Bitcoin (BTC) Yield Generation Methods: Explore Ways to Earn Interest on Your Holdings

Key takeaways

While Bitcoin (BTC) doesn’t support native staking, holders can earn yield through:

Centralized lending platforms like Binance Earn, Nexo and Ledn.

Wrapped Bitcoin (WBTC) on Ethereum for joining Aave, Curve and other DeFi protocols.

Bitcoin-related networks like Babylon and Stacks.

WBTC allows BTC to be used in lending, liquidity pools and yield farming on Ethereum-based DeFi protocols. But it comes with the usual DeFi and smart contract risks, in addition to risks related to the bridge and the centralized custodian (BitGo) holding the WBTC.

Protocols like Babylon and Stacks use unique mechanisms:

Babylon: BTC is locked in time-locked scripts (e.g., on-chain vaults) to serve as collateral for Babylon’s PoS network, which in turn powers Cosmos zones.

Stacks: A proof-of-transfer (PoX) model where STX token holders “stack” their tokens for about two weeks to support network consensus and earn BTC rewards, which are paid by Stacks miners.

These protocols offer opportunities for yield generation within the Bitcoin ecosystem without altering the core protocol to introduce staking.

However, custodial, smart contract and regulatory risks remain. There’s also an ongoing discussion within the Bitcoin community about whether Bitcoin should have yield-generating features, considering it aligns more with a decentralized and trust-minimal ethos.

Bitcoin is a native proof-of-work (PoW) blockchain, which means it doesn’t support staking. It’s secured by miners who solve mathematical puzzles to add new blocks and transactions to the blockchain. In contrast, most blockchains today are powered by proof-of-stake (PoS), where users stake their tokens to become validators and secure the network.

With the rapid development of decentralized finance (DeFi) and layer-2 solutions, there are now several ways for Bitcoin holders to generate passive income from their BTC holdings without altering the core protocol.

What is staking?

Staking is a consensus mechanism used by PoS blockchains, like Cardano and Solana, to validate transactions and forge new blocks. Essentially, users lock up their cryptocurrency to become validators. They are then randomly selected to create the next block and confirm transactions, earning rewards for their services. The more coins you stake, the higher your chances of being selected.

In order to participate in staking, you will need to download a "light client" or "full node" wallet from the specific blockchain you wish to join. You will also need a minimal amount of the native cryptocurrency to become a validator. For example, to stake Ether (ETH) on Beacon Chain, you will need at least 32 ETH.

What are the best coins for staking in 2023?

Here are some of the most popular blockchains that offer staking to earn interest on your crypto:

Lido (ETH 2.0 staking)

Anarchist Ventures (staking-as-a-service platform)

Chain Station (DeFi and crypto derivatives)

Coinbase (U.S.-based exchange)

Kraken (advanced trading platform)

Most PoS blockchains offer staking in two modes:

Normal staking: This is the standard mode of staking, where you will be locking up your cryptocurrency for a specific period of time in order to become a validator.

Liquid staking: This mode allows you to retain liquidity over your cryptocurrency while it is being staked. When you stake your cryptocurrency, you will receive a derivative token (e.g. stETH for Liquid Ether) that can be used in other DeFi protocols.

What are the different ways to earn yield on Bitcoin?

Unlike PoS blockchains, Bitcoin cannot be staked. This is because it relies on a PoW consensus mechanism, which is powered by miners who solve complex mathematical puzzles to add new blocks and transactions to the blockchain.

However, there are several ways to earn yield on BTC without altering the core protocol. These methods usually involve using third-party platforms or bridging BTC to other chains.

1. Centralized lending platforms

Crypto lending platforms, such as Binance Earn, Nexo and Ledn, allow users to earn yield on their BTC by depositing it into the platform’s account. The platform will then lend out the BTC to institutional borrowers, who pay interest on the loan. This interest is then paid out to users of the lending platform.

For example, if you deposit 1 BTC into Binance Earn at an annual percentage rate (APR) of 5%, and the interest is paid monthly, then you will receive approximately 0.0416 BTC in interest each month.

However, lending platforms are custodial, which means that they hold custody of your BTC. This exposes you to the risk that the platform could be hacked or become insolvent. In addition, lending platforms are subject to regulation, which could affect the terms of their lending programs.

Recently, several crypto lending firms, including Celsius and BlockFi, have encountered difficulties and ceased allowing users to withdraw