Various ways of earning passive income appear with the advances in blockchain technology and cryptocurrency. Today, you can not only buy and sell your digital assets on exchanges, but you can also earn money passively, even by playing joyful games. This article will highlight some of the most popular ways of generating passive income from your crypto assets.
Explaining Passive Income in Crypto
Passive income is earned from financial activities in which a person is not actively involved. Potential returns from cryptocurrencies can vary – staking or lending provides regular interest payments, while mining offers rewards in newly minted coins.
To maximise the passive income from crypto, conduct research and choose methods that align with your investment goals and risk tolerance. Diversifying strategies and staying informed about the crypto market can optimise the chances of earning a reliable and sustainable passive income. However, it should be noted that the returns from passive income can be influenced by such factors as cryptocurrency price movement, network demand, and participation of individuals in the market.
Ways To Earn Passive Income
There exist many ways to earn passive income from cryptocurrencies. For example, such methods as staking, liquidity mining, lending, and pay-to-earn gaming can deliver significant returns if implemented wisely. Let's discuss these methods in more detail.
Staking
Staking is one of crypto's most popular methods of earning passive income. It involves holding a certain amount of cryptocurrency in a crypto wallet and participating in the process of transaction validation on the blockchain. Staking can be implemented on networks that use Proof-of-Stake (PoS) and Delegated Proof-of-Stake (DPoS) consensus protocols. PoS is a consensus method alternative to Bitcoin's Proof-of-Work (PoW). PoS networks agree on which transactions are valid through a process that involves nodes locking up large amounts of tokens for some specified period.
PoS blockchains reward validators for adding new blocks, unlike PoW, where miners receive rewards. Validators don't need expensive hardware but must have a significant amount of tokens to add to the next block. Validators are chosen based on the stake and initial investment. In exchange for staking your funds, PoS blockchains pay you rewards in their native crypto.
Delegated Proof of Stake (DPoS) consensus mechanisms enable nodes to delegate staking rights to a full validator, providing affordable passive income through transparent voting and stake allocation.
Staking rewards are typically distributed as additional crypto tokens or transaction fees. The annual percentage yield (APY) for staking can vary depending on the network activity, the token's inflation rate, or demand for staking.
Crypto staking involves risks like market fluctuations, security breaches, software vulnerabilities, and network attacks; stakers also should be aware of penalties for unstaking or withdrawing funds before the specified time.
Popular networks for staking include Cardano (ADA), Ethereum (ETH), and Polkadot (DOT).
Staking not only helps you earn passive income, but it also assists in securing the network against spam and malicious threats.
Liquidity Mining (Yield Farming)
Liquidity mining (also known as yield farming) is another extremely popular way to earn passive income from cryptocurrency in the decentralised finance sector. It became popular due to the popularity of decentralised exchanges (DEX) and swap pools. DEXs need liquidity pools that are used to conduct transactions with specific tokens. These tokens come from community members called liquidity providers. They deposit their tokens into the liquidity pool, that is, into the smart contract for the DEX. In exchange, users receive passive income for contributing to the operation of the DEX.
When considering liquidity mining, one of the significant factors is the presence of decentralised exchanges and liquidity pools. Decentralised exchanges operate under an Automated Market Maker (AMM) structure, which makes trading easier. When a trader makes an exchange on a DEX, a certain percentage of the value exchanged is paid as a commission.
AMM collects commissions and distributes them among liquidity pool investors. The more traders use this pool, the more money liquidity miners earn.
The second factor to pay attention to is the "liquidity pool". A liquidity pool is a smart contract that stores tokens for trading or providing liquidity. For liquidity miners, a liquidity pool is a smart contract that stores the capital they offer on a DEX.
Yield farming is the process of staking LP tokens obtained by providing liquidity. Yield farming is another strategy for token holders to increase capital already distributed among liquidity pools. This helps offset any non-permanent losses resulting from the provision of liquidity.
The annual percentage rate for farming liquidity varies widely and depends on the following parameters:
- Number of tokens (in USD) available for distribution
- Total number of staked LP tokens (in USD)
- Remaining farming time.
The reward for farming is calculated immediately after staking LP tokens, and rewards and deposited funds can be claimed at any time after the end of the farming period and in any amount.
DeFi Lending
Cryptocurrency loans are one of the industry's most popular passive income sources. DeFi lending involves using lending services directly through the blockchain. Lenders and borrowers interact through smart contracts with no intermediaries, which automates interest rates. As with liquidity mining, this method involves depositing cryptocurrency into the borrowing pool.
You can act as both a lender and a borrower.
Lenders deposit funds into a lending platform's smart contract, which is issued to other users on credit, with a small percentage paid to the lender. This decentralised process resembles a banking system.
To obtain a loan, you must invest your funds; for instance, you can invest ETH in a platform offering an equivalent amount of USDT. The platform freezes ETH coins in a smart contract, and to return them, you must deposit the borrowed USDT back into the platform account.
This method involves some risks. Thus, since crypto loans are not centrally regulated and have no repayment guarantees, the collateral amount usually significantly exceeds the loan size.
In addition, crypto assets are volatile, and the cost of a loan or collateral can change significantly when the funds are used. Accordingly, it will be necessary to increase the collateral or return more funds than was initially taken by the borrower.
Pay-To-Earn Gaming
Play-to-earn (P2E) is a gaming concept that combines play and earnings. Participants in DeFi projects play crypto games and receive non-fungible tokens (NFTs), cryptocurrency or other rewards for this.
In P2E games, users boost the value of in-game assets (pets, items, etc.) expressed in cryptocurrencies or NFT tokens.
An NFT token is a unique digital certificate stored on the blockchain. In crypto games, NFT tokens can be goods, equipment, characters, and so on; in other words, anything that relates to in-game purchases or currency. Users can sell NFT tokens to other gamers or earn tokens through the Play-to-Earn (P2E) model.
The P2E model is a class of blockchain games that allows you to earn money while playing. As a rule, the longer the game lasts, the more tokens the gamer receives, though the playing conditions may change.
The first crypto game — CryptoKitties — appeared at the end of 2017 and immediately became so popular that the high traffic of CryptoKitties and the associated load on the ETH network led to a decrease in transaction speed.
Players can buy, sell, collect and breed virtual cats in this game. In 2018, one of these cats was auctioned for $170 thousand.
Conclusion
With the development of cryptocurrencies, various ways to get passive income have evolved. All of them have their benefits and risks, and to choose the most advantageous one, it is necessary to understand the process and methods of their work and define your investment goals and risk tolerance.
