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Academy Beginners Tutorial Article
Bitcoin DeFi Liquidity mining Crypto mining

Guide to earning passive income with crypto: Mining, staking, liquidity mining and lending

2021.07.03 Matthew Lam

An introduction to ways you can earn passive income in the cryptocurrency market

Since Bitcoin’s inception in 2008, cryptocurrencies have emerged as an alternative asset class with trillions of dollars in market capitalization. With their unprecedented growth and improving fundamentals, crypto assets have continued to present new and attractive opportunities to market participants.

In earlier years, for instance, most investors only profited from proof-of-work mining and the price appreciation of digital currencies. Then came along the initial coin offering boom followed by a shift toward proof-of-stake consensus mechanisms and the ability to “stake” assets to earn rewards. However, in the last couple of years, we’ve seen the meteoric rise of the decentralized finance ecosystem, which has, to a large extent, changed the crypto landscape in terms of the potential to earn passive income.

In this article, we go over some of the ways to earn passive income using crypto assets. Before we get started, however, we would like to remind our readers that crypto investments and assets come with unique risks that should be understood and considered beforehand.

How do you earn passive crypto income?

There are, broadly, four types of passive income opportunities in cryptocurrencies: mining, staking, liquidity mining and lending. In this article, we will discuss all four with relevant examples.

Crypto mining

In simplistic terms, decentralized blockchains rely on validators or entities that gather, verify, process and broadcast transactions on the network. These validators are incentivized by block rewards and transaction fees, and in return, they maintain the integrity of the blockchain network.

However, since blockchains advocate trustless transparency, these validators are not chosen by any central authority and are actively discouraged — by consensus mechanisms — from processing transactions in bad faith.

These consensus mechanisms are the core of any blockchain, with the most popular being proof-of-work and proof-of-stake.

Cryptocurrency mining, in general, refers to participation in a proof-of-work network like Bitcoin where validators are required to dedicate computing power to compete against other validators — all of whom, together, ensure that the network cannot be compromised by bad actors.

While the specifics of consensus mechanisms are outside the scope of this article, readers interested in mining crypto need to be aware of the blockchains that support proof-of-work.

Mining proof-of-work cryptocurrencies requires mining machines such as ASICs, or application-specific integrated circuits, which are specifically designed for mining. Users equipped with mining machines choose the appropriate mining pools to start cryptocurrency mining, as solo mining has now become impossibly competitive.

Popular mining pools, such as OKEx Pool, list key information, including the cryptocurrencies that can be mined and stats such as the pool’s hash rate, estimated daily yield, settlement methods and so on.

Miners can use pool calculators to estimate their daily mining revenue. Source: OKEx

To start mining crypto with OKEx Pool, please refer to this step-by-step mining tutorial.

On a side note, proof-of-work cryptocurrencies, particularly Bitcoin, have recently come under a lot of criticism regarding their energy consumption and environmental impact, and we have been witnessing newer cryptocurrencies moving to proof-of-stake mechanisms.

Ethereum, with its upcoming upgrade, will be the most prominent and the largest cryptocurrency by market capitalization to make this transition.

Staking

Just like mining is for proof-of-work blockchains, staking is applicable to proof-of-stake blockchains, where validators earn the right to process transactions by proving that they have a major “stake” in the network.

This is done by depositing tokens into the blockchain’s smart contract and receiving rewards for securing the network by doing so.

Typically, users are eligible to be randomly chosen as validators if they have staked a minimum amount of tokens or coins, specified by the network. In general, users who stake large amounts of coins are more likely to be chosen as validators. 

When validators successfully create a new block, they will receive block rewards as staking rewards. If the protocol identifies any malicious behavior on part of the validators, they automatically lose part of their staked or locked tokens. This process, known as a slashing event, discourages validators from acting in bad faith.

Similar to proof-of-work mining, it has become challenging for solo entities to become validators without owning significantly large amounts of tokens or coins. This has now resulted in users delegating their tokens to set validators, who then distribute rewards to their contributors.

For example, as Ethereum migrates to proof-of-stake, users who stake at least 32 ETH on the network are eligible to become validators. Alternatively, users can stake less than 32 ETH through staking pools and still earn staking rewards. To learn how to stake ETH, check out our step-by-step tutorial.

The calculation of staking rewards varies across blockchains and is dependent on multiple factors — such as inflation rate, the total amount of tokens staked in the network and the validator’s stake.

Typically, there are two rates for staking rewards, one for running a validator node and another for users who delegate their stakes. In order to motivate validators to maintain the security of the blockchain, the reward rate for validators is usually higher. For instance, at the time of writing, running a validator node for the Solana blockchain earns an annual staking reward of 7.47% as opposed to 6.73% earned by delegators.

While staking is typically less complicated than mining, OKEx Earn’s one-stop service for staking makes it even easier. By selecting Staking in the product filter, users gain an overview of available cryptocurrencies with details such as estimated annual percentage yield and terms of staking. For more information on staking crypto via OKEx Earn, please refer to our step-by-step tutorial

Users can subscribe on OKEx Earn for staking rewards. Source: OKEx

Liquidity mining

The rise of decentralized finance has brought novel ways to earn passive income with cryptocurrencies. Some of the most popular applications in the DeFi space are decentralized exchanges and automated market makers that allow users to trade and swap tokens with others without the need for an intermediary or traditional exchange mechanisms.

This is achieved using smart contracts and liquidity pools that combine assets loaned to the protocol by users known as liquidity providers. It is with this liquidity that automated market makers serve their users and, in turn, collect transaction fees that are split between the protocol and the liquidity providers.

Apart from fees, liquidity providers are often incentivized by additional tokens, and this practice of providing liquidity to earn passive income is known as liquidity mining.

Liquidity mining first gained traction when lending protocol Compound launched its governance token, COMP. When users provided liquidity to Compound’s pools, they earned interest as well as additional COMP tokens. After the success of Compound’s liquidity mining, decentralized exchanges and automated market makers followed suit with similar models.

Variations of this model exist across decentralized exchanges and automated market makers, with some requiring users to provide liquidity to pairs that form pools. For instance, in SushiSwap, users contributing liquidity to the WETH/USDT pool need to provide both these assets — in return for which, they receive passive income in two forms:

  1. In the staked currencies, via a percentage of the trading fees
  2. In SUSHI, the governance token of SushiSwap

Apart from decentralized exchanges, you can also use OKEx Earn as an accessible one-stop solution to participate in liquidity mining. By selecting DeFi in the product filter, users can subscribe to liquidity pools on SushiSwap and earn SUSHI tokens directly. For details, please refer to our step-by-step tutorial.

Users can participate in liquidity mining via OKEx Earn. Source: OKEx

Lending

Lending is another avenue to earn passive income in the decentralized finance ecosystem. By lending cryptocurrencies to protocols such as Maker and Compound, users earn varying rates of interest.

There are two markets in decentralized lending protocols: the supply-side (i.e., lending) market and the demand-side (i.e., borrowing) market. When using Compound, for example, users can view assets available for borrowing and lending, along with their corresponding annual rates, or APYs.

An overview of Compound’s borrowing and lending markets. Source: Compound

Borrow APY is the interest rate paid by borrowers and is used to distribute interest to the lenders according to the Supply APY.

Most DeFi lending platforms operate in the same way — and while they are powerful, they do have learning curves, and so users need to familiarize themselves with each protocol’s particulars.

Alternatively, OKEx users can make use of the OKEx Earn platform and earn passive income via the Savings section (accessible via the products filter). With this feature, users can easily select cryptocurrencies they wish to lend in order to start earning interest with flexible terms. For further information, please refer to our step-by-step tutorial on using OKEx Earn for passive income.

In this article, we’ve focused on ways to earn passive income in the crypto space. However, this is not an exhaustive list, and there are numerous other ways available to users of varying skill levels. All these methods. however, are very different from trading, which requires the frequent buying and selling of digital assets to profit from price changes.

If you’re considering trading cryptocurrency, you can join us at OKEx for an industry-leading trading experience. New traders can also receive rewards in BTC and USDT for first deposits, trades and more.


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Disclaimer: This material should not be taken as the basis for making investment decisions, nor be construed as a recommendation to engage in investment transactions. Trading digital assets involve significant risk and can result in the loss of your invested capital. You should ensure that you fully understand the risk involved and take into consideration your level of experience, investment objectives and seek independent financial advice if necessary.

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