example, Curve has a stETH-ETH trading pair that has an annual interest rate of about 3%, while other exchanges use two different versions of ETH bridges and pay generous interest. The main risk of the ETH-ETH pair is that investors must trust that two independent bridges will not be hacked, and stETH-ETH will have a slight impermanent loss, which will slightly reduce profits.

There are several different ways to earn relatively high yields on Ethereum. While some are easier and safer than others, each has its own advantages and disadvantages, and the best strategy is to take advantage of several different ETH yield opportunities to increase diversity and reduce risk. Before investing in any of these opportunities, each investor must do their own research and make sure they understand the risks and rewards of these strategies.