The term passive income refers to an income source in which the holder of an asset receives a fixed or regular payment each month. Passive income has many forms. Cryptocurrency, which is becoming more and more popular by the day, is one method to attain passive income. Crypto passive income, however, can be tricky as there are so many different chains and protocols promising financial freedom.
Uninformed decision-making can cost a lot of money and unnecessary heartache. Here are the top 5 ways to put your crypto to work and generate income without having to work all day.
1. Staking on Proof-of-Stake (PoS) Blockchains
Staking refers to the act of pledging your crypto tokens to a specific PoS blockchain to validate transactions and add new blocks to the chain. Rewards are provided in the form of transaction fees to those who successfully validate and add blocks to the chain.
When it comes to staking, keep in mind that there is often a lock-up period where you cannot withdraw your tokens. Yield rates will also vary across blockchains and according to the the performance of the validator you choose to stake with. Always research the chain and validator you are staking with and carefully understand the risks of staking before getting started.
Arguably one of the safest ways of earning passive income through crypto might be through lending stablecoins. A stablecoin is a crypto token that is pegged 1:1 to a fiat currency, such as USD. Some popular ones include DAI, USDT and USDC, all of which are pegged to USD. Stablecoins usually return a rate of about 5-10%. However, lending other crypto currencies can produce varying interest rates. DeFi Rate has a great comparison chart if you are looking to compare lending rates across various currencies and exchanges.
3. Providing Liquidity
If you are keen on exploring the world of decentralised finance (DeFi), you might want to start by looking into liquidity pools. These pools allow DeFi users to exchange one crypto token for another, and they only work when other users provide what’s known as liquidity.
When you provide liquidity, you dedicate two different cryptocurrencies of equal value to a liquidity pool. For instance, if 1 ETH is worth $1,000, you could add 1 ETH + 1000 DAI to a liquidity pool. In return, whenever someone exchanges ETH for DAI or vice versa, you earn a portion of the transaction fees that user paid to perform the transaction. This is also referred to as liquidity mining.
One thing to take into consideration when providing liquidity, however, is impermanent loss. This occurs when there are wild fluctuations in the prices of the token, causing the value of your liquidity position to be lower than the value of your tokens if you had just held them in your wallet.
4. Farming Tokens
At times mistaken for staking, farming refers to the act of locking a specific token into a protocol in order to receive rewards. One example of this is an LP token. Users who decide to deposit their tokens into a liquidity pool receive LP tokens to substitute the tokens that they deposited into the pool. These LP tokens can sometimes be used to farm rewards.
These LP tokens are locked into the protocol governing the pools, and rewards are typically paid out in the protocol’s native token, such as SUSHI on SushiSwap. This way, the protocol benefits because people hold on to their tokens instead of selling them for profit, and users receive rewards for essentially doing nothing.
5. Crypto Savings Account
Lastly, if you are DeFi-averse and prefer to keep your crypto on a centralised platform where you can contact Support whenever you need to, a crypto savings account might for you. Crypto savings accounts, such as Celsius or nexo, work like a bank account for crypto. You deposit your money with them, and they pay you interest.
(13/6/22 Update: Celsius has just announced a withdrawal freeze across all assets – please be aware, DYOR, and deposit at your own risk. Some alternatives include Gemini, Crypto.com, Coinbase, and KuCoin.)
The difference between a crypto savings account and a traditional bank account is that the rates for a crypto savings account is much higher. Depending on where you live, banks might pay you an interest of 0.05%, and a 2% annual interest rate is considered high. However, on a crypto savings account, you can easily earn upwards of 10% annual interest. If you want to avoid the volatility of crypto, you can simply deposit a stablecoin. At the time of writing, nexo is paying 12% on USD stablecoins, and Celsius is offering a rate of about 8%.
Earn Passive Income Through Crypto
All of the above methods have their pros and cons. While some protocols may offer very high returns, they often come with higher risks as well. Always DYOR (do your own research) and only invest something if you are comfortable with its risk level. Earning passive income through crypto is great because there are no lengthy KYC processes and you don’t need a huge capital to get started. However, it’s important to always keep its risks in mind. Definitely keep abreast of market news and developments so you can withdraw your investments if risks change and you start to get uncomfortable.