Crypto passive income solutions
By Rafał - 2019-07-31
With the enthusiasm around cryptocurrencies and the new financial possibilities associated with it, many users and investors have made the choice to move towards new investments solutions offered by the blockchain technology for either active or passive income.
Proof of Work
The Proof-of-Work, or PoW, is the original consensus algorithm in a Blockchain network. This type of algorithm is used to confirm transactions and produce new blocks to the chain. With PoW, miners compete against each other to complete transactions on the network and get rewarded. The principal characteristic of this method is that it needs big amounts of electricity. Each transaction in blockchain must be verified by several nodes with the more verification the safer a transaction is. It has brought a lot of questioning toward the long term possibilities and the drawbacks of POW.
The advantages associated with POW are really dependant on the coin mined, the equipment used, and the profitability with it. Some miners realized a lot of profit by mining Bitcoin in the early days where the competition was rare and where the electricity cost was low. Today, it has become extremely expensive to mine alone and benefit from it (for the well known currencies) . Rigs constructors have been, since few years, always trying to build or create more powerful and complex systems to mine crypto currencies, always increasing the electricity bill with these machines.
This has brought two important and concerning drawbacks with the evolution of POW systems.
- Possible Centralization: To continue to obtain a constant profitability, the miners grouped themselves into a mining pool (group of miners).Over time; some of these pools have become too large in the number of validated transactions and present a risk for the entire POW solutions.
- The 51% attacks: If a pool or an entity manages to hold 51% of the total computing power of the network then it is able to falsify and alterate the blockchain and even practice double spending. For example the cryptocurrency Verge has made the painful experience in 2018. If you want to learn and understand how this type of attack works , you can visit : https://www.investopedia.com/terms/1/51-attack.asp
Acquisition of a mining rig to mine a specific coin directly. The owner will have to carefully pick the coins to benefit from it and sell later on to cover the expenses related to the rig purchase. This solution is a long-term pick and allows the users is a long term pick and allows users to learn technical skills related to crypto mining and generate a passive income directly from its operations.
Rig Renting: If a user wishes to avoid purchasing a complex system to mine , it is still possible to rent hashing power directly using a third party site. MiningRigRentals and NiceHash are two important key players in this field. In that way, both new miners and rig owners can benefit from POW coins as a solid long-term investment. The owners can even put its equipment on these sites and generate a passive income when users rent it.
Proof of Stake
The Proof-of-Stake, or PoS will make the consensus mechanism completely virtual. While the overall process remains the same as proof of work (POW), the method of reaching the end goal is entirely different. PoS happens by a “miner” putting up a stake, or locking up an amount of their coins, to verify a block of transactions. The cryptographic calculations in PoS are much simpler for computers to solve: you only need to prove you own a certain percentage of all coins available in a given currency. For example, if you somehow owned 2% of a specific coin , you’d be able to mine 2% of all transactions across this same network. In POS, instead of miners, there are validators. When the block gets added, the validators get a block reward in proportion to their stake. To stake you must have your coins locked somewhere in a contract or just simply keep it in the wallet, depending on the currency you have. You can’t sell it or move it, because if you do, you’re not able to verify the blocks hence no reason to reward you.
The POS solutions were created to address the issues with POW systems regarding energy consumption and mitigate the risks associated. PoS algorithm makes attacking the chain really devastating for attacker, because if he can land a successful 51 attack, that means he has more than 51% of all coins, and if something happens with this chain, his own coins will lose its value.
- A high energy gain
- Decentralization of mining pools.
- Attacks 51% (own the majority of the network) are much more expensive and even almost impossible to realize without the attacker losing everything.
- It is easier to "forge" new blocks for the network as there is no need to invest in advanced and complex computer hardware
- The simplicity of the system could lead to a "Nothing at stake" attack that could be translated as "Nothing to lose".
- It is no longer necessary to spend energy to undermine a block, a malicious person could "easily" hijack the network and rewrite his own blockchain.
- In some investor’s mind, the cost to forge these cryptocurrencies being very low, they tend to have no value at all on the market.
- Staking alone directly on a personal wallet left open 24h/24h to receive reward continuously every day. This solution has been improved by now with the new Delegated Proof of stake systems. The Dpos solve the issues related to leaving the wallet opened all the time. With DPOS , a specific number of delegates is defined and share all the rewards between the voters and supports on a daily basis.
- Staking Pool: In the same way as miners group themselves to benefit from an increased hashing power , stakers are also able to join a staking pool ( offered by some projects or third party sites) to increase their rewards.
A Masternode, or a MN is simply a cryptocurrency full node or computer wallet that keeps the full copy of the blockchain in real-time and always up & running. However masternodes are considerably different in their functionality than normal nodes because they perform several other functions apart from just keeping the full blockchain and relaying blocks/transactions as a full node does. These nodes increase the privacy of transactions, allow instant transactions , grant access to participation in governance and voting and enable budgeting and treasury systems. These masternodes are not standalone but they are always communicating with other such nodes to make a decentralized network. Just like full nodes in a cryptocurrency, masternodes can be run by anyone but still have some requirements.
- Receive a portion of rewards directly for being a masternode owner and participating in the network. The passive income is related to the number of existing MN. More MN means less rewards but also a better overall security.
- Access to governance system with votes on proposal. MN owners are completely part of the ecosystem and can chose the path a specific project should take.
- In addition, masternodes receive transaction fees each time a user uses a service such as InstantSend or PrivateSend
- Requires technical knowledge to setup one.
- The collateral amount is locked and cannot be used to be spent elsewhere.
- Some Masternodes can be costly to setup depending on the coin’s price, sometimes greater than $10,000 with high collateral (even $100,000+ with DASH).
- Full node setup with X coins as collateral: Can be setup using a local infrastructure or through a VPS provider (Like Vultr or DigitalOcean). You have control over your holdings and generate daily income.
- In case investors cannot afford a full node, some third party site offers the possibility to join a Shared Masternode service. You just have to own a specific % of a coin’s masternode and you’ll receive the exact same % compared to the daily income of a full MN. The only drawback with this solution is the centralization associated to send your holdings to the MN manager.
Some entities have brought banking solutions on the blockchain. The main advantage of these solutions is to offer a better interest rate that what could be offered in the traditional banking system. Nexo is one of the first to take the lead in that sphere offering several crypto solutions and passive income for their customers. Nexo is a financial institution and currently generates operating revenues from interest on its Instant Crypto Credit Lines™. At the same time, in order to develop its strategy, expand its service range and manage its day-to-day agenda, Nexo incurs expenses related to sales, general operations, marketing and administration and pays corporate tax, etc.
- High interest rates on Nexo tokens and stable coins ( 8%)
- Switching from traditional banking to blockchain with a completely secured solution
- The rewards are proportional to holdings
- Centralized Management
- The interest solution isn’t available for every currency and only applies for Nexo’s own token and stable coins such a USDT, TUSD etc.
Additional NEXO Income
- Base Dividend is paid out to all eligible token holders proportionally to their NEXO Token holdings;
- Loyalty Dividend is paid out individually for each NEXO Token based on how long it has been in the Nexo Wallet from one ex-dividend date to the next. The share of the Loyalty Dividend will be no less than 1/3 of the total dividend amount to be distributed in any given period.
Crypto-Exchanges profit sharing
The crypto sphere has seen a global increase in the number of existing exchanges to actively trade cryptocurrencies. To bring confidence and advantages, numerous well known crypto exchanges brought a dividend/profit sharing system on the table. In this case, we will take Kucoin as example (but Coss is also one which offers an outstanding solution for their customers). KuCoin is an international cryptocurrency exchange based out of Hong Kong that currently supports the trading of 210 digital assets. What’s unique about KuCoin is that they share 50% of their overall trading fee revenue with users holding their exchange-based token. In a similar fashion to Binance, KuCoin offers relatively low tradings fees and incentives for holding (or trading) its native cryptocurrency.
- Incentives bonus: KCS holders receive daily cryptocurrency dividends and the rewards are proportional to holdings
- Exclusive KCS holder rights: Higher ranking KCS users will receive one-on-one consultative services for investment strategies and expedited customer service
- Low fee structure: Same low 0.1% trading fee as Binance (Bittrex charges 0.25%), a trading discount for KCS holders and low withdrawal fees.
- Centralized Management and Exchange ( Might become fully decentralized in the future)
- Rewards are really dependant on the exchange daily volume and activity
- KuCoin Shares (KCS) are the native currency of the KuCoin exchange platform that allows holders to profit from the success of the exchange. KuCoin takes into account the amount of KCS users hold when distributing the various coins. The more KCS you hold, the more dividends you’ll receive. The dividends can be varied in terms of volume but also in type of coins.
- Daily payout at 0:00 (UTC+8) after the accounting team evaluates the trading fees from each trading pair on the platform.
- Discount on trading fees and future services on the platform.