Passive income is money generated by individuals not actively participating in work. In most cases, what you need to do is invest your money or digital assets in a specific cryptocurrency investment strategy or platform and wait for it to generate profits. In some cases, the returns are fixed and predictable. In other situations, several factors beyond your control may come into play.
The typical way of passive income is through buying and holding cryptocurrencies-also known as “HODLing” in the industry. This means that investors are ready to buy a digital asset, and their mentality is to hope that its price will rise sharply at some point in the future. Such investors are ready to go a long way, because this long-term strategy may require them to hold positions at any time within 6 months to 5 years. During this investment period, investors do not have to take the initiative in the cryptocurrency market. They only need to buy digital assets and store them in a secure wallet-preferably a non-custodial wallet.
A wallet is a device or application in which you can store a special key (private key) that can access your cryptocurrency. Non-custodial wallets allow you to store private keys in personal devices, including computers, mobile phones, or specialized wallet devices. With this, you can fully control your private keys and ultimately control your digital assets. In contrast, using custodial wallets allows third parties to control your private keys.
However, simply buying and holding cryptocurrency assets for the length of time does not guarantee that you will make a profit. In fact, you are very likely to lose money. Therefore, the pure HODLing cryptocurrency cannot be regarded as a true source of passive income.
Channels to earn passive income
Proof of Stake (PoS) is a blockchain consensus mechanism designed to allow distributed network participants to reach an agreement on new data entering the blockchain. Please note that the blockchain enables an open and decentralized network where participants contribute to the governance and processes involved in verifying transactions. This is critical because this community-centric approach eliminates the need for central institutions such as banks. In most cases, the blockchain randomly selects participants, promotes them to the status of validators, and rewards them for their efforts.
The system used to select validators varies from blockchain to blockchain. Some blockchain networks require users to deposit or invest their financial resources into the network. Here, the blockchain selects validators from a pool of users who have pledged a specific amount of their native digital assets. In return, the verifier receives interest on the bet funds for contributing to the effectiveness of the network. This verification mechanism is the so-called proof of PoS. It provides holders (those who hold for a long time) an opportunity to generate passive income.
Now that you know that there may be a technical threshold for transaction verification, you can completely choose the PoS blockchain, which allows you to delegate your chips to other participants who are ready to assume the technical requirements for pledge. It is understandable that the reward allocated to the verifier is slightly higher than the reward of the delegator. Some PoS blockchains you can consider are:
For more convenience, you can use one of today’s several pledge services. Through these platforms, you can deposit a small fraction of the number of digital assets required by the blockchain. For example, you usually need to deposit at least 32 ETH on the Ethereum 2.0 blockchain to become a validator. However, with a third-party Ethereum betting service, you can start accruing interest only by depositing 5 ETH.
Interest-bearing digital asset account
Holders can take advantage of interest-bearing cryptocurrency accounts to earn fixed interest for their idle digital assets. Think of this as putting money in an interest-bearing bank account. The only difference is that this service only supports cryptocurrency deposits. Instead of holding digital assets in your wallet, you can deposit them into these accounts, and get income every day, every week, every month, or every year according to a predetermined interest rate. Cryptocurrency service providers that provide such products include:
In the centralized and decentralized fields of the cryptocurrency industry, lending has become one of the most popular cryptocurrency services. As an investor, you can lend your digital assets to borrowers to get the opportunity to earn interest. There are four main lending strategies you can choose:
- Peer-to-peer lending: The platform that provides such services has enabled a system that allows users to set terms, determine the amount they want to lend and the loan interest they intend to generate. The platform bridges lenders and borrowers, similar to a peer-to-peer trading platform that bridges buyers and sellers. This lending system provides users with a certain degree of control when it comes to cryptocurrency lending. However, you must deposit your digital assets in the custodial wallet of the lending platform in advance.
- Centralized lending: In this strategy, you are completely dependent on third-party lending infrastructure. Here, the interest rate is fixed, and the lock-up period is also fixed. Like the former, you must transfer your cryptocurrency to a lending platform before you can start earning interest.
- Decentralized lending: This strategy allows users to perform lending services directly on the blockchain. Unlike the two strategies, there are no intermediaries involved in DeFi lending. Instead, lenders and borrowers interact with programmable and self-executing contracts (also called smart contracts) that set interest rates autonomously and regularly.
- Margin lending: Finally, you can lend your cryptocurrency assets to traders who are interested in using borrowed funds for transactions. These traders use the borrowed funds to amplify their trading positions and repay the loans with interest. In this case, the cryptocurrency exchange does most of the work on your behalf. All you need to do is make your digital assets available.
Unlike the PoS mechanism explained earlier, some blockchains, including Bitcoin , have chosen a more computer-intensive approach. Users need to compete with each other to solve highly complex mathematical problems to prove that their claims are eligible for verification. (More commonly referred to as miners). This process is called cryptocurrency mining. Due to the competitiveness of this consensus mechanism, miners must invest in powerful computers and pay high electricity bills.
Needless to say, this kind of adventure is time-consuming and technical. Therefore, investors often choose an alternative method called cloud computing. In this way, you can pay a fee to a third party and let them undertake the technical work of cryptocurrency mining on your behalf. In essence, you pay a sum of money to the platform that provides this service, renting or buying mining machines from their mining facilities. After this first payment, you may need to pay a daily maintenance fee so that the cloud mining service provider can help you manage your mining machine.
Although this sounds exciting, there are also many risks. Since cloud computing has been widely adopted, it has been a controversial topic. Due to the remote nature of this mining industry, there have been many fraud cases. Therefore, you should conduct due diligence before choosing this option.
Tokens that can receive dividends
Certain tokens provide holders with part of the income of the company that issued the token. All you need to do is to hold the tokens and you are eligible to automatically receive a certain percentage of the company’s income. The number of tokens you own determines the share of income you will receive. An example of this is KuCoin Shares (KCS), where holders receive daily share of transaction fees accumulated by the KuCoin blockchain asset exchange. The amount received is proportional to the number of KCS tokens held by each holder.
Yield farms are another decentralized method of earning passive cryptocurrency income. This is achieved by the dynamic operation of decentralized exchanges. These exchanges are basically trading platforms. Users rely on a combination of smart contracts (programmable and self-executing computer contracts) and investors to obtain the liquidity needed to execute transactions. sex. Here, users do not trade with brokers or other traders. Instead, they trade with investors—known as liquidity providers—deposit funds in special smart contracts called liquidity pools. In turn, the liquidity provider receives a certain percentage of transaction fees from the pool.
To start earning passive income through this system, you must first act as a liquidity provider (LP) on a DeFi exchange (such as Uniswap , Aave or PancakeSwap).
In order to start earning these fees, you must deposit two or more digital assets into the liquidity pool in a specified proportion.
Once you deposit liquidity, the decentralized exchange will transfer LP tokens, representing your total capital share locked in the liquidity pool. Then you can use the supported decentralized lending platform to invest these LP tokens and earn additional interest. This strategy allows you to earn two separate interests from a single deposit.
The cryptocurrency passive income opportunities listed in this guide are just some of the many ways you can make additional profits with idle digital assets. Please note that these opportunities are risky. Therefore, it is recommended to do your own research, seek professional guidance from a qualified financial adviser, and determine what is most suitable for your investment goals.
Posted by:CoinYuppie，Reprinted with attribution to:https://coinyuppie.com/six-major-revenue-generating-channels-for-cryptocurrency-passive-income-in-2021/
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