What is Ethereum and What is Ether?
Ethereum is a fully decentralized blockchain technology that facilitates the creation of digital currency, and validation of global payments.
What makes Ethereum really standout is that in addition to being an efficient alternative payment platform, it is also a highly customizable and scalable decentralized blockchain. With its Ethereum Virtual Machine system (EVM), it allows developers to host smart contracts and build decentralized applications (Dapps) in a common programming language.
As a fully established decentralized ecosystem, all on-chain transactions are powered by its native cryptocurrency called Ether (ETH). Ether is used to pay for transactions and the cost of computation of smart contracts on the Ethereum blockchain.
Who created Ethereum?
Ethereum was launched in 2013, by a Canadian-Russian programmer named Vitalik Buterin. In 2013 he published a whitepaper document that described technical designs and the proposed functionalities of the Ethereum concept.
In the document, Vitalik describes Ethereum as “a decentralized, global computer network that could run on a blockchain similar to Bitcoin.”
This early version of the Ethereum software provided the groundwork for the promotion of the project's Initial Coin Offering (ICO). You can think of the ICO as a crypto-sphere equivalent of an Initial Public Offering (IPO) in the traditional stock market.
Ethereum’s ICO in 2014 was a huge success. Beyond all expectations, the project raised well over $16 million from investors. This provided much needed funds and enabled the platform to scale up its operations. The media buzz from the ICO also helped it expand its reach to a network of miners and developers within a short period. In 2015, the Ethereum network officially went live with an initial supply of 72 million coins.
Although it was not the first crypto currency created, the status of Ethereum as one of the pioneer blockchain in the crypto world cannot be disputed.
Why should I earn a yield on my Ethereum?
Income from Lending and Staking yields enables you to accumulate passive income on your ETH without depending on the swings of the exchange markets. This can make a huge difference as it can help holders to smoothen out effects of the ever-volatile waves of the crypto markets.
It’s also worth noting that as more Ether comes into circulation from mining or staking, your total percentage share of Ether tokens decreases. Earning a yield on your Ether is a way to not only counteract supply inflation but to also grow your percentage ownership of the Ethereum network.
What is Ethereum mining?
Ethereum users can acquire Ether (ETH) by purchasing it via various crypto exchanges or by validating transactions on the blockchain as a miner.
The mining process involves network participants, who continuously vie to verify nodes of transactions by using their computing power to solve complex mathematical computations. Ethereum Miners are rewarded with units of Ether accordingly for every node of transaction that they successfully solve.
What is Staking?
In general terms, Staking cryptocurrencies is the process of setting aside a certain amount of tokens dedicated towards validating nodes of transaction for the network. By simply holding these coins, the holder facilitates the network's operations and security infrastructure and is compensated accordingly with units of the native token.
To fully understand how staking works on the Ethereum platform, you’ll first need to gain some insights into the Proof of Work system. Proof of Work is a cryptography validation system in which miners compete to solve complex mathematical puzzles. The miner who successfully solves it first gets to add the next block to the blockchain and is rewarded a unit of Ether.
Proof of work has so far earned praise from all corners as a highly secure, decentralized and transparent system. The problem, however, is that it involves huge volumes of computing power and electricity to solve the arbitrary computations required for miners to validate transactions.
As a result, the developers of Ethereum have reached a consensus that such dependency on electrical power is not only expensive but also environmentally unsustainable in the long run. In the ETH 2.0 overhaul, they have since turned to the next best option – the Proof of Stake system.
In the Proof of Stake system, Network participants (Miners) can now simply lock in their Ether and at intervals, the algorithm randomly assigns them the task to validate the next block of transaction. At each successful validation of a block, a miner is rewarded with units of Ether.
Typically, the probability of being assigned a block of transactions depends largely on the amount of ETH stake that each miner has locked in.
What is ETH v2.0?
Since inception, to verify and validate transactions, the Ethereum blockchain has utilized the Proof of Work system. In late 2020, in response to scalability and energy efficiency concerns as Ethereum hit mainstream adoption. Ethereum developers announced a plan to overhaul the platform and transition to the Proof of Stake system in the update to ETH 2.0.
How do I stake my ETH to earn yield?
To facilitate the transition to ETH 2.0, users and members of the Ethereum community can assist the developers by providing ETH tokens for them to facilitate tests.
Through the Beacon Chain, Ethereum creates an avenue for ETH holders to earn interest income from staking as developers continue to lay groundwork for the upgrades that will coordinate the new ETH 2 system.
If you wish to stake Ethereum independently, you can do so through your own Ethereum wallet. However to take stake independently, you must have at least 32 ETH, which is quite a sizable amount. So, alternatively, crypto exchanges provide crowdfunding staking pools for people who cannot afford the minimum 32 ETH. These exchanges aggregate retail investors’ Ether holdings to stake them collectively on the Ethereum blockchain.
This allows you to deposit any amount of Ether that you can afford and earn a proportionate amount of the annual yield. However, it is important to note that these exchanges may charge you an administrative fee for managing your staked Ether.
What is an Ethereum interest account?
Depositing your ETH into an interest account involves transferring custody of your crypto currency holdings into the hands of a lender company for a specified period. These companies pay you a certain amount of interest, while loaning out your funds to others at a higher rate.
How do I earn interest on Ethereum through an interest account?
Decentralized lending platforms offer ETH holders opportunities to earn passive income by offering interest-yielding savings accounts. By keeping your ETH in these accounts, you can earn a sizable interest yield over a period of time.
Lending platforms like YouHolder, Blockfi, Celcius Network etc, use your deposit funds to supply loans to institutional and retail crypto borrowers. In return, they offer you an attractive interest rate. The rates you get usually depend on the coin that you deposit as well as the duration of deposits.
This arrangement is quite similar to savings deposit accounts offered by traditional banks. Only that this is offered by crypto finance companies, and of course, the yields are far more competitive.
Can the interest rate on an Ethereum interest account change?
It is important for every investor to be aware that most lending platforms reserve the right to make slight changes to the rates of interest offered. It depends heavily on shifts in general market dynamics and/or changes in policy of the company. However, changes in interest rates happen infrequently. And when it does, such platforms will often give investors a decent heads up to keep them abreast of any potential changes.
Is my Ethereum secure in an interest account?
Usually yes, if you have taken your time to do your research and chosen a reputable lending platform. Always check reviews from current and former users of the platform. To be safer, it’s important to check if your chosen platform offers any form of insurance or guarantees to their customers.
Another indication of safety of a platform is how much funds that the platform is currently managing. The more assets the company has under management, the better.
Another threat that you need to be aware of is hack attacks. Many crypto platforms are seen as honey pots. Because of the massive amount of funds that they custody, it makes them a viable target for hackers. Do some research into the history of the company if the lending platform or its users have fallen victim to hackers due to lapses in the platform’s software engineering or if the company has never had a security issue.
If you are able to do this objectively, your Ethereum investments should be safe and secure.
What should I look for in an Ethereum interest account?
Like every other investment, depositing into an interest account involves some element of risk. To mitigate these risks as an investor, you must always DYOR (Do your own research).
Here are some of the factors that you should look out for before you invest your ETH in an interest account.
- Reputation of the lending platform.
- Rates offered: If a platform is offering rates that are way above competitors, you should be wary of foul play ahead. That being said, all the platforms we feature on HodlRate.com have been vetted for legitimacy and safety. Conversely, you also don’t want to lose money by investing in a platform that offers very low rates.
- Reviews from previous users: It is crucial to examine reviews from previous and existing users of the platform to access the reputation that they have in the industry.
- Regulatory requirements: to avoid running into cross hairs with the law, it is important that the platform you choose possess all the required licences to operate within the jurisdiction of your country.
How do I open an Ethereum Interest Account?
Earning interest on crypto is available to eligible users who have signed up to a crypto lending platform. The requirements vary from one platform to another. Typically, all you require is an internet-enabled device and an email address. You may be required to provide basic information for KYC such as your Government-approved Identity card and proof of address. To beef up your security of your funds and data, you may also have to provide a phone number to enable 2-factor authentication.
What is DeFi?
Defi is an abbreviation of Decentralized Finance. It is an umbrella term for an emerging range of blockchain-based financial applications. They do not rely on any central financial intermediaries such as banks, brokerages or the stock markets. Unlike traditional financial trading platforms, DeFi platforms make use of smart contracts and blockchain technology to create Defi Applications or DApps.
How do I Use DeFi to earn a yield on my Ethereum?
Some of the most prominent DeFi applications that are hosted on Ethereum offer yield earning opportunities in exchange for depositing your ETH into their smart contracts. These yield opportunities can come in the form of depositing your ETH into a liquidity pool used for lending, trading, or automated arbitrage strategies. The uses of ETH to earn yield in DeFi are endless and are ever evolving.
What’s the difference between staking ETH, using DeFi and depositing into an interest account?
For any investor, DeFi yield generation and Ethereum interest accounts are both geared towards the same goal – earning passive income from your Ethereum holdings. However, the two concepts differ widely in terms of methodology and application.
The key difference between them is that, in DeFi yield generation, you retain full ownership and custody of your Ether. Conversely, in an Ethereum interest account, you transfer the custody of your crypto holdings into the hands of a 3rd party company.
Another difference is that an Ethereum interest account offers a relatively stable rate of return, whereas in DeFi and staking, the total returns that you can earn can be a little more variable. As it is often determined by actions of other people on the platform i.e. volume of transactions.
What are the tax implications of earning yield on your Ethereum?
The taxes on gains on cryptocurrency vary widely across different countries and regions. In the USA for instance, if you held the crypto-asset for less than one year, your gains will be taxed as a short-term capital gain at the same rate as your regular income from stocks or traditional investment vehicles. Short-term capital gains in the USA range between 10% – 37%.
Conversely, if you have held the asset for over a year, you will be liable to pay the long-term capital gains tax rate ranging between 0% – 20%.
In Europe, taxes on crypto investment gains vary widely across the EU, there is no blanket tax rate levied on crypto assets.
In the UK, tax implications on digital assets are categorized based on your trading or investing activity. If you are a HODLer, meaning that you have deposited your ETH in an interest yielding account or staking pool, then your gains are subject to the 10% capital gains tax. If you are a trader, then your profits or losses are subject to general income tax laws. If your total income from trading cryptocurrencies is below 12,500 GBP, then you’re exempted from paying any taxes. Crypto traders who earn profits above 12,500 GBP will have to pay between 20% and 45% depending on your tax bracket. Any losses that you incur can be applied to reduce your taxable income.
Countries like Estonia, France and Bulgaria also have similar tax regulations to the UK. However, countries like Portugal and Switzerland have ruled that crypto to crypto transactions are free from all forms of taxation. So, If you are a tax-qualified individual and you make profits from cryptocurrency transactions (investing, trading, staking etc.), you are not subject to income tax law on your ETH yields.
What's the difference between APR and APY?
APR and APY are two crucial concepts that you should be familiar with, if you want to earn yield on your Ether. APR means Annual Percentage Rate, it refers to the current annualized rate that a platform offers for saving your money in a deposit account for a year. APY on the other hand stands for Annual Percentage Yield. It takes into consideration the amount of earnings that you accumulate by compounding your earnings over different investment periods.