STAKING

The Best Way To Earn A Passive Income

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By CNBCTV18.com  IST (Published)

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With the advance of blockchain technology, several avenues have opened up for investors enabling them to earn a passive income. One can earn rewards on their existing holdings by opting for staking, yield farming and liquidity farming. Find out more about these income streams here-

As blockchain technology has progressed over the years, it has created several avenues for investors to earn a passive income. These days, you need not spend hours analysing and tracking the performance of tokens to make money in the crypto market. Instead, you can simply earn rewards on your existing holdings.

The three most popular ways to do this are staking, yield farming and liquidity mining. If all these terms sound alien to you, we’re here to catch you up on them. Tag along as we describe these income streams and explain how they differ. Let’s go!

Yield Farming

This is like putting money in a bank account to earn interest over time. However, instead of depositing funds in a bank, you provide crypto assets to a DeFi lending platform. Other users on the platform can borrow these assets for their trading needs. The platform charges interest on the borrowed tokens and provides you with a portion of this income.

Yield farming is popular because of its lucrative returns (going as high as 100 annual percentage yield (APY)). However, it is also risky. The prospect of handsome returns is complemented by smart contract risks and the possibility of impermanent losses. In some cases, the platform could also face liquidation; the recent meltdown of lending platforms highlights this risk.

Smart contract risks refer to the potential loss of locked assets due to cyber-attacks or technological failure. Impermanent loss refers to the unrealised losses an investor may incur if the price of their tokens falls while locked in a smart contract. It is called impermanent as the losses may be neutralised if prices rise again.

Liquidity Mining

With liquidity mining, you need to deposit a particular combination of assets into a liquidity pool. This combination is known as a trading pair. It consists of two assets frequently traded for each other, such as ETH/USDT. When you deposit your tokens, it helps the protocol with liquidity and allows for crypto trading.

Every time a user swaps these tokens, the platform charges a trading fee, and a portion of this fee is passed on to you. The size of your reward depends on the amount you contribute to the liquidity pool. Some platforms may have slightly different implementations. However, the basic idea behind liquidity mining remains the same. Like yield farming, the risks of liquidity mining also include impermanent loss and smart contract risks.

Staking

Staking allows blockchains to select honest participants for its transaction verification and block addition process. Users who wish to participate in this process must first pledge a certain amount of the blockchain’s cryptocurrency.

This ensures they work for the good of the network, as they risk losing their staked crypto in case of downtime or unscrupulous behaviour.

In exchange for their commitment, validators receive rewards denominated in the blockchain’s native cryptocurrency. These rewards are not as high as yield farming or liquidity mining, but they are generally higher than the interest on a savings account. Also, staking is much safer, as the only risks you face are network bugs and seizure of tokens in case of false validation.

Now you have a basic understanding of how these passive income streams work. However, before dipping your toes into yield farming, liquidity mining or staking, it is important to do your own research as well. There are several different platforms that offer these services and each of them have their own little intricacies. Therefore, one must fully understand how things work on different protocols before putting their tokens on the line.

Traciwininger
Author: Traciwininger

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