October 05, 2022
Dividends are when a company distributes some of its earnings to its shareholders to distribute profits. A company would choose to pay dividends because its rate of growth has typically slowed down. However, dividends are also an indication of stability as once a company starts paying dividends, it’s highly likely stakeholders keep receiving them.
The big question is: does crypto pay dividends just like the traditional finance world?
The answer is: Crypto doesn’t pay out dividends. Instead, there might be other ways to receive cash flow from holding tokens. People could receive rewards paid in cryptocurrency for parking their crypto assets on certain protocols or participating in certain liquidity pools. There could be opportunities for passive income and passive rewards. However, these rewards wouldn’t be called dividends.
In order to receive a dividend, investors should be the shareholders of a company. However, cryptocurrencies are not companies: they are technically currencies. Therefore, since cryptocurrencies are not companies, they cannot hand out dividends. That being said, there are other rewards possible by holding cryptocurrencies.
One of the most standard ways to earn crypto rewards is through Crypto staking or yield farming. Recently, there has been a new trend of offering rewards through airdrops, a form of promotion for early crypto adopters. For example, people who traded on OpenSea before a certain date participated for the chance of claiming a free SOS airdrop on the Open Dao.
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Keep in mind that crypto rewards are historically paid out in crypto, and not often in fiat currency. That being said, let’s examine some ways of earning crypto rewards passively:
- Crypto staking: Staking is the idea to lock up some coins in a vault, in order to earn some passive income on it. There are many different staking protocols on other coins, but the main point is that whatever coin you retain is the reward you will receive. For example, if you stake your $BTC on a centralized exchange (or another protocol), you will be rewarded in BTC. Lock-up times can be flexible or fixed term. Most vaults tend to be fixed-term for one month or more, meaning you cannot remove the crypto for that period. This method is often used when holding on to the crypto long term but gives less flexibility if you want to sell.
- Yield farming: This is similar to crypto staking, but here you are providing liquidity to a decentralized exchange’s liquidity pool to then stake that liquidity pool token to yield another token. This token could be completely different from the previous one. For example, you can provide an ETH/1INCH liquidity pool, stake it and earn 1INCH token passively until the liquidity farming rewards are over. But there’s an issue: impermanent loss. You may receive more of a certain token, but if that token goes down in value, you still lose compared to your initial investment.
- Airdrops: Airdrops can be considered as a sort of promotion for early adopters. These are basically free tokens given to people who perform certain actions or are early adopters of certain protocols. For example, if someone used Uniswap before August 15th, 2020, they could claim 400 free UNI tokens. At the time of the airdrop, this was worth roughly $1200, but for people who held onto their UNI tokens the airdrop was worth as much as $20,000 at some point. The issue with airdrops is that they are never publicly announced, meaning that one can only speculate on airdrops happening. Furthermore, airdrops do not always reward the first users handsomely. For example, the WTF airdrop gave very few tokens for early users of the WTF website. Therefore it isn’t reliable.
The Bottom Line
Overall, there are quite a few ways to earn crypto in a passive (or semi-passive) manner. However, this is different from dividend investing. Investing in anything involving crypto does pose its risks, and is generally considered to be extremely volatile. These crypto rewards are nice, but are definitely new and may not be sustainable. Some staking rewards are above 10%, and one can definitely assume that this level of rewards cannot remain so high for very long. Although one could earn passive rewards in the crypto world, it will still be very different from earning passive income through dividends given out by a company.