What Is Uniswap & How to Earn Interest Income with It

If you’re unfamiliar with any of these terms, never fear; we will discuss them in the article. First off, HODL is an acronym used by cryptocurrency investors that is short for Hold On for Dear Life, mainly because that’s what it feels like when we buy crypto as it goes through its cycles like an F-N rollercoaster.

So, please don’t feel like the Lone Ranger when you buy a cryptocurrency and the price drops immediately, or there’s good news about your favorite coin or token, but it nose-dives anyway. Just HODL! It’s what we do.

If you are unfamiliar with cryptocurrency and investing in it, you should first read my article, How to Buy Crypto Without Knowing the Intricate Details.

What is Uniswap

Uniswap is a decentralized Ethereum token exchange that allows users to trade tokens directly without the need for any middlemen. However, it's not just an exchange—it provides liquidity sourcing and price discovery services.

How Does it Work?

The exchange works by allowing users to deposit their tokens into a smart contract, which provides liquidity for the exchange. When somebody wants to buy or sell a token, they use ETH (Ether) to pay for it, and this gets exchanged for the appropriate number of tokens. The beauty of this system is that it doesn't rely on any central authority, and there is no need for user registration or KYC.

“Know Your Customer (KYC) are a set of standards and requirements investment and financial services companies use to verify the identity of their customers and any associated risks with the customer relationship.” —Investopedia.

Typically, when you sign up for a cryptocurrency exchange service you must provide several forms of identity verification. The better your verification, the bigger the investment you can make, and the more money you can withdraw daily.

Think about it as if this were your bank, would you want them to just hand your money to anyone who knew your account number? Of course not, that’s why they require an ID.

What Is a Smart Contract?

I rarely use Investopedia or any “…pedia” as a reference because these are usually second or third-hand, meaning anyone can create or edit these entries.

However, I am not opposed to using it to provide you with a definition of anything having to do with investing. Their definition of a smart contract is:

“A smart contract is a self-executing contract with the terms of the agreement between buyer and seller being directly written into lines of code. The code and the agreements contained therein exist across a distributed, decentralized blockchain network.” — Investopedia.

So, that begs the question of what is a “decentralized blockchain network.”

What Is a Blockchain?

Once again, Investopedia says:

“A blockchain is a distributed database that is shared among the nodes of a computer network. As a database, a blockchain stores information electronically in digital format. Blockchains are best known for their crucial role in cryptocurrency systems, such as Bitcoin, for maintaining a secure and decentralized record of transactions. The innovation with a blockchain is that it guarantees the fidelity and security of a record of data and generates trust without the need for a trusted third party.”

That Investopedia page breaks down each portion of the blockchain analysis, so it is good reading if you still don’t understand the process.

How Can I Earn Interest Income for My Cryptocurrency?

Many people who buy cryptocurrency to hold it long-term would like to draw interest on that crypto rather than just waiting for the price to up enough that it is worthwhile to sell. Typically, the buy price is significantly higher than the sell price, though that can change rapidly.

There are a few ways to earn interest income from the website. The first is by staking your tokens in the liquidity pool. With staking, you will be rewarded with a portion of the fees generated by the exchange.

Reputable staking exchanges include Binance, Kraken, and Bitstamp. However, just being reputable doesn't exempt you from hacking, and there is no FDIC or deposit insurance for crypto yet. You should spread out your investments among reputable exchanges to reduce your risk.

The second method is to become a liquidity provider yourself. You can do this by depositing your tokens into the Uniswap smart contract and then setting up automated trades for them via application programming interface (API) calls.

An API call is, “a set of programming code that queries data, parses responses, and sends instructions between one software platform and another.” — Investopedia.

How to Earn Interest on Crypto Holdings - A Beginner's Guide

I like to share 99Bitcoins’s YouTube videos because they are short, concise, to the point, and easy to understand. If you agree, like and subscribe for announcements about new videos.

Coinbase

Coinbase offers a wallet service on top of its exchange whereas with Uniswap you need to provide your storage solution. Coinbase is also a lot more user-friendly. I always thought they had a strong reputation.

However, when I looked at Trust Pilot for Coinbase, out of 6,400 reviewers, 78% of those said their experience with Coinbase was bad or terrible, as opposed to only 18% who rated them excellent, great, or even average.

What’s more, as you can see in the screenshot below, Coinbase customer service “Hasn't replied to negative reviews for the past 12 months.”

Granted, your experience with Coinbase could be different. You should do your own research about the companies you trust with your cryptocurrency. But this is not the type of organization I would trust with my cryptocurrency after reading these reviews.

Passive Income

Passive income can be generated by holding onto tokens that provide regular payouts. For example, the staking token for the Tezos blockchain pays out a percentage of its annualized yield every six months.

I published an article about two methods to acquire passive income with cryptocurrency. One of those was staking.

Investing in any cryptocurrency requires an understanding of the possibility of loss, as well as a hope for gain. With many of these Metaverse tokens, there is value aside from face value.

My weekly look at cryptocurrency on Medium.

Crypto Wallets

Crypto wallet can make it easy to manage your holdings and come with extra security features. This makes them more appropriate for long-term investments like real estate or even retirement accounts.

Three reputable hot wallets (online), Exodus, Ledger, and Atomic Wallet.

Three highly-praised cold wallets are Ledger Nano X, Trezor Model One, and Cool Wallet Pro.

A cold wallet is, “A cold wallet, otherwise known as a hardware wallet or cold storage, is a physical device that keeps your cryptocurrency completely offline. ... There is no back up to this form of storage; if you misplace your wallet, you lose access to your investments.” — Time.com.

This statement is from an excellent article by Ryan Haar, How to Decide on a Hot Wallet or Cold Wallet for Your Crypto, and Whether You Need One at All, dated 23 September 2021.

Decentralized Finance

They allow you to create and manage your Decentralized Finance (DeFi) applications on the Ethereum blockchain, an interesting new development in the world of cryptocurrency.

This means that you can create your portfolio of crypto assets or even trade directly against other DeFi services without having to go through an exchange.

“Decentralized finance, also known as DeFi, uses cryptocurrency and blockchain technology to manage financial transactions. DeFi aims to democratize finance by replacing legacy, centralized institutions with peer-to-peer relationships that can provide a full spectrum of financial services, from everyday banking, loans and mortgages, to complicated contractual relationships and asset trading.” —Forbes

“Aave and Compound are two leading DeFi networks that allow for decentralized borrowing and lending. You can earn interest on your crypto holdings by depositing any of the supported coins to their platform.” — 99Bitcoins.

Aave As a Defi Service

Aave is a company that provides online wallets which you can use to store your Ether. It is one of the most popular wallet providers in this space but does not offer interest income opportunities like its Uniswap does.

Compound As a Defi Service

Compound is a DeFi service that allows you to earn interest on your deposited tokens. It is one of the most popular services in this space and has been around for a lot longer. All you need to do is deposit your tokens and then set up an automated lending deal with the desired interest rate. You can then use the Compound web interface or API to borrow or lend tokens against your deposited assets.

Final Thoughts, Disclaimers, & Observations

So, there you have it. You can buy crypto, HODL it, and earn interest as you watch the price go up and down, which would otherwise drive you crazy. The best method is to look around to see which exchange with an excellent reputation will pay you the best interest.

At this point, you might be confused with the various options that are available to generate interest on your cryptocurrency. You might wonder, where should I HODL my crypto? I feel you.

Look around, do not just grab the first exchange that offers a good interest rate. You must know the fees you must pay to withdraw your money, and will it lead to a taxable event if you do.

Take Yearn Finance, for instance, although you can earn a significant amount because it searches for the best rates for you, when you withdraw, you could have to pay “gas fees.” I read about one person’s experience there who said, “…to withdraw your assets, you will need to pay over $1000 gas fees, which will kill any interest you accumulated and probably you would lose some of your initial deposit!”

Plus, Yearn Finance notifies the IRS, which all exchanges might need to do eventually. I personally do not mind paying taxes on gains. It is income, after all. Yearn is just one that I read about; you need to find out what your earned interest will ultimately entail.

What’s more, many experts suggest that you do not commit more than 10% of your crypto investment to draw interest from an account that requires you to lock up or leave your currency there for six months to a year.

However, that’s totally up to you. But walk —don’t run. Start small and make sure to do a complete circle with an exchange before you commit too much. Your interest might be smaller on a one-month commitment, but you will know how difficult it is to withdraw your crypto.

“…while APR and APY may sound the same, they are quite different and not created equal. For starters, APY, or annual percentage yield, takes into account compound interest, but APR, which stands for annual percentage rate, does not.” — Investopedia.

Keep in mind; typically, the higher the interest paid the higher the risk. Of course, if you can find an exchange that pays a decent interest rate, either APR or APY, and they allow you to maintain your keys, that might be the best you can hope for to earn while you hold your crypto.

DISCLAIMER: This article is for entertainment and informational purposes only. It should not be considered financial or legal advice. Not all information will be accurate. I am not a financial adviser, and anything I propose should be considered friendly banter to show you what is possible if you invest your money in these vehicles. However, there are no guarantees. Consult a financial professional before making any significant financial decisions.

Stephen Dalton is a retired US Army First Sergeant with a degree in journalism from the University of Maryland and a Certified US English Chicago Manual of Style Editor. Also, a Top Writer in Finance, Nutrition, Travel, Fiction, Transportation, VR, NFL, Design, Creativity, and Short Story.

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