How to Earn Yield on Bitcoin (BTC) Despite Lack of Native Staking

This article explores how to generate passive income from BTC holdings through centralized lending, Wrapped Bitcoin (WBTC) on Ethereum, and Bitcoin-related networks like Babylon and Stacks.

Key takeaways

* Though Bitcoin doesn't support native staking, holders can earn yield through centralized lending platforms, Wrapped Bitcoin (WBTC) on Ethereum, and Bitcoin-related networks like Babylon and Stacks.

* WBTC allows BTC holders to participate in lending, liquidity pools and yield farming on Ethereum-based DeFi platforms like Aave and Curve but introduces bridge and smart contract risks.

* Protocols like Babylon and Stacks use mechanisms like native time-locked scripts or stacking to offer rewards without removing BTC from the Bitcoin blockchain.

* Custodial, smart contract and regulatory risks persist. Bitcoin's community also remains divided on whether Bitcoin yield generation features align with its decentralized and trust-minimized ethos.

Unlike proof-of-stake (PoS) blockchains like Ethereum or Cardano, Bitcoin relies on proof-of-work (PoW) mining for network security. However, with the rise of decentralized finance (DeFi) and layer-2 innovations, Bitcoin BTCUSD holders can now generate passive income through various yield-generating methods. These include centralized lending, Wrapped Bitcoin WBTC on Ethereum, and layer-2 solutions like Babylon and Stacks.

This article explores how to earn yield on BTC, the risks involved and the technological advancements enabling these opportunities, all without altering Bitcoin's core protocol.

Staking vs. mining

Staking and mining are two distinct consensus mechanisms used to secure blockchain networks and validate transactions.

Staking is central to PoS blockchains like Ethereum and Solana. Participants lock up cryptocurrency to become validators, who are randomly selected to create new blocks and confirm transactions, earning rewards. The more coins staked, the higher the chance of selection.

Mining, used by PoW blockchains like Bitcoin and Litecoin, involves miners solving complex mathematical puzzles with powerful computers. The first to solve the puzzle adds a new block and receives a reward. Mining demands significant energy and hardware.

Bitcoin's PoW design means it does not support staking. The network relies entirely on miners, ensuring decentralization and security. There are no validators or staking rewards in the traditional sense. Yield-generating methods for BTC, such as lending or layer-2 solutions, are not equivalent to PoS staking.

Did you know? Some staking platforms offer liquid staking, where you get a token representing your staked asset (like stETH for Ether). This lets you earn staking rewards and still use your capital in DeFi protocols.

Ways to earn yield on Bitcoin

While you cannot natively stake BTC due to its PoW mechanism, there are alternative methods that might help you earn yield on your BTC holdings and make passive income. These methods often involve using third-party platforms or bridging BTC to other blockchains.

Centralized lending platforms

Centralized lending platforms like Binance Earn, Nexo and Ledn enable you to earn with BTC deposited, which the platform lends to institutional borrowers. In return, you receive interest, which might be paid daily or monthly. But this method involves custodial risk, as users must trust the platform to remain solvent and secure. The collapse of firms like Celsius and BlockFi has highlighted this vulnerability.

WBTC on Ethereum

WBTC is an ERC-20 token backed 1:1 by BTC, held by a centralized custodian (BitGo). It enables BTC holders to engage in Ethereum-based DeFi protocols, such as lending on Aave, providing liquidity on Curve or yield farming. This unlocks DeFi's potential but introduces risks from BitGo's custody, bridge vulnerabilities and smart contract bugs.

Bitcoin layer-2 platforms

Emerging layer-2 platforms such as Babylon and Stacks are also providing opportunities for users to explore Bitcoin-native yield options. Babylon locks BTC in time-locked scripts to secure its PoS network, while Stacks uses a proof-of-transfer (PoX) model where STX tokenholders lock tokens to earn BTC rewards. These platforms expand Bitcoin's utility without leaving its ecosystem entirely.

Did you know? Ethereum became the largest PoS network in 2022 after "the Merge," switching from miners to validators. This move reportedly reduced the blockchain's energy consumption by over 99.95%, making it one of the greenest major crypto networks.

How to earn yield with BTC on a centralized lending platform

Earning yield on BTC via centralized platforms is straightforward. Choose a reputable platform, create a verified account, deposit BTC, select a flexible or fixed-term lending option, confirm terms, and monitor earnings. Funds can typically be withdrawn after the term.

Using Binance Earn as an example, the platform offers multiple yield options:

Simple Earn: Beginner-friendly, offering stable yields through flexible or locked savings products.

Dual Investment: Higher-risk, with returns based on the settlement price of two assets, exposing users to market volatility.

On-chain Yield: Bridges funds to DeFi protocols like Aave, with variable yields managed by Binance.

Yields and terms vary by option and market conditions. Simple Earn offers lower, predictable returns with flexible withdrawals, while