Cryptocurrencies are taking the financial industry by storm, and provide multiple ways to generate passive income. Even during cycles of market volatility, there are a multitude of ways to earn crypto. In this article, we review the top 8 ways to generate passive income in the crypto market.
Proof-of-Stake (PoS) is an advanced consensus mechanism used to mine or extract cryptocurrencies. In addition to being an efficient way to maintain the consensus of a network, PoS allows the crypto holders to earn a yield by staking. There are different PoS types, including simple PoS, nominated PoS, and delegated PoS.
To earn passive income from staking, users need to set up a validator node and lock up a fixed minimum amount of coins. Users can actively validate the network or they can also delegate their coins to a selected validator and earn a yield from it.
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Several cryptocurrencies such as Solana, Cardano, Avalanche, Terra, and Polkadot are using the PoS mechanism and allowing coin holders to earn a yield by staking. If a user stakes Solana coins, they will earn the yield in Solana coins. The percentage of yield that can be earned depends on various factors such as the amount of yield and staking period.
Lending cryptocurrencies is one of the best ways to earn passive income from cryptocurrencies in both centralized and decentralized sectors of the industry. There are four major ways to lend digital currencies and earn interest as a passive income.
Peer-to-peer lending: Similar to how crypto trading platforms match buyers and sellers, certain platforms connect lenders with borrowers. Through P2P lending, lenders can set their terms and decide the amount they want to stake and the interest rate they would like to charge.
Centralized lending: Users go through centralized platforms to lend and earn interest on their crypto holdings. The interest rates and lock-up period are decided by the platforms. While users have less say in the terms of the loan, this is also one of the reliable ways to earn passive income.
DeFi lending: In contrast to centralized lending, users can directly lend their crypto holdings on the blockchain and earn interest. Lenders and borrowers interact with smart contracts on the blockchain that independently set their interest rates.
Margin lending: Users can also lend their crypto holdings to individuals who would like to borrow funds for trading. These traders use the borrowed funds to amplify their position and repay the loans with interest.
Yield farming allows crypto holders to earn cryptocurrency by using their current digital assets in a decentralized manner. In this process, users, also known as farmers, lock their crypto holdings in a liquidity pool with the help of smart contracts. In exchange for providing liquidity, users will earn new tokens as rewards.
Yield farmers constantly move their funds to make sure they earn maximum returns from their crypto holdings. Some of the best yield farming platforms are Pancakeswap, Curve Finance, and Sushiswap.
Even though yield farming and AMM are closely related processes, they share some differences. In AMM, users contribute their funds to liquidity pools and are called liquidity providers. In exchange for providing liquidity, users will get a share of transaction fees for all the transactions that take place through the pool. Uniswap and Balancer are the best examples of automated market-making platforms.
Investors who plan to hold cryptocurrencies for a long period can make use of this strategy to earn passive income. Instead of holding digital currencies on other platforms, users can deposit their funds into the accounts that will allow them to earn interest on their crypto holdings.
Similar to how traditional banks offer interest for the money stored in bank accounts, these digital asset accounts also offer interest for storing cryptocurrencies. Some popular platforms with this capability are Nexo, Celsius Network, and BlockFi.
Play-to-earn (P2E) NFT games are emerging at a rapid rate. However, to make considerable earnings, players would have to spend a lot of time and invest significant funds to get necessary items in the games. So this may not exactly be a passive income-generating method.
But, the inception of guilds is creating a new way to generate passive income using NFTs. P2E gaming guilds are groups of investors, gamers, and managers who purchase gaming NFTs. NFT holders can join a guild and rent their NFTs to players and earn interest.
Renting NFTs to generate a yield is sometimes far more efficient than directly playing the game and earning. The amount of the yield can vary from guild to guild based on the games they support and the skills of the players. Yield Guild, Good Games Guild, and Merit Circle are some of the platforms that offer this service.
Users can earn passive income by holding dividend-yielding or yield-bearing tokens. When users hold these types of tokens, they can earn a share of the profits generated by the underlying issuer. This works similarly to dividend yield stocks in the stock market.
The popular yield-bearing tokens include KuCoin shares and AscendEX. Both of these platforms pay a fraction of their trading revenue to token holders. Nexo is another platform that shares a portion of its profit to its token holders. Holding the tokens is all users need to do in order to earn a share of their profit as passive income.
Crypto funds allow users to earn passive income with their digital currencies, and sometimes with fiat money as well. Similar to traditional hedge funds, crypto funds also help digital asset holders to earn passive income.
Some of the examples of crypto funds are Grayscale’s Bitcoin trust and Decentralized trust. They allow fiat investors to gain exposure to the price changes of a single cryptocurrency. Other crypto funds like Pantera Capital have more complex funds such as the Pantera blockchain fund. However, these funds require a large minimum amount of funds to get started.
Similar to cryptocurrencies, NFT staking operates on the proof-of-stake (POS) consensus algorithm. NFT staking allows users to earn rewards as a means of passive income without selling their NFTs or transferring their ownership. Stakers earn rewards for holding or locking their NFTs in the platform. To learn more about passive income through NFT staking, refer to this blog.