Making money with cryptocurrencies
Cryptocurrencies can be used not only to make money from the growth of their value due to the balance of supply and demand in exchange trading. Bitcoin and other tokens can generate passive income in the form of interest on deposits. However, the mechanism for generating this interest is different from fiat currency investments. What is stacking and farming, which platforms allow crypto deposits, and can I earn interest on bitcoin?
Cryptocurrency deposits: Stacking
Today, there are two ways to create cryptocurrency deposits – stacking and pharming.
The point of stacking is to keep the network running on the Proof-of-Stake (PoS) algorithm to ensure all transactions are on the blockchain. Digital coin holders are rewarded for this. The more tokens a holder has, the more likely they are to become the creator of a new blockchain. For several networks, the entry threshold will be on the order of 50,000 coins. This amount allows holders of a node (a full-fledged blockchain network node) to receive their remuneration as a percentage – of the network’s use of their nodes. This is the income from stacking. The percentages vary from network to network.
The first networks with stacking capabilities were EOS, Tezos, TRON, and Cosmos. More recently, Ethereum has joined them with the development of Ethereum 2.0 (Eth2), which supports Proof-of-Stake. The company has also developed a special calculator that can be used to calculate stacking percentages. The threshold for the Ethereum 2.0 network was planned to be 32 ETN per input for validators so that stacking could be earned.
In Erachain’s blockchain, for example, the fee depends on the size of the transaction in bytes. Validators essentially compete with each other. The more money in the account, the more often blocks will be collected. Specifically, in our protocol, there is a restriction that one node is not allowed to assemble blocks in a row. Reassembly is set after four blocks. This mechanism is necessary to protect the network from hacker attacks, the expert added, and different networks have their conditions for work and earnings.
Cryptocurrency deposits: Farming
There’s also pharming, which is a way to make money on decentralized exchanges with the help of an automated market maker. Users create a pool of liquidity from some pair of tokens, such as bitcoin to USD, and invest different amounts of tokens in the pool. Depending on the share, they receive remuneration from transactions. Whoever invested more will receive more, accordingly. This is a kind of mini-bank created on the blockchain, which allows other clients of the network to use the placed liquidity. For this, the network pays interest to the creators of the pool.
The interest in farming is linked to the rates of the cryptocurrencies collected in the pool. Because the volatility of crypto-assets is very high, it is hard to consider pharming as a source of permanent passive income. There is an opinion that both stacking and pharming imply a relatively high income, but in reality, it is not much higher than yields on deposits and rarely exceeds 12-15% per annum.
Stacking and pharming are much more complicated than bank deposits. To get passive income this way, one needs to get into these technologies consistently, and if a person is not engaged in cryptocurrency operations regularly, he will hardly be able to just swap fiat deposits for crypto “deposits” in this way.
Any cryptocurrency is based on a blockchain or a chain of blocks. When a fork is made, a new coin is formed with a similar name but operating under new rules and on a new blockchain. Once a hard fork is announced, the price of a coin will most often rise, and everyone will try to buy as much of it as possible to get as many new coins later.
The more people buy, the faster and higher the price becomes. It’s all reminiscent of stock dividends and how the price behaves when it’s announced and on the eve of the close of the register. The amount of earnings on forks is uncertain. It all depends on the coin and the fork itself. A higher probability of earning for those who constantly and for a long time keep this or that coin in a cryptocurrency purse.
You can not only buy a coin on the eve of a hard fork but also buy it and sell it on the eve of a hard fork for a higher price. Chen Limin of ICB Fund felt that this option is not as common in recent years as other passive income options in the crypto market. Let’s take a look at examples of DeFi-platforms for cryptocurrency deposits
Curve Finance is a decentralized exchange based on AMMs (automated market makers) whose main goal is to facilitate the exchange of near-value assets. This is useful in the DeFi ecosystem because there are many wrapped and synthetic tokens that tend to mimic the price of the underlying asset.
Curve Finance currently supports Stablecoins in U.S. dollars, euros, wrapped/synthetic BTC, and wrapped/synthetic ETH assets. For example, one of the largest liquidity pools is 3CRV, a stablecoin pool consisting of DAI, USDT, and USDC. The ratio of the three stablecoins in the pool depends on supply and demand in the market. Depositing a coin with a lower ratio will bring the user a higher percentage of the pool. When the ratio of one of the coins is significantly higher, it can serve as a good chance for arbitrage.
Users who participate in this pool receive returns on the underlying tokens, exchange fees generated by the Curve pool, and CRV rewards for providing liquidity to Curve Finance.
Uniswap is a decentralized exchange protocol on Ethereum that allows direct token exchanges without storing funds on an exchange. To use Uniswap, all you have to do is send your tokens from your wallet to the Uniswap smart contract and receive the desired tokens in your wallet in return.
How to put crypto at interest
In 2020, Uniswap updated its smart contract, and the new version expanded trading pairs to support any ERC-20 tokens. In 2021, Uniswap released the latest version, which introduced two major new features: concentrated liquidity – where providers can set price ranges in which they would like to provide liquidity.
For example, an ETH/DAI liquidity pool could provide 30% of its capital in a price range of $2000 to $3000 and the remaining 70% in a price range of $1500 to $1700. Multiple commission levels – the pools have three commission options that liquidity providers can choose from: a. 0,05%, b. 0,30%, c. 1,00%.
For example, the USDC/DAI trading pair has low price volatility and can guarantee a lower pool commission of 0.05%. Trading pair ETH/DAI has higher price volatility and guarantees a pool commission of 0.30%. Meanwhile, a pool commission of 1.00% may be more appropriate for more volatile or exotic trading pairs.
Stacking is a way to validate transactions and create a block in the blockchain. It only works for cryptocurrencies that use the Proof of Stake algorithm. For example, Ethereum 2.0, Tezos, Solana, and others. You get rewarded for this in the form of new coins. The more coins you have, the more chances you have to create a new block.
It’s possible to do the stacking yourself, but you need to understand the technical details of cryptocurrency. Sometimes it’s also expensive – some blockchain networks have an entry threshold. For example, to validate Ethereum transactions, you need to have 32 coins. A simpler way is to give the coins to a recognized validator, such as a staking exchange.