In the context of cryptocurrencies, passive income refers to the ability to earn a consistent stream of income from crypto assets without the need for constant market participation. Passive income can be generated through various strategies, such as staking, yield farming, lending, providing liquidity on decentralized exchanges (DEXs), and many others. Each of these methods offers unique opportunities but also comes with associated risks.
Mining is one of the ways to earn passive income in crypto. It involves using computational resources to solve complex mathematical problems, thereby securing the network and validating transactions. For this work, miners are rewarded with new coins and transaction fees. However, the high initial setup costs and electricity expenses can act as significant entry barriers into mining.
Staking offers an alternative to mining where investors lock up their holdings to secure the network. In return, they receive new coins as rewards. This process is integral to Proof of Stake (PoS) blockchains. The rewards depend on the staked amount and the duration of the investment.
Yield farming and crypto lending are popular passive income methods in decentralized finance (DeFi). Yield farming involves lending your crypto to a DeFi protocol in exchange for fees or other tokens. This can be highly profitable but also comes with risks, such as impermanent loss. Crypto lending lets you earn interest by lending your tokens to others through a platform, which manages the loan and repayment processes. One of the risks is the borrower's potential inability to repay the loan.
Providing liquidity to a DEX is a way of depositing pairs of tokens into liquidity pools, facilitating trading against that liquidity. In return, you receive a portion of the trading fees. The revenue you earn depends on the platform’s trading activity and revenue share model.
Learn more: A Beginner's Guide to Earning Passive Income With Crypto.
