How to generate passive income with cryptocurrencies?

It is possible to earn passive income with cryptocurrencies through 4 main alternatives:

  1. staking
  2. lending
  3. farming
  4. tokenized assets

Next, we’ll show you how each one works and how to start earning passive income with cryptos.

But first, we need to remember that this content is not a recommendation for investments or platforms. We only present the options available in the market to assist you in the search for information.

For your safety and strategy, before investing your money in any platform, remember to analyze your investor profile and carry out your own analysis and research. Now, let’s go:

1. Passive income with cryptocurrency staking

Staking means keeping funds stored in the cryptocurrency wallet to help with the security and functioning of a Blockchain that uses the Proof of Stake mechanism to validate transactions.

In exchange for leaving your cryptocurrencies locked in that protocol, you receive rewards like passive income. Thus, Blockchains can encourage users to hold cryptocurrencies instead of selling them.

Therefore, this is a fundamental process for the integrity of a Blockchain and for promoting direct community participation in a decentralized network.

How is staking profitability calculated?

The rules for calculating staking rewards will vary from Blockchain to Blockchain.

But overall, how much you can get paid for your participation will depend on how many coins you stake and how long you keep them locked.

That is, the more coins you put into a protocol, the more chances you have to be rewarded and the more passive income you will receive.

The total amount staking on the network and the rate of inflation and issuance of new coins also influence this calculation.

How to stake cryptocurrencies?

Staking can be done in the following ways:

Run your own node

This is the way to have more autonomy and control of your own staking, but it is also the way that demands more resources and technical knowledge. To operate as a transaction validator, you will need a compatible computer to connect to the network and studies on the protocol you choose.

Staking through intermediaries

Staking is possible through third parties, such as exchanges and digital wallets . This option does not work with own custody, but it brings more convenience.

In this case, these platforms act as intermediaries. Therefore, you can start with smaller stakes and do not need such advanced technical knowledge. A fee is charged for providing this service.

staking pools

Staking pools are a way to bring together people who don’t have enough tokens to run a validator node by themselves.

Thus, pools act as an environment where several people can connect to pool resources, until reaching the amount required by a Blockchain protocol to lock in staking.

Pool participants lock their tokens together and the rewards will be proportional to each person’s participation in the pool, according to the amount each person contributed.

2. Lending: loans with cryptocurrencies

Lending can be understood as a cryptocurrency lending process. It is very similar to lending models to generate passive income in the traditional way, however, with cryptos.

In this sense, you lend your cryptocurrencies to some liquidity platform, such as exchanges and decentralized protocols, and receive interest for it.

With the technology of decentralized finance, the entire process is done in an automated and secure way through smart contracts that run on the Blockchain.

All the rules involved in the transaction, such as interest and collateral, are previously defined and put into practice by smart contracts, without the need for intermediaries such as banks.

How to do lending?

One cannot ignore the risk of a very sharp fluctuation in prices in the market, causing the loan for which you provide liquidity to become unbalanced, generating capital loss.

Therefore, it is recommended to look for platforms that offer greater liquidity to mitigate this risk.

You find both centralized and decentralized options. Among the decentralized ones, the AAVE and Yearn Finance protocols are one of the largest and best known.

3. Passive income with farming

This process allows investors to deposit and lock their cryptocurrencies in a protocol acting as liquidity providers for that system. In return, investors are rewarded financially.

How to farm?

The farming process is usually done through a decentralized exchange, called DEX.

A DEX serves the same purpose as a centralized exchange: connecting people interested in buying and selling cryptocurrencies. The big difference is that, in DEX, it is the users themselves who provide liquidity so that transactions can take place.

It works as follows:

Suppose Alice wants to exchange her A cryptocurrencies for B cryptocurrencies. Meanwhile, Bob has B cryptocurrencies and wants to exchange them for A cryptocurrencies.

For this exchange to take place, the decentralized exchange uses a liquidity pool formed by investors.

These liquidity pools function as a large crypto asset fund, which is fueled by users depositing cryptocurrency pairs, in equal proportions of value.

Thus, by depositing your cryptocurrencies in the liquidity pool of a DEX, you help to maintain the exchange’s liquidity, after all, you are helping that DEX to be able to meet its own demand.

How is the profitability of farming calculated?

The calculation of earnings from farming is usually annual and can happen in two main ways: APR or APY. Both formulas are the same used by the traditional market:

  • APR (Annual Percentage Rate): formula based on a simple interest calculation.
  • APY (Annual Percentage Yield): formula that considers compound interest, which is basically directly reinvesting the profits obtained, with the intention of generating even more profits.

It is worth remembering that these formulas work as estimates and therefore the result may not be as assertive, and it is also necessary to consider the greater volatility of the crypto market compared to the traditional one.

Therefore, it takes experience and study of the cryptocurrency market to deal with all the dynamics and acceleration that farming involves and the risks that this entails.

4. Investing in tokenized assets as passive income

Tokenized assets are the digital representation of real-world assets, rights or financial products, including products that generate passive income.

The tokenization of assets is done by registering these real assets on the Blockchain. By gaining a virtual representation, these assets can be bought and sold digitally, much more easily and conveniently than would be done in the traditional way.

In addition, the initial investment cost also becomes lower, since a tokenized asset can be traded either in its entirety or have its ownership fractioned and digitally distributed in smaller parts, such as shares.

Some examples of financial products capable of generating passive income that can be tokenized are musical royalties and precatorios.