Staking, lending, and providing liquidity are three ways people can earn passive income from cryptocurrencies. Staking involves holding cryptocurrency in a wallet or smart contract for an extended period in exchange for interest, rewards, or similar returns. Proof of stake is a way some cryptocurrency ecosystems validate their blocks on their particular blockchain network. Lending cryptocurrencies to earn interest from exchanges like Gemini and Binance come with risks as lack of regulations in the crypto industry allows them to lend out crypto without limit on how many times the same crypto can be lent out. Providing liquidity involves supplying assets to a liquidity pool and earning a portion of transaction fees.
What is Staking in Cryptocurrency?
Staking is a way to passively earn rewards, interest, or fees in exchange for holding cryptocurrency in a wallet or smart contract for an extended period of time. Proof of Stake is a way some cryptocurrency ecosystems validate their blocks on their particular blockchain network. Validators put a certain amount of their own cryptocurrency at stake as collateral.
How does Staking work?
The Proof of Stake algorithm selects validators to validate the next block by considering the amount of cryptocurrency the validator has staked on the network and the amount of time the cryptocurrency has been staked. Validators earn rewards for verifying the block and are penalized if they propose a fraudulent transaction.
Risks Associated with Staking
Investors can stake their cryptocurrency directly or use third-party staking services provided by exchanges and platforms. Direct staking is complicated, risky, and may lead to losing funds from user error and long lockup periods. Third-party staking may freeze accounts, limit withdrawals, and fail to have sufficient financial backing in the event of a mass run.
What is Yield Farming?
Yield farming is a way to passively earn rewards by lending out cryptocurrency to others who borrow it. Although it may seem like a great way to earn passive income, it comes with a ton of risk due to lack of regulations of cryptocurrency industries.
Risks Associated with Yield Farming
Exchanges and other crypto service platforms can lend out cryptocurrency without any limit on how many times the same cryptocurrency can be lent out. Investors who lend out their cryptocurrency lose ownership and control of it. Lack of rules and regulations may expose investors to potential insolvent events.
Staking and yield farming are interesting new ways investors can earn passive income, but they come with risks due to lack of regulations and rules. Investing a lot or potentially any crypto at stake and at risk for passive rewards may not be a good idea. Investors should wait until there is more transparency about underlying assets and regulations to protect them from potential insolvency events.