As cryptocurrency becomes more mainstream, coins and tokens have found multiple uses across business, tech, and finance. Users can now earn interest and rewards for simply owning and holding crypto.
To gain more rewards for participating, users of tokens that support the proof-of-stake model put up more of their coins to secure the blockchain.
For this reason, more protocols now support compound interest. Let’s look at some of them below.
Also, we’ll explore the Compound protocol, a decentralized finance tool that earns you interest for lending your coins to other crypto owners.
Does Staking Crypto Compound?
You can compound your crypto by staking it to earn rewards and interest. In fact, reinvesting your initial capital and all returns gained from staking can exponentially increase your returns. So how does compound interest work in crypto?
Compound Interest in Crypto
If you already understand how compound interest works, then you already know how it will work in crypto. For those who don’t, compound interest is earning interest on your interest. Think of it as the snowball effect.
Imagine a small snowball (your stake) rolling down a snow-covered hillside. At first, it’ll be slow, gaining mass (interest and rewards) as it goes. As it gets bigger, it gains momentum, collecting more snow until it becomes a massive ball double or triple in size.
By reinvesting your returns into your stake and letting it grow over time, you can accrue massive benefits.
These returns continue to expand the size of your stake until you end up with double or triple your initial stake.
Read more: Is Staking Crypto The Same As Interest?
Why Compounding Works Well in Crypto
Compound interest works so well in crypto because of three reasons:
- There are hundreds of coins and tokens to choose from. Some coins have higher annual percentage yields and staking on them can bring you healthy returns.
- You can diversify your risk by staking different coins and tokens at once.
- Most Crypto exchanges will help you choose products that are simple to compound.
- If the dollar value of your assets increases, the value of your token also increases. When you eventually liquidate your crypto assets, even if you had minimal gains on interest, you’ll have more in cash than you did when you bought them.
Compound interest should not be confused with the Compound protocol, which is something entirely different. Let’s look at that now.
What Is Compound?
The Compound protocol is a software that runs on Ethereum. Its goal is to create an incentive for the distributed computer network to operate a money market that’s quite similar to what we have in the standard market today.
Compound enables you to deposit your crypto coins or tokens into a pool that borrowers can access. You earn an interest on all the assets you deposit on this protocol.
This decentralized finance (DeFi) system then rewards you with a cToken, a special crypto that represents your deposit.
You can trade or transfer your cTokens in any way you wish, but they can only be redeemed in the cryptocurrency you initially locked in the protocol.
So, for example, cETH is redeemable in ETH, and cDAI in DAI.
To incentivize participation even further, Compound awards you with COMP tokens based on the number of cTokens in your wallet. The interest rate of COMP varies, and is higher in less liquid assets in the market.
How To Re-Invest The Rewards
You can reinvest your rewards in several ways:
- Once you redeem your rewards, you can stake your token and earn passive income.
- You can compound your rewards by increasing your token deposits back into the Compound protocol
- By earning more COMP tokens, you can take part in all future decisions made about the future of the protocol. This includes increasing interest rates and other decisions that affect profits and revenue.
Can You Lose Crypto By Staking?
While you won’t lose the actual number of coins or tokens you have, their dollar value may decrease. That’s also part of the risk that comes with staking in crypto.
Such incidents occur often in crypto. One major reason for these losses is inflation in the crypto market.
Increased supply of liquid currency in the trading platforms reduces interest rates and sometimes the value of an asset.
If anyone can easily access a token or coin, that reduces the dollar value of your stake. It also reduces interest rates and cuts your gains.
What Happens When You Stake Your Crypto?
Several things happen when you stake your tokens:
- First, your coins/tokens go into validating transactions and creating new blocks in the protocol. This increases the security of the blockchain and its value.
- Every new block mined rewards validators with newly minted crypto coins. Depending on the model your crypto uses, each validator may be rewarded equally or according to the share of their stake in the mining process.
- Staking crypto also reduces the circulation of coins in the market. This makes them more valuable, driving up their dollar price. In turn, each coin you stake becomes more valuable.
Can You Stake Any Crypto?
While you can stake many cryptocurrencies, not all of them support staking.
If you want to stake, choose a blockchain protocol that uses the proof-of-stake model. These protocols reward you with new coins or tokens when you stake your coins to validate transactions.
Protocols that use the proof-of-work model (like BTC) can’t support staking. Instead, you’ll need computational power to mine new blocks and mint new coins as rewards.
Here are some common crypto protocols that support staking:
- Tezos (XTZ)
- Terra (LUNA)
- Solana (SOL)
- Polkadot (DOT)
- Ethereum (ETH)
Can You Stake on Coinbase Pro?
Coinbase Pro supports staking.
It also provides you with direct access to the Coinbase market. All orders you make on your Coinbase Pro account are executed directly on the market. If you already have a Coinbase account, upgrade to Pro and enjoy access to all these products right away.
Can you stake Ethereum on Binance?
Binance enables you to stake Ether on their platform.
Staking Ethereum on Binance is super easy. Once you have the minimum required Ethereum balance in your Binance wallet, you can stake.
If not, transfer your coins from other wallets to Binance account. Besides that, you can buy more Ether from their trade platform and add it to your wallet.
How to stake ETH on Binance
- Log into the Binance Platform, click on the Finance tab on the main navigation bar.
- Select the Binance Earn link
- Scroll down to ETH 2.0 Staking and click on the View More option on the ETH 2.0 Binance staking page.
- Select Stake Now
- Enter the amount you want to stake, then select Confirm
- Binance will open a confirmation window. Carefully read the terms and conditions on this window.
- Last, Click Confirm to proceed.
Binance will deposit your ETH stake as the BETH token into your Spot Wallet. On the Binance platform, you’ll view your balance on the Spot or Fiat page. Binance will use your BETH balance to determine the amount of ETH 2.0 staking rewards they’ll send to your account.
Does ETH Staking Compound?
You can compound your ETH stake, but at this time you can only do it on StackWise.
The StackWise platform enables you to reinvest your ETH2 rewards back into staking directly from their dashboard.
StackWise uses a liquidity pool that links to your ETH2 stake and rewards ETH. This pool also allows you to reinvest your rewards by staking them again.
To compound your rewards often, switch your rewards into stakes through the Uniswap V3 pool.
Does ADA Staking Compound?
Your Cardano (ADA) stake compounds automatically. You don’t need to withdraw your rewards to your wallet to compound it. Instead, everything in your Cardano wallet, including your rewards, counts into your new stake.
This way, the power of compound interest applies to your Cardano token with no action on your part.
Does Tezos Staking Compound?
Just like Cardano, your Tezos stake also compounds automatically. Your entire Tezos balance, including any rewards accrued, count into your stake.
So long as you’re holding Tezos in your wallet, you’ll earn an interest on it, which compounds as you earn more rewards.
Does Coinbase Staking Compound?
It may be possible to earn compound interest on Coinbase, but you may have to withdraw your rewards into your account, turn them into cash, then buy more coins or tokens for the asset you wish to stake. This, unfortunately, comes with some fees attached.
You can earn interest from the Compound protocol on your Coinbase account. Using this DeFi instrument, you can lend out your crypto or borrow from a crypto pool.
Does Kraken Staking Compound?
You can earn compound interest by staking your coins on Kraken. You earn rewards for staking or holding crypto, and you can grow them further by compounding them. Kraken also supports the Compound protocol.
By using this instrument, you can also lend or borrow crypto and earn rewards for participating in the protocol.
We hope you can now tell the difference between compound interest and the Compound protocol. Both are excellent ways to earn dividends, interest and rewards for participating in various blockchain protocols.
Explore them and find out how you can make more using both.