Updated: Sep 30, 2021
Earning passive income has never been easier with cryptocurrency. Want to put your crypto to work? I'll walk you through the three easiest ways you can get started today.
Becoming a Liquidity Provider
Staking is by far the simplest way to earn passive income using the crypto assets you already own. Think of staking like depositing money into your bank to earn interest. The only difference is that you deposit crypto instead of whatever currency your local bank accepts. Staking pays you interest because your deposit helps secure the blockchain of whichever cryptocurrency you select. This is achievable through a mechanism called Proof-of-Stake. Only coins that are built using Proof-of-Stake are able to be staked.
Many popular exchanges and wallets support staking. It's pretty typical to see 6% APY or higher across many different cryptocurrencies depending on which exchange you use.
These are a few popular places for staking:
Being a liquidity provider (LP) is my favorite way to earn passive income in crypto. From a high level, providing liquidity works as follows:
Deposit a cryptocurrency (add liquidity) into a decentralized exchange (DEX)
In return for adding liquidity, you will receive a "pool token"
The "pool" being referred to is the collective liquidity that all LP's are currently providing for the selected coin
Pool tokens automatically earn fees proportional to your share of the pool
These pool tokens can be redeemed at any time
Typically when providing liquidity you will need to deposit 2 tokens. The first token is the base-currency of the DEX. For example, ETH is the base-currency of DEXs like Uniswap or Sushiswap while BNB is the base-currency of PancakeSwap. The second currency you provide is the pool you want to join. This can be any other coin available on the DEX.
A strategy when deciding which pool to join is to look for one that has (or will have) high volume. Pools with higher volume generate more fees for you to earn from. Another strategy is to become a big fish in a small sea by adding liquidity to a lower-cap crypto that you think will see price appreciation. Although this strategy comes with additional risks to consider, it gives you exposure to greater potential gains from being a LP.
Big shoutout to the blue collar workers of crypto. Yield farming is very similar to staking however the incentives are different.
Let's use the yield farming protocol, Compound, as an example. On Compound users are able to earn rewards from staking stablecoins like USDT, USDC, and DAI. The difference between yield farming and staking is that yield farmers are not paid interest in the form of the currency they deposit. In this case, users would earn Compound's COMP token as payment for staking their USDT.
Yield farming provides a unique opportunity if you're bullish on the token that is rewarded. I don't recommend yield farming unless you have a significant amount of money that you can use to farm with. There are also more complex concepts like impermanent loss that you need to be aware of, so unless you are a veteran I'd stick with the first two options before tackling yield farming.