Trading cryptocurrencies is a well-known method for earning profits in the crypto industry. Detailed research is necessary for making profits through crypto trading and still, it is not a reliable source of income. Even experienced investors will encounter losses due to the high volatility of cryptocurrencies. Creating multiple revenue sources of income is important for anyone to achieve financial freedom in the early years of life. In addition to trading, there are several other ways to generate passive income using digital assets which can provide stable income. This article will go through some of the ways to earn passive income using cryptocurrencies.
Six ways to earn passive crypto income
Proof-of-stake (PoS) is an advanced consensus mechanism that is used to extract cryptocurrencies. In comparison to the proof-fo-work mechanism, PoS is a less resource-intensive mining process. The users who involve in PoS are called validators. They stake their crypto holdings in a suitable wallet and perform various functions like validating transactions in order to receive staking rewards. Other versions such as delegated proof of stake and leased proof of stake also exist which allow users to generate income in the form of staking rewards.
Staking usually involves setting up a staking wallet and simply holding their cryptocurrencies. In some cases, users add or delegate their holdings to a staking pool where they do not have to validate the transactions and still earn passive income. Crypto exchanges also support this method by allowing their users to simply hold the digital currencies and by taking care of all the other technical requirements. Staking is the best way to increase the income from cryptocurrencies with minimum to zero efforts and risks. It is necessary to investigate the best platforms which will provide promising rewards.
Lending cryptocurrencies is the most popular way to generate passive income in both centralized and decentralized sectors of the crypto industry. Crypto holders can lend their digital currencies to borrowers and earn interest. There are four ways of generating passive income through lending.
- Peer-to-peer lending: Certain platforms will connect lenders with borrowers and enable peer-to-peer lending just like how crypto trading platforms match buyers and sellers. Lenders can set their terms and decide the amount they want to stake and the interest rate they would like to charge. Users may have to deposit their digital assets into the lending platform’s custodial wallet beforehand.
- Centralized lending: Users need to completely depend on the lending infrastructure of the third parties. The interest rates and the lock-up period are all set by the centralized platforms and lenders will have no freedom to choose the interest rates. In this process also, lenders would have to transfer their crypto holdings to the lending platforms to earn interest.
- DeFi lending: DeFi lending allows users to execute lending services directly on the blockchain to earn income. There are no intermediaries involved in this process like P2P and centralized lending platforms. Lenders and borrowers interact with programmable and self-executing contracts that are known as smart contracts which independently set interest rates.
- Yield farming
Yield farming is another decentralized method of earning more cryptocurrencies using the present digital assets. The users are known as either farmers or liquidity providers who earn passive income through yield farming. Users would have to lend their funds to others or lock their crypto holdings in a liquidity pool with the help of smart contracts. In exchange for providing liquidity, users will earn rewards in the form of cryptocurrencies or governance tokens. Generally, yield farmers use complex strategies to maximize their earnings. They constantly move their funds from one marketplace to another which gives high returns.
- Automated market-making
Yield farming and automated market maker (AMM) concepts are closely related in terms of liquidity pools and liquidity providers. But there is a slight difference in the implementation of yield farming compared to the AMMs. When liquidity providers contribute their funds to liquidity pools, they will earn a share of transaction fees of all trades incurred in the liquidity pool. Whereas in the case of yield farming, the distribution of new tokens also takes place in addition to the share of transaction fees. The similarity between yield farming and AMM is users will get rewards in proportion to the amount of liquidity they provided to farms or liquidity pools.
- Interest-bearing digital asset accounts
Long-term crypto holders can deposit their digital assets into the accounts which allows them to earn fixed interest on their funds. This method is exactly like storing money in bank accounts and earning interest. The only difference is digital asset accounts only support cryptocurrency deposits. Instead of holding the digital assets in various other platforms, users can deposit them in these interest-bearing accounts. Users can receive interests daily, weekly, monthly, or yearly earnings based on their predefined interest rates.
- Dividend-earning tokens
Dividends are a classic way of earning passive income on investments. Some cryptocurrencies offer rewards which are called dividends that can be earned by simply holding digital assets in digital wallets or for taking a specific action. Dividends are more popular in the stock market and they are completely different from cryptocurrency dividends. The rewards can vary based on various factors like the trading volume on a crypto exchange platform.
Trading cryptocurrencies has gained more popularity these days because users are able to generate high profits in a shorter period of time. However, there are several other methods to generate passive income using cryptocurrencies other than trading with less effort and less risk. It is essential to research all the passive income generating methods using cryptocurrencies and choose a reliable platform to carry out the process.
Six best ways to generate passive income using cryptocurrencies which eliminate the risks and efforts needed to trade digital currencies.