Key takeaways
-
There are many ways for investors to increase their Bitcoin holdings.
-
Options include centralized lending and placing Bitcoin wrapped in DeFi protocols.
-
For “native” yield, a growing range of sidechain and Layer 2 solutions bring DeFi to the Bitcoin ecosystem.
As Bitcoin investors prepare for what could be the next crypto winter, many are looking for a place to park their coins where they can grow.
However, without a staking mechanism like Ethereum’s, generating yield from BTC requires more creativity.
Today, investors looking for yield in Bitcoin can choose from dozens of different platforms and strategies, each with their own risks and rewards.
The easiest way to generate a return on BTC is to lend it to borrowers willing to pay interest on the loan.
Several centralized exchanges operate lending desks that connect investors with traders wishing to borrow margin collateral.
While this is simple, it is important to understand the counterparty risk involved in centralized crypto lending.
FTX, Celsius, and BlockFi failed exactly here, and many investors remain wary of the practice.
With the rise of decentralized finance (DeFi), crypto investors have gained new ways to generate returns without lending directly to traders.
In the DeFi model, lenders place their coins in a shared liquidity pool.
Protocols like Aave can algorithmically set rates based on supply and demand, distributing interest proportionally to depositors.
Similar algorithmic logic applies to automated market makers (AMMs) like Uniswap and Curve, but instead of interest payments, yield is generated by trading fees.
Initially, BTC investors seeking DeFi yields had to wrap their coins, and Wrapped Bitcoin (WBTC) has been an important source of value and liquidity for the ecosystem.
Investors “tried various things to get a return on their Bitcoin. They even tried lending it through centralized entities, and it didn’t end well,” Curve founder Michael Egorov observed at CCN.
In his opinion, “wrapping Bitcoin and using it in DeFi (is) much safer.”
As decentralized finance matures, Egorov expects more wrapped Bitcoin to come to the ecosystem.
Conservative BTC holders have stayed away so far. But as protocols prove their resilience, more will begin to come forward, he predicted.
However, the most die-hard Bitcoiners will likely still reject WBTC yield strategies for ideological reasons.
For those who don’t want to trust custodians like BitGo that secure the assets the wrapped tokens are built on, a new generation of “native” Bitcoin yield products offers an alternative.
