By default, blockchain protocols don’t pay interest to those holding their native currencies – unlike interest paid by a conventional savings account or a dividend paid out to shareholders. But there are plenty of companies that will pay you interest on your cryptocurrencies if you park your holdings with them.
Some companies in this category stake your crypto to enhance the security of a blockchain, others add liquidity to vast pools of crypto that power decentralized finance (DeFi) protocols, some may lend your crypto to others and finally, companies may invest your crypto. But they all have one thing in common: They use the money they earn from these activities to pay you regular interest on your holdings.
Read More: What is Staking?
How crypto savings accounts work
Crypto savings accounts were created because interacting with unfamiliar protocols by yourself can be confusing and complicated. For people who just want to earn some interest on their crypto and not let it just sit there, the crypto savings account may be an elegant solution. Just like a savings account with a conventional bank, the company behind a crypto savings account will lend, invest or stake your crypto on your behalf, then pay you a cut of the proceeds as regular interest payments.
Many exchanges (like Coinbase or Binance) offer crypto savings accounts, as do crypto companies like BlockFi, Celsius and Nexo. These companies differ vastly in the interest rates they provide for their users, and in the terms under which interest will be paid out, such as the annual returns, lock-up periods and the regularity of interest payments.
For example, take BlockFi, a lending company that has attracted more than $10 billion in assets from over a million clients. It offers variable rates of up to 11% annual percentage yield (APY). Popular coins like bitcoin (BTC) and ether (ETH) have comparatively low interest rates of up to 3%. Stablecoins like Gemini’s GUSD carry interest rates of 11%, and alternative cryptocurrencies, or altcoins, cardano (ADA), solana (SOL) and avalanche (AVAX) come with interest rates of 10%.
Crypto savings accounts may offer you more favorable rates if you agree to lock up your crypto for a while, or if you hold a platform-specific token. Nexo, for instance, increases interest rates by up to 4% for holders of the platform’s governance token, NEXO. Binance and Crypto.com are among companies that offer greater interest rates to holders who lock their tokens away for months at a time; keep in mind this kind of deposit means you can’t sell that crypto in the event of a sudden downturn.
Some crypto savings accounts, like those offered by BlockFi and Celsius, have drawn scrutiny from regulators. In February 2022, BlockFi agreed to pay $100 million in fines to U.S. regulators for its crypto lending product, the BlockFi Interest Account, following charges that the account constituted an unregistered securities offering. Now, BlockFi no longer offers these accounts to U.S. citizens.
Why consider crypto savings accounts?
Of course, the main advantage of decentralized finance (DeFi) is that it allows anyone to access services that in traditional finance would only be available to institutional investors.
Many DeFi protocols offer greater returns than savings accounts run by large corporations; they can produce yields as high as 20%, but many aren’t beginner-friendly. Some services, like Argent Wallet or Zapper, let you interface with DeFi protocols through an app that is just as easy to use as a crypto savings account.
So why would you opt for a crypto savings account over a DeFi protocol, if the money ends up in the place, anyway? Why not just cut out the middleman?
For some, the answer may be that as well as convenience, these companies handle some of the risk. Even though BlockFi, for instance, could go bust if it lends your money to dodgy borrowers, it has agreed to pay out depositors first in the event of an insolvency. Some companies, like Nexo, are backed by insurers and work with established custodians, such as BitGo.
As investors have seen in May 2022, a protocol like Anchor, which provides yield based on UST deposits, can struggle when the token melts down. As of writing, Anchor has proposed cutting yield from an average of 19.5% to 4%, which is a major slash in rates. Ultimately, Anchor isn’t regulated and doesn’t guarantee rates or deposits.
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