As blockchain technology has evolved over the years, it has created multiple avenues for investors to generate passive income. Nowadays, you don’t have to spend hours analyzing and tracking token performance to make money in the crypto market. Instead, you can simply earn rewards for your existing holdings.
The three most popular ways to do this are staking, yield farming, and liquidity mining. If all of these terms sound strange to you, we’re here to let you know. Join us as we describe these income streams and explain how they differ. Let’s go!
yield farming
It’s like putting money into a bank account to earn interest over time. However, instead of depositing funds with 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 for its lucrative returns (up to 100 percent annual yield (APY)). However, it is also risky. The prospect of handsome returns is complemented by smart contract risks and the possibility of temporary losses. In some cases, the platform could also face liquidation; The recent collapse of lending platforms underscores 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 unrealized losses an investor may incur if the price of their tokens falls while locked in a smart contract. It is called fickle because the losses can be neutralized if prices rise again.
Liquidity Mining
Liquidity mining requires you to deposit a specific combination of assets into a liquidity pool. This combination is called a trading pair. It consists of two assets that are commonly traded against each other, such as: B.ETH/USDT. Depositing your tokens helps the protocol with liquidity and enables crypto trading.
Every time a user exchanges these tokens, the platform charges a trading fee, and part of that fee is passed on to you. The amount of your bonus depends on the amount you put into the liquidity pool. Some platforms may have slightly different implementations. However, the basic idea behind liquidity mining remains the same. Like yield farming, liquidity mining risks also include volatile loss and smart contract risks.
Mark out
Staking allows blockchains to select honest participants for the transaction verification and block addition process. Users wishing to participate in this process must first pledge a certain amount of cryptocurrency to the blockchain.
This ensures they are working for the benefit of the network as they risk losing their staked cryptos in the event of downtime or unscrupulous behavior.
In return for their engagement, 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 more secure as the only risks you face are network errors and token confiscation in case of false validation.
Now you have a basic understanding of how these passive income streams work. However, before you dip your toes into yield farming, liquidity mining, or staking, it’s important to do your own research as well. There are several different platforms that offer these services, and each of them has its own little intricacies. Therefore, one must fully understand how things work on different protocols before putting their tokens on the line.
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