5 min read Steve Fisher, the author of Residual Millionaire, defines passive income as money “that comes in every month whether you show up or not. It’s when you no longer get paid for your personal efforts alone, but rather, get paid for the efforts of hundreds or even thousands of others and on the efforts of your money. It’s one of the keys to financial freedom and freedom of time.”
Q1 2021 hedge fund letters, conferences and more
The idea of passive income is not new. Before the cryptocurrency industry caught the frenzy, people were already earning from traditional passive income streams such as affiliate marketing, stock investments, dropshipping, Amazon FBA, and lots more. In the cryptocurrency space, passive income sources typically present themselves in the form of mining, staking, hosting masternodes, and more recently yield farming and liquidity mining.
Following the advent of Bitcoin, mining became the earliest way to earn passive income from cryptocurrencies. Crypto mining essentially entails using computational power to secure a network and confirm transactions in exchange for a reward. Compared to its early days when Bitcoin could be mined using central processing units (CPUs), an increase in hash rate has pushed miners from graphics processing units (GPUs) to Application-Specific Integrated Circuits (ASICs).
Although Bitcoin mining is still profitable, the space is now dominated by corporations with significant resources. In March 2021, Bitcoin miners generated more than $1.5 billion in profits, with mining revenue surging to a daily high of over $52 million.
Away from Bitcoin mining, there is staking, which is a less resource-intensive alternative to mining. It often involves locking funds in a wallet and performing some certain functions to earn rewards. Ahead of Ethereum’s transition to a Proof-of-Stake network, its Beacon staking contract is currently leading the pack as the largest PoS cryptocurrency by market capitalization. More than 4.5 million ETH has also been staked on the contract. At current market prices, this is about $18 billion.
In more recent times, the market has moved away from mining and staking to yield farming and lending. This shift was fueled by the 2020 DeFi boom.
Overall, the basic principle remains the same – make your cryptocurrencies work even while you sleep.
Proof-of-Stake blockchains are arguably the hallmark of passive income in the crypto space. But they also tell a tale of how unsustainable the model can become. Platforms that offer high staking rewards have no trouble attracting new users who are eager to double or even triple their investments within a short period. However, it is hard to fathom how these networks can stay profitable for long.
As the circulating supply of these projects begins to increase, everyone’s holdings quickly become diluted since most of these projects do not offer extra functionality beyond staking. Assuming the primary use case of a staking blockchain is staking, one is left to question the other utilities that these chains provide.
The bottom line is that blockchains that offer passive income either in the form of staking or mining need to offer extra products and services to stay profitable, relevant, and sustainable.
Passive Income (PSI) is one of the few blockchain projects that have come to realize this inherent challenge. The blockchain is introducing an exciting concept to the passive income niche. For one, PSI drives sustainability in passive income through several economic activities. It uses tokenization to upgrade yield generation to decentralized financial passive income. At the core of its solution, PSI wants to improve on existing passive income models, making them more affordable and adaptable to everyone.
Another project that is at the center stage of passive income in the cryptocurrency space is Uniswap. Uniswap is a decentralized exchange (DEX) that allows users to swap one ERC-20 token for another directly from a web3 wallet. The key difference between a DEX like Uniswap and other centralized exchanges such as Binance is that the swaps are facilitated by liquidity providers. Simply put, an individual can put his idle funds to use and generate passive income by becoming a liquidity provider on Uniswap.
Although there are several other blockchain projects that have distinguished themselves in the passive income niche, Yearn Finance is another worthy mention. The yield aggregator and DeFi ecosystem maximizes yields for users of the platform. The interesting thing about Yearn Finance is that it allows users to select the DeFi protocol offering the highest annual percentage yield (APY) based on their risk tolerance. Users can earn lending fees from both Yearn and Curve through the yPool feature.
Passive income in the cryptocurrency space is like a hydra. If one shuts down, there are several others to take its place. So, in reality, the niche may never go out of style.
Take staking blockchains, for instance, the total market cap of all PoS coins currently stands at around $12.6 billion. About $8 billion out of this figure is locked up in staking wallets. This confirms the fact that a lot of crypto users are still actively staking. But should any of these projects become unsustainable and close shop, you can be certain that there will be ten more to take their place and offer similar or better promises.
The real problem is not in staking or any other passive income models. The problem lies in the sole reliance on a single income stream. That being said, a project built around transaction fees with no complementing economic activity is bound to fail.
Passive income blockchains need to look beyond transactional fees and the holding-to-earn concept. Their first steps should be to “build.” And this means having a minimum viable product, a strong community, progressive partnerships, and a diverse ecosystem of network participants.