A certificate of deposit (CD) is a financial product allowing customers to earn an interest rate premium after making a deposit.
In our modern financial world, credits are an important tool that allows customers to purchase goods and services without the necessary capital in hand.
However, there’s also the reverse situation, when customers have gathered up capital, and want to start earning from it. A certificate of deposit (CD) is one of the many ways to do that.
A CD is usually issued by banks and other financial institutions when a client makes a substantial deposit. This deposit is then left at the hands of the institution to use, while the customer receives a percentage-based interest rate premium. Certificates of deposit can have varying terms and conditions, depending on the issuing institution, as well as on the amount the customer is ready to deposit. Even today, with the serious diversification we’re seeing in the financial and investment world, CDs remain one of the more popular ways to earn passive income from your savings.
In cryptocurrency, the certificate of deposit mechanism has yet to be explored extensively. While the concept is very appealing, there aren’t many crypto projects that have yet ventured into the world of CDs.
One of the more recognizable CD tokens is REX. This was the first attempt to combine the popular traditional finance interest mechanic with blockchain technology. REX is a Binance Smart Chain (BSC) token, or a BEP-20 token, which means it can be used in a wide variety of decentralized finance applications built on BSC. It launched in mid-2021 and ultimately is one of the more popular CD options on the blockchain.
Other tokens like HEX have also joined the ecosystem. However, REX remains a leader in the CD sector on BSC. The main difference here is that HEX is Ethereum-based, which usually means higher gas fees for users.
The way CDs work in the cryptocurrency world is very similar to their operation in traditional finance. Crypto investors lock up a portion of their token holdings, receiving a fixed or flexible interest rate based on that deposit.
However, with cryptocurrency-based CDs, there is an important clarification to be made. Certificates of deposit in traditional finance are based on deposits in fiat currencies, which rarely see major fluctuations in their price. However, with cryptocurrencies, prices can experience major spikes and corrections. This means that the return rate on any crypto-backed CD fluctuates in a correlation with the price movement of the given token.
Of course, price changes may be in favor of investors if the price for their CD tokens is increasing. However, it is important to note that certificates of deposit in crypto carry a larger amount of risk compared to their traditional finance counterparts.
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