Top 3 ways to generate passive income in cryptocurrency

Many crypto newcomers think that trading and mining are the only ways to benefit from crypto. But these are so-called active ways to get profit. In fact, the crypto market also provides multiple options to generate passive income where an individual is not actively involved in the profit-making process. Some of them are crypto-active, while others are considered as crypto analogs of existing services in traditional finance.

Top 3 ways to generate passive income in cryptocurrency


“HODLing”, a typical way when you buy and hold your crypto as long as possible, cannot be considered as a true passive income generator. Yes, HODLers don’t have to be proactive and have almost no involvement in getting a return. But holding crypto assets for any length of time does not guarantee you to make money. At the same time, passive income may provide you with fixed and predictable profits.


What to do if you need crypto here and now? The solution may be to borrow crypto, but the time will come and you need to give it back.

Here are some of the most popular ways in the crypto industry to generate passive income.



Staking

If you heard about mining, then you know that it is used in networks with Proof-of-Work consensus algorithms like Bitcoin or Litecoin. But some cryptocurrencies use other mechanisms to provide consensus in the network. And Proof-of-Stake (PoS) is one of them. In most cases, blockchains with Proof-of-Stake randomly pick participants and reward them for their efforts to validate transactions.


The systems used to select the next validators differ from blockchain to blockchain. But usually, users need to deposit or commit a specified sum to the network to become a validator or participate in consensus. The process of holding coins when you participate in consensus is called staking. Validators earn interest in crypto on the staked funds, providing them an opportunity to generate passive income.


Becoming and being a validator might be a tech-savvy process. That is why some blockchains also allow you to delegate your funds to existing validators that receive a staking reward for that. Validators often take some fee when they receive a reward with entrusted funds. Cardano, Tezos, Polkadot, Solana, and Tron are some of the most popular PoS blockchains in the crypto market.


At the moment, staking is a relatively straightforward and easy-to-start way to receive passive income in crypto. Many crypto exchanges and wallets have adapted staking on their platforms, and it significantly simplified the process for regular users. Usually, users just need to have some funds on their balance and select the amount they want to send to participate in staking. In some cases, for example, at CEX.IO, the whole process is automated. You can receive a staking reward just by holding crypto on your balance or even trading coins that participate in staking. It makes crypto exchanges the places where customers can buy Tron (TRX) or any other stackable coin and use it for staking at once.



Lending

Crypto enthusiasts like to say that you can become your own bank with crypto. And it truly is because you can not just own funds without relying on third parties but also provide bank services on your own. Lending is a frequently used service in both the centralized and decentralized parts of the crypto world. It allows you to lend your digital assets to borrowers and earn certain interest for that.


Crypto lending platforms usually have one of the highest total values locked in the protocol (TVL) among decentralized finance (DeFi) projects. For example, Maker, and Aave have over $10 million TVL.


There are four main lending strategies available on the crypto market.



Peer-to-peer lending


On peer-to-peer (P2P) lending platforms, users can set their terms, the amount they want to lend, and their own interests. After that, the platform matches lenders with borrowers, just like P2P trading platforms do with crypto buyers and sellers. P2P may ask lenders and borrowers to send funds to a custodial wallet beforehand. Such a way for crypto lending provides users with a certain degree of control.


Decentralized Lending


With decentralized lending protocols, users can directly execute lending services on the blockchain. There are no intermediaries involved in the lending process. Lenders and borrows usually interact with smart contracts which autonomously set interest rates, monitor the lending process, and execute lending operations.


Centralized lending


Users solely rely on the infrastructure of a specific third party to lend and borrow funds. Interest rates are usually fixed and have lock-up periods. To start using such platforms, users need to transfer funds and choose their roles for operation.


Margin lending


Platforms that support margin lending allow users to lend their funds to traders who are interested in using leverage. These traders use borrowed funds for opening positions and repay the loans with interest.



Yield farming


Decentralized Finance offers one more method of earning passive income which is called yield farming. Yield farming is related to another concept in DeFi: decentralized exchanges. Decentralized exchanges allow users to trade cryptocurrencies without intermediaries and rely on the combination of smart contracts. But such platforms need liquidity to execute trades between users. To become a yield farmer, you, first need to become a liquidity provider and transfer your funds into special smart contracts known as liquidity pools. For being a liquidity provider, you will receive a proportional amount of trading fees from the pool.


If you want to start earning these fees, you need to send two or more digital assets into a liquidity pool. For example, you have to deposit both MATIC and USDT if you want to provide liquidity to a MATIC/USDT pool. You also need to select a decentralized exchange where you want to be a liquidity provider. Some of the most popular ones are Uniswap and PancakeSwap.


These are only a few opportunities to get extra profit with your digital assets. You can also find interest-bearing digital asset accounts, dividend-earning tokens, and many other options to benefit from crypto. But note that ways to generate passive income are not risk-free. It means users should do their own research to determine what suits most their investment goals and risk management strategy.



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