May 25, 2021
5 min read
This story originally appeared on ValueWalk
Steve Fisher, author of Residual millionaire, defines passive income as money “that comes in every month, whether you show up or not.” It is when you are no longer paid just for your personal efforts, but instead for the efforts of hundreds, if not thousands, of others, and for the efforts of your money. This is one of the keys to financial freedom and the freedom of time. “
The idea of passive income is not new. Before the cryptocurrency industry took the frenzy, people were already earning traditional passive income streams such as affiliate marketing, equity investing, dropshipping, Amazon FBA, and more. In the cryptocurrency space, sources of passive income typically come in the form of mining, staking, masternode hosting and more recently. yield agriculture and liquidity extraction.
After the advent of Bitcoin, mining became the primary way to earn passive income from cryptocurrencies. Crypto mining is essentially the use of computing power to secure a network and confirm transactions in exchange for a reward. Compared to its early days where Bitcoin could be mined using central processing units (CPUs), an increase in hash rate pushed miners from graphics processing units (GPUs) to application-specific integrated circuits. (ASIC).
While Bitcoin mining is still profitable, the space is now dominated by companies with significant resources. In March 2021, Bitcoin miners generated more than $ 1.5 billion profit, with mining revenues reaching a daily high of more than $ 52 million.
Away from Bitcoin mining is staking, which is a less resource-intensive alternative to mining. This often involves locking funds into a wallet and performing certain functions to earn rewards. Prior to Ethereum’s transition to a Proof-of-Stake network, its Beacon Staking Contract currently leads the pack as the largest PoS cryptocurrency by market cap. More … than 4.5 million ETH was also wagered on the contract. At current market prices, that’s about $ 18 billion.
More recently, the market has shifted away from mining and staking into yield farming and lending. This change was fueled by the DeFi 2020 boom.
Overall, the basic premise remains the same: make your cryptocurrencies work even while you sleep.
How sustainable are passive income blockchains?
Proof-of-Stake blockchains are arguably the hallmark of passive income in the crypto space. But they also tell how the model can become unsustainable. Platforms that offer high rewards have no trouble attracting new users who want to double or even triple their investments in a short period of time. However, it is difficult to understand how these networks can remain profitable for long.
As the circulating supply of these projects begins to increase, each other’s holdings are rapidly diluted as most of these projects do not offer additional functionality beyond staking. Assuming the primary use case of a staking blockchain is staking, it remains to question the other utilities that these chains provide.
The bottom line is that blockchains that offer passive income in the form of staking or mining must offer additional products and services to remain profitable, relevant, and sustainable.
Passive income (PSI) is one of the few blockchain projects to have achieved this inherent challenge. Blockchain introduces an exciting concept to the passive income niche. On the one hand, PSI promotes the sustainability of passive income through several economic activities. It uses tokenization to improve the generation of return into decentralized financial passive income. At the heart of its solution, PSI wants to improve existing passive income models, making them more affordable and adaptable to everyone.
Another project that is central to passive income in the cryptocurrency space is Uniswap. Uniswap is a decentralized exchange (DEX) that allows users to exchange one ERC-20 token for another directly from a web3 wallet. The main difference between a DEX like Uniswap and other centralized exchanges like Binance is that swaps are facilitated by liquidity providers. Simply put, an individual can use their unused funds and generate passive income by becoming a liquidity provider on Uniswap.
While there are several other blockchain projects that have stood out in the passive income niche, Yearn Finance is another worthy mention. The Yield Aggregator and DeFi Ecosystem maximize returns for users of the platform. The cool thing about Yearn Finance is that it allows users to select the DeFi protocol that offers the highest Annual Percentage Return (APY) based on their tolerance for risk. Users can earn Yearn and Curve loan fees through the yPool feature.
Passive income blockchains are still alive and well
Passive income in the cryptocurrency space is like a hydra. If one stops, there are several more to replace it. So in reality the niche may never go out of fashion.
Take blockchain staking for example, the total market cap of all PoS coins is currently around $ 12.6 billion. Of that figure, about $ 8 billion is locked away in staking wallets. This confirms the fact that many crypto users are still actively staking. But if one of these projects becomes unsustainable and shuts down, you can be sure that there will be ten more to take their place and deliver similar or better promises.
The real solution
The real problem is not with staking or any other passive income model. The problem lies in relying solely on a single stream of income. That being said, a project built around transaction fees with no add-ons economic activity is doomed to failure.
Passive income blockchains must go beyond transaction fees and the concept of hold-to-earn. Their first steps should be to “build”. And that means having a minimum viable product, a strong community, progressive partnerships, and a diverse ecosystem of network participants.