Cryptocurrencies: how to generate passive income?

With the rise of crypto-currencies in recent years, the process of creating them (called “mining”) has also experienced rapid development. However, if it makes it possible to generate new units of virtual currencies while validating the integrity of each new block of the networks which underlie them, mining has a major defect: it is energy-intensive.

Faced with the explosion in popularity of certain crypto-assets such as bitcoin, miners have engaged in a real escalation. Organized into “mining pools”, they brought together overpowered machines with crazy consumption and often harmful to the environment. Other methods have therefore flourished to ensure the operation of crypto-currency networks, foremost among which is “staking”. Discover how this method can generate passive income, and the advantages of the solution offered by Bitvavo!

What is cryptocurrency staking?

Staking was first and foremost born as an alternative to the original process of creating crypto-currencies and validating transactions within blockchains, called Proof of Work (PoW) – or “proof of work” in French. To understand what staking consists of, it is therefore necessary to first explain what the PoW process is.

This process consists, for a minor wishing to create new units of crypto-currencies or validate a new block on a blockchain network, to solve a complex mathematical equation thanks to the computing power of his computer hardware. This resolution process constitutes the “proof of work” which gives their validity (and their value) to the new blocks/tokens thus created. Indeed, if obtaining the proof of work requires enormous resources, it is however easy to verify its conformity once it has been obtained.

To overcome the huge energy consumption induced by the PoW process, an alternative process has been devised: the Proof of Stake (PoS). This does not require the resolution of an equation, and therefore the mobilization of substantial computer power, to allow the validation of an action on the blockchain: it simply requires the immobilization of crypto-assets.

The PoS therefore consists of placing all or part of its crypto-currencies in escrow in order to participate in the process of validating the blocks of the blockchain network. Thus, while on blockchains using a Proof of Work consensus it is the miners with the greatest computing power who receive the rewards, on blockchains using a Proof of Stake consensus it is the users putting the most crypto-assets into escrow (proposing the most important “stakes”) who receive them.

The “proof of stake” therefore lies in the fact of putting part or all of one’s capital at stake to validate blocks. But beware: if the method seems “easy”, it is not free of risks: in the event of failure of the validation process, the user can lose the crypto-currencies placed in escrow!

How does crypto staking work?

As you will have understood, to generate passive income through the staking of crypto-currencies, you must participate in the process of validating the blocks of a blockchain based on the Proof of Stake consensus. On such a blockchain, you can escrow all or part of your tokens, in order to be chosen to validate the integrity of transactions, and thus receive rewards.

Generally, a draw is set up to designate the users responsible for carrying out this validation work. Thus, those who put the most chips in play generally have a better chance of being chosen. Rewards, on the other hand, are mostly transmitted in the native cryptocurrency of the relevant blockchain. However, there are blockchains that use two different cryptocurrencies: one for staking, the other for rewards.

Concretely, it is therefore simply a question of keeping your crypto-currencies on your virtual wallet in order to carry out actions in the interest of the decentralized network of the blockchain, while receiving rewards. With the popularization of this method, which is easier to set up and less energy-intensive, more and more specialized platforms are offering a stacking function to users of crypto-assets.

Advantages and disadvantages of cryptocurrency staking

Just like crypto mining, staking has both advantages and disadvantages for users. Among its strengths, we can obviously cite the fact of “easily” earning passive income (rewards) without having to perform any particular task or mobilize significant computing power. All you have to do is store your cryptocurrencies.

Another strong point of staking: it makes it possible to participate in the maintenance and sustainability of the blockchain, and thus to support the virtual currency market and the decentralization of the economy. Much less energy-intensive than mining, staking is in fact less impactful for the environment. In addition, staking is easy to access (many platforms today offer this function intuitively), does not require the purchase of additional computer equipment or significant capital to hope to receive passive income.

On the downside, staking necessarily involves immobilizing all or part of the crypto-currencies you hold. Thus, in the event of a drop in their prices, you risk suffering financial losses without being able to react in time. Finally, security is always a major issue in the cryptocurrency market, as their success attracts the attention of many fraudulent platforms. So be sure to choose yours carefully.

Generate passive income with Bitvavo staking

If you want to start staking cryptocurrencies now, you can use the services of the Bitvavo platform, one of the main crypto-asset platforms in Europe.

Ergonomic and completely secure, it offers staking in two forms:

• Off-chain staking, through which you can earn rewards on available and inactive account balances in your Bitvavo account;
• Staking on chain, thanks to which you can actively participate in the validation process of blockchain transactions (based on the mining model).

In any case, nothing could be easier than getting started: as soon as you have crypto-currencies in your Bitvavo account, you just have to register for the dedicated service on the platform. Many crypto-currencies are available and compatible with this service, from bitcoin to ether via Tezos or Litecoin.

On the reward side, Bitvavo calculates them according to two main factors:

• The reward rate currently available on your account, which depends in particular on the total amount you have staked on the blockchain network;
• The amount of cryptocurrencies you hold on a daily basis.

As you will have understood, cryptocurrency staking is a simple and accessible way to generate passive income through virtual currencies. In addition to participating in the block validation process within the blockchain and achieving obvious energy savings compared to the classic Proof of Work system, cryptocurrency staking allows you to enjoy automatic rewards while leaving your assets increase in value over time.

To make the most of this feature now offered by many crypto trading platforms, go to Bitvavo!