Comparing Passive Income Opportunities in Cryptoassets
Cryptocurrencies represent one of the most exciting investment opportunities at present. Indeed — few long-term investments in the 21st century have been as lucrative. Secondary opportunities have also emerged from the market in the form of passive income: rewards for owning currencies, staking them or providing services on their network. Passive income currencies present an opportunity to capitalize not only upon price speculation, but also on reliable, steady streams of income. If approached strategically they can also provide compounded returns, some with compounding frequencies far higher than one would see in more traditional finance models. Here we will look at four strategies available for passive income in cryptoassets currently, their rates of return on investment and their barriers to entry.
Some of the most lucrative types of passive income are masternodes. These can be proof-of-work or proof-of-stake coins, but the concept remains the same. Masternodes perform tasks which aid the overall network — such as processing instant transactions, adding to the network’s security and so on. As a reward, those who maintain these masternodes are rewarded with passive income. The downside to this option is the considerable investment need to establish such a node and the need for infrastructure and knowledge to keep it running. One must own a set amount of the currency in question to gain this status — depending on the token this can cost hundreds of thousands of dollars, and the node must be running constantly. This can be done with an always-connected computer, or increasingly commonly through cloud servers like Amazon’s Web Service. At present there is a limited selection of established currencies with masternode integration, but this is expected to increase as time goes on. One other factor to consider with any masternode is the benefit/risk ratio of its return on investment. Masternodes with projected ROIs in the thousands of percents per annum regularly crash due to hyperinflation, so more modest, sustainable ROI models are usually wiser investments.
There are currencies which will pay dividends without the need to stake, or establish a masternode. These generate further coins with no additional effort needed by the holder, they simply need to be stored on a private wallet as opposed to an exchange. The downside to this option is the comparatively low rate of return when compared to masternode rewards, and the fact that some of these coins pay dividends in the form of a secondary token which is usually worth much less than the primary currency. This is the case with Neo, which is indivisible but pays dividends regularly through its secondary token, Gas. Other examples are coins founded by exchanges which reward by distributing a portion of the exchange’s fees to coin holders, proportional to the amount of coins they maintain.
While the earliest cryptocurrencies use proof-of-work consensus algorithms to process transactions (adding new blocks), requiring energy intensive GPU or CPU processing power, proof-of-stake rewards people who hold large amounts of their currencies and ‘stake’ them — effectively fixing them as collateral for the network. The network then runs a complex lottery and decides who will get the chance to add a block and receive block rewards. The more coins staked and the longer they’re staked for, the higher the chance of being assigned the block and receiving the reward. Oft-described as the successor to proof-of-work, proof-of-stake is expected to be implemented to Ethereum in its Serenity update, though no minimum stake or reward sizes have been disclosed as yet.
In practice somewhere between dividend coins and proof-of-stake, delegated proof-of-stake tokens allow holders without enough coins to meet the minimum staking requirements to still participate in staking and receive block rewards. Holders delegate their balance to a node owner, and when the node owner is rewarded they distribute the rewards proportional to the amount they were delegated. The node owner takes a slice of this reward as a fee for using their infrastructure. There is also a similar consensus algorithm pioneered by Tezos called liquid proof-of-stake (LPoS) which functions in a similar manner, but delegation is optional and it allows for an unlimited number of validators (called bakers).
Many of these different strategies offer return on investment rates which would be considered high in any sphere. Factors to consider with passive income include not only the barriers to setup and maintenance, but also the relevant tax laws in the investor’s home country — in some cases every payment of passive income can be considered a taxable event. As such the savvy investor needs to recognise the tax implications of these strategies, in balance with the potential ROI. Third-party services are emerging to provide the setup and maintenance of passive income ventures in cryptoassets, including establishing masternodes and staking. Strategies such as those detailed here provide the potential to compliment increases in price by increasing the quantity of the cryptoassets held, and as a result passive income tokens have been the subject of close attention since their recent emergence.
*Prices all at 11/22/2018
Article by Byron Murphy, Editor at ViewNodes (https://www.viewfin.com/viewnode/tezos/)
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