Last year’s successful Ethereum Merge was a significant accomplishment that instilled confidence in the crypto community. This year, advancements to the Ethereum network, like the Shanghai upgrade, enable new opportunities and options for those earning yield.
But for individuals new to crypto, transforming from a passive ETH HODLer to an active yield generator can be intimidating without a thorough understanding. For the new crypto user, earning ETH requires learning new terminology and processes.
This article provides a beginner's guide to earning passive income on ETH and gives examples of current yield-generating strategies.
Earning yield on ETH is the practice of using decentralized finance (DeFi) protocols or central exchange programs to generate returns on ETH in the form of additional ETH or cryptocurrency. Participants can earn variable yield by depositing ETH into a staking pool, lending protocol, or liquidity pool and gaining fees on its use while it is locked up. Allocations can also be made to fixed-yield products and strategies that offer a more predictable return.
Many of these processes involve using instruments of DeFi to generate returns on ETH. Smart contracts, programs of code stored on the blockchain, automatically execute complex transactions when predetermined conditions are met without the need for a financial intermediary like a bank.
Expected yield returns are usually annualized. The two most commonly used measures are annual percentage rate (APR) and annual percentage yield (APY). The difference is that APY accounts for compounding interest, interest accrued on both the principal and the accumulated interest from previous periods, but APR only calculates interest on the principal.
There are many ways to earn yield on ETH. Strategies can be used to earn variable yield through staking, liquid staking tokens, lending, and liquidity providing or fixed yield using Defi protocols or central exchanges. Simplified yield-earning strategies are available through products like Index Coop’s dsETH, icETH, or asset managers’ vaults.
Below, we’ll review these three ways to earn yield.
Variable yield can be earned through staking, liquid staking tokens, lending, and providing liquidity.
There are three major variable yield-earning strategies:
Earning a fixed yield is another option for those looking to earn passive income. Fixed yield strategies are much more conducive to long-term growth; the interest rate does not change throughout the maturity period. Benefits of fixed yield include:
Right now, there are a few options to earn fixed yield:
Those looking to maximize yield may be interested in yield products, like leveraged yield products and asset managers’ vaults, which expand upon typical ways of earning passive yield accrual. These products tend to be higher risk and higher return than variable and fixed income strategies due to the involvement of more yield-earning strategies and variables that affect each.
Deciding between yield strategies requires time, knowledge, and often active management of the chosen position. Yield products extract the guesswork out of selecting a specific protocol by instead offering exposure to a predetermined automated strategy. These automatically managed strategies can provide passive income:
Index Coop is a decentralized autonomous organization (DAO) that powers structured decentralized finance (DeFi) products and strategy tokens using smart contracts on the blockchain. We offer a suite of sector-structured products, leverage and inverse products, and yield-generating products. We aim to create products that are simple to use, accessible to everyone, and secure. Our products are built on Index Protocol and Set Protocol, twice-audited, self-custodial DeFi tools that allow for creating and managing Ethereum-based (or ERC-20) tokens. Among users, partner protocols, and our composable products, Index Coop maintains one of the largest partnership networks in the DeFi ecosystem.
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