If you want to make money successfully on the cryptocurrency market, then you should constantly monitor new trends. All of us know about the possibilities of earning income when trading cryptocurrency. But what about passive earnings? There are many strategies for generating income from cryptocurrencies and today we will look at farming, its pros and cons and differences from staking and landing.
At the moment, farming is the most popular and approved method of passive income. Before farming, there was staking at the peak of popularity, and before at this place was mining.
Mining
Mining (PoW, Proof-of-Work) is the extraction of cryptocurrency due to powerful computer installations. Mining farms generate new blockchain nodes through mathematical calculations, receiving cryptocurrency as a reward.
For mining it is necessary to purchase expensive equipment and find a space to store it. Moreover, miners constantly incur electricity costs, which affects the profitability of crypto mining. (more details: LINK)
The scale of electricity costs during mining has reached incredible proportions.
For example: the same amount of electricity is used for mining as is consumed in the Republic of the Congo or in Argentina or in the Netherlands per year.
Another example: every day, the same amount of energy is spent on mining as 520 thousand Canadians spend. (According to a study by Cambridge University scientists. By the way, the annual energy consumption for Bitcoin is enough to power this university for 688 years).
Due to the high power consumption when mining cryptocurrencies, developers are constantly looking for new ways to earn money from digital money.
One of the oldest ways to get passive income without resorting to mining is landing.
Landing is the provision of your assets for use, on loan. As a rule, it’s used on exchanges. Users provide their funds for use at 10-12%. In their turn, the exchange provides market liquidity and increases its income at the expense of user assets. The advantages of the landing page is the possibility of providing not only cryptocurrencies, but also fiat money.
In 2020-2021, a new type of cryptocurrency earnings came to the peak of its popularity - staking (PoS, Proof-of Stake).
Compared to mining, staking is more environmentally friendly and energy efficient. Users make a profit at the expense of their crypto assets, which ensure the operability of the blockchain. With this method of earning, the cryptocurrency is stored in the Proof-of-Stake algorithm. This method saves holders from the need to purchase expensive equipment and ensure the operation of mining farms. For providing their assets, users receive a profit of up to 36% per annum. Such a high percentage motivates people to hold their assets longer, which has a positive effect on the cryptocurrency exchange rate.
There are two types of steak:
- Starting your own node;
- Delegating coins to validators.
In the first case, the user must have a certain set of technical knowledge and have an impressive amount for investment. However, other users can connect to its node, which will significantly increase profit. For the second option, it is enough to deposit a certain amount to the wallet and delegate assets to the network validators. In this case, you will need to pay a fee from the earnings, and the profit will be credited automatically.
Is staking analogous to storing money in a bank? Is it perhaps easier to put them as a deposit in a safe deposit box?
Before taking your money to the bank, you need to read its terms and conditions carefully. And at the same time, you should be well aware of the level of inflation in the country. Let's give an example of Russia.
The highest percentage of deposits was in 2002, and amounted to 12.8% per annum. But the percentage of inflation that year was about 15%. At the same time, as a rule, there is a certain "entry threshold” and a time for which you cannot take your money back. Is it profitable?
You can start staking with any amount of money, and the interest rate is higher than in banks.
Advantages of staking:
- No entry threshold
- No KYC/AML system
- A wide selection of coins and conditions
- No taxation
Disadvantages of staking:
- The income for staking is changeable
- Selection of the validator
- Unstake-period
- There is no deposit insurance
Now, farming has replaced staking
Farming is a relatively new type of passive income generation that came from DeFi. The farming process is a mixture of landing and staking.
In this type of earnings, users act as liquidity providers. However, farming differs from lending in that it provides a currency pair to the liquidity pool at once. Earnings are accrued at the expense of spreads and exchange commissions.
As with staking, the percentage of profit depends on the volume of the liquidity pool and the number of participants. At the very beginning, the profitability of farming could exceed 100% per year. However, now the profitability of farming is calculated through the Annual percentage rate (APR) and annual percentage yield (APY). Thanks to the correct calculations and selected strategies, the profit of the holders can reach as much as 50%.
However, the DeFi system is still extremely young and poorly understood. Before starting farming the users must have a good knowledge of cryptocurrency technology and a well-developed strategy for making a profit and minimizing risks.Therefore, this type of earnings isn’t recommended for beginners of the cryptosphere.
Risks when working with pharming:
1. High probability of an error in the smart-contract.
Even if the project is from conscientious developers, there is a possibility of vulnerability detection by scammers, which can lead to irretrievable loss of assets.
2. High market volatility. Income changes every minute.
Therefore, in order not to lose savings, the holder must always keep his finger on the pulse. To reduce risks, it is advised to add a stable coin to the pair, which will reduce income, but also minimize risks.
