With so much choice, it can be difficult to make up your mind about which protocol to use. Like anything, it is a matter of weighing up the risk and having a clear goal in mind.
Naturally, the least risky options are the more established platforms that insure customer funds. Generally speaking, this means centralized entities like Coinbase and Binance. Emerging platforms offering super-high APYs – particularly decentralized platforms that entail smart contract risk – should be approached with caution.
You may be wondering about the difference between centralized and decentralized options. Centralized platforms are operated by custodians who govern their own systems and set interest rates. Decentralized platforms, on the other hand, are operationalized by smart contracts that automate the distribution of loans and interest rate payments according to market forces. There is no executive board to speak of.
While defi lending protocols offer more attractive rates, they entail greater risk due to the potential for there to be an underlying bug in the smart contract. If something goes wrong and you lose your funds, there’s no recourse or means of protest.
Nonetheless, many people looking to earn interest on their crypto appreciate the transparent, non-custodial nature of defi, as compared to the invasive KYC processes mandated by centralized alternatives. Moreover, decentralized platforms allow users to maintain control of their own private keys.
To summarise, then, passive crypto earning opportunities allow users to benefit from locking up their digital assets. Due to the volatility of cryptocurrencies, fixed staking periods, and floating interest rates (in defi), there is an element risk – but also reward. As such, it’s imperative to do your research and compare and contrast the rates and risks entailed by each platform. It also pays to stay abreast of the regulatory rules around crypto lending practices, which are ever-evolving.
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