Blockchain protocols do not, by default, pay interest to the holders of their currencies - unlike interest on a traditional savings account or a dividend paid to shareholders. However, there are a number of companies that will pay you interest on your cryptocurrencies if you park your holdings with them.
Some companies in this category use your cryptocurrencies to increase the security of a blockchain, others add liquidity to huge crypto pools that power decentralized financial protocols (DeFi), some can lend your cryptocurrencies to others, and finally, companies can invest your cryptocurrencies. However, they all have one thing in common: they use the money they earn from these activities to pay you regular interest on your holdings.
How crypto savings accounts work
Crypto savings accounts were created because dealing with unfamiliar protocols can be confusing and complicated. For people who simply want to earn some interest on their cryptocurrencies and not just let them sit around, crypto savings accounts can be an elegant solution. Just like a savings account at a traditional bank, the company behind a crypto savings account will lend, invest, or deploy your cryptocurrency on your behalf and then pay you a portion of the proceeds as regular interest payments.
Many exchanges (like Coinbase or Binance) offer crypto savings accounts, as do crypto companies like BlockFi, Celsius, and Nexo. These companies differ greatly in the interest rates they offer to their users and the terms under which the interest is paid out, such as annual returns, lock periods, and regularity of interest payments.
Take BlockFi, for example, a lending company that has attracted more than $10 billion in assets from more than a million customers. It offers variable interest rates of up to 11% APR. Popular coins like Bitcoin (BTC) and Ether (ETH) have comparatively low interest rates of up to 3%. Stablecoins like Gemini's GUSD have interest rates of 11%, and alternative cryptocurrencies or altcoins like Cardano (ADA), Solana (SOL), and Avalanche (AVAX) have interest rates of 10%.
Crypto savings accounts can offer you more favorable interest rates if you agree to lock your cryptocurrencies for a while, or if you hold a platform-specific token. Nexo, for example, increases interest rates by up to 4% for holders of the platform's governance token, NEXO. Binance and Crypto.com are among the companies that offer higher interest rates to holders who lock their tokens away for months; keep in mind that this type of deposit means you can't sell the cryptocurrency in the event of a sudden downturn.
Some crypto savings accounts, like those offered by BlockFi and Celsius, have come under scrutiny from regulators. In February 2022, BlockFi agreed to pay a $100 million fine to U.S. regulators for its crypto lending product, the BlockFi Interest Account, after allegations that the account constituted an unregistered securities offering. Now BlockFi is no longer offering these accounts to U.S. citizens.
Why should crypto savings accounts be considered?
The main advantage of decentralized finance (DeFi), of course, is that it allows everyone to access services that are reserved for institutional investors in traditional finance.
Many DeFi protocols offer higher returns than savings accounts run by large corporations; they can generate returns of up to 20%, but many are not beginner-friendly. Some services, such as Argent Wallet or Zapper, let you use DeFi protocols through an app that is as easy to use as a crypto savings account.
So why choose a crypto savings account over a DeFi protocol if that's where the money ends up anyway? Why not just cut out the middleman?
For some, the answer may be that these companies are not only convenient, but also take on some of the risk. For example, although BlockFi could go broke if it lends your money to shady borrowers, it has agreed to pay out depositors first in the event of insolvency. Some companies, like Nexo, are backed by insurers and work with established custodians like BitGo.
As investors saw in May 2022, a protocol like Anchor that offers returns based on UST deposits can have problems if the token melts down. At the time of writing, Anchor has proposed to reduce its yield from an average of 19.5% to 4%, a significant cut in rates. Ultimately, Anchor is not regulated and does not guarantee rates or deposits.