Exploring Passive Income in Cryptocurrencies: Will 2020 be Year of Staking?
Researcher of decentralized systems. Head of Research, Cellframe
The blockchain industry definitely looks like a blue ocean - there are a lot of opportunities, the wind changes fast, and the calm suddenly can be replaced by the storm. And, as in real sailing, to be successful it means to catch a wave and tailwind.
If we recall a brief history of the blockchain industry, we will come with the fact, that 2013 was a year of Bitcoin, when general public first time recognized skyrocketing digital gold, 2017-2018 - the years of ICO’s, and 2019 - the year of Defi
(decentralized finance applications, like MakerDAO or Compound).
Defi applications offered some brand new opportunities for getting passive income in crypto, which determined their success in the community. For example, using Compound users can provide safe loans and get much more interest, than when placing deposits with banks in developed countries.
There are many reasons, why the price (here we are talking about yearly interest rate of borrowing money) of 1$ of fiat money in banks is lower than the price of borrowing 1 DAI or 1 USDC.
These reasons include the limited liquidity, high volatility and speculative nature of cryptocurrency market (it is importing according to the fact, that people often borrow money by means of MakerDAO or Compound with goal to buy extra crypto using their current holdings as a collateral), and some others.
Analyzing the current state of dApps and blockchain ecosystems there is an important trend:
Instead of one centralized entity, that receives all generated value from some kind of business (as we see in traditional finances), the business process in a decentralized environment operates by means of coordinated efforts of independent agents.
And these agents share the value, generated by the system.
Talking about decentralized networks, they are clearly the type of systems which run by means of coordinated efforts of independent agents. In the case of Bitcoin or Ethereum, these agents are known as miners, which get rewarded for their work on network security and transaction processing.
In blockchains, which operation is based on PoS consensus miners play the same role, but instead of equipment, they need to hold coins and use simple hardware (or just delegate these tokens to someone who has it through the wallet).
Using coins (tokens) as a skin in the game for guaranteeing honesty in some activity in order to further receive a reward if everything went according to the rules of the system is named staking
Staking slowly but surely becomes one of the opportunities to get passive income, not connected directly with the banking sector. So, it is not surprising that stake-as-a-service companies recently attracted a lot of attention
It clearly looks like a trend - while Ethereum migrates to the PoS era, another blockchain platforms use PoS initially as a basic consensus algorithm.
Besides a variety of blockchains, there are some modern dApps like Livepeer
that require staking for other purposes, but also provide an opportunity to get rewards.
The opportunities for participating in producing value in networks via staking are significantly broader than in 2017 or 2018, and this market starts maturing.
In my opinion, talking about income strategies in crypto in 2020 staking will be sure one of the leading ones.
Talking about sectors of the staking market, I can highlight the follows:
Blockchain platforms, using PoS as a consensus algorithm
One of the most known blockchain platforms based on PoS consensus is Tezos
. It made a lot of buzz in 2017 when conducted an ICO, and also is leading one now. Other known platforms include Tron
, and some others.
In order to stake you need to get coins, install a wallet and (if you are searching the fastest way) delegate them. Lists of trusted delegators can be easily found on the internet (and they mostly are stake-as-a-service companies, mentioned before).
The relative income in this market segment is not very high, but keep in mind the main rule of investments - higher profits are connected with higher risks. Low-interest rate is balanced by the relative stability of this sector and good opportunity to grow in value.
Second layer solutions
This segment of the market is younger than the previous one, but logic is the same - they use PoS consensus to secure their networks, mostly dedicated to outsourcing transactions from major blockchains. The most known projects that are already live are Matic network
and Loom network
As “masternode coin” is defined blockchains, whose consensus involves masternodes as one of the principal agents, participating in consensus. A masternode can be considered as an elementary unit, which is allowed to participate in consensus.
For some coins, like the leader of this segment DASH
, the consensus is PoW+masternodes. To launch a masternode you need a minimum deposit of coins, which size is determined by the rules of the network.
For example, to launch DASH masternode, you need to own 1,000 DASH. Talking about other known projects, there are PIVX
, and some others. It is important to note, that it is dangerous to consider owning masternodes in networks with low capitalization and not listed on major exchanges. Be aware of the SCAM.
Projects, in which staking is a core part of cryptoeconomic model, and is not purely related to the PoS consensus of blockchain.
This segment of the staking market is rather young and its history lasts around two years. The interesting opportunities are Livepeer (decentralized video streaming platform, where users use tokens to stake on behalf of quality service providers) and Synthetix (the token is used for the creation of synthetic assets).
This category also includes some tokens of exchanges, for example, IDEX
token and Kucoin Shares (KCS)
. Note please, that you need to stake these tokens using an exchange.
Besides, tokens of some such novel projects are listed only on small exchanges, so be careful - liquidity can be low.
There are other examples, such as PlatinCoin
, a project of the digital ecosystem of crypto-ATMs and e-commerce shops where the token is staked with a goal to incentify economic agents and accelerating ecosystem growth.
It is a rather small project, which token recently was listed on such a huge exchange as Bithumb. Another example is the cross-chain platform Kava
, which got significant exposure due to Binance where the token is used in the validation and governance process.
I predict, that in ten years capital will not be only placed in treasury bonds, stocks of large companies, real estate or other tools that bring the rent to their owner.
Probably, a significant share of the capital will be used to support the operation of decentralized networks and dApps, such as Ethereum, Compound or Livepeer, capturing value from their successful operation and provide services to their users.
According to Confucius popular saying, a journey of a thousand miles begins with the first step. So, the first step was made in 2018-2019 years and novel approach for capital usage now confidently striding the market.
As closing notes, it is important to point out that despite the start of the “maturing phase” of the staking market it is rather volatile. So, you need not only consider the yearly interest rate of staking, but also the price of the underlying asset.
If it changes significantly, you can lose all your profits. So, make your own deep research including project background, real customer base, liquidity of coin or token and keep in mind that high-profit rates are associated with high risks.
I do not have any vested interest in any of the mentioned projects and coins. This article is not investment advice.
The views, descriptions, and opinions expressed are those of the author. Do your own research.
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