Much like in traditional finance systems, specific crypto projects may reward holders with regular payouts. Crypto dividends combine investment growth potential with ongoing reward. Typically, by engaging in various blockchain activities, you start earning passively, creating another income stream.
This guide introduces the concept of crypto dividends. Being a barely talked about subject, we would break it down into bits for easy understanding. Learn how to earn passively with crypto with crypto dividends and the popular projects that offer them.
What are Crypto Dividends?
Think of them as rewards or a thank-you gift from a crypto project for simply holding onto their tokens or committing tokens to certain activities. These can be staking, yield farming, lending, or providing liquidity. These rewards are structured and paid within specific periods to project or blockchain network loyalists.
The dividends are generated from a slice of transaction fees or extra tokens (the ones not in supply). The interest on these dividends is usually denoted in annual percentage yield (APY), representing the returns over a period of a year.
We can, therefore, see that crypto dividends are similar to earning interest in a savings account. However, there is a modern twist that sees your digital assets work behind the scenes while you sit back and enjoy the perks!
How Crypto Dividends Work
Imagine planting an orange tree, and all you have to do is sow seed. No other effort is required for the tree's growth as someone else helps nurture the tree. To top it off, you receive the orange fruits during harvest. Crypto dividends are similar as you’re rewarded just for investing in certain projects. Here’s how it works, step by step:
Step 1: Pick the Right Cryptocurrencies
Not all crypto projects offer dividends. That's why you need to find the ones that reward holders. Using our tree analogy, it's just like how orange trees will grow better in sandy loam soil than in heavy clay soil.
Similarly, certain cryptocurrencies are tied to specific blockchains or decentralized applications that create the ideal environment for rewards to flourish. Therefore, picking the right project determines the rate at which your investment grows.
Step 2: Commit Your Tokens
Once you’ve chosen the right cryptocurrency, it's time to let it grow. There are two ways to go about it: Staking and Yield Farming.
When you stake your cryptocurrency, you’re essentially locking it up to support the blockchain network operations. In return for your generosity, you earn rewards in the form of additional coins.
Yield farming is like sharing orange seeds with a neighbor. In return, they give you a portion of the harvested fruits. Similarly, with yield farming, you provide liquidity to DeFi protocols (essentially lending your assets) and receive profit shares.
Step 3: Earn Your Rewards
The rewards can come in different forms. Sometimes, you’ll earn extra tokens of the same cryptocurrency. This is like getting oranges from your orange tree. Other times, you might get a different token or a share of network profits. The payout schedule varies (some are monthly and others are quarterly).
Why Consider Crypto Dividends?
The answer is simple: high returns. Unlike stocks, which yield a modest 2-5% annually, some cryptocurrencies can offer much higher rates. This makes investing in these projects more attractive to people with an eye for high-risk investment vehicles. Cryptocurrencies are highly volatile, so you should know that “with great reward often comes great risk.”
Risks of Crypto Dividends
Several things go into a successful harvest, such as good seeds, healthy soil, and the right conditions. With all this in place, sometimes the harvest isn’t as expected. Crypto dividends are no different. Threats that could affect your payouts include market volatility, scams, or regulatory issues. Here are five risks to consider before investing:
Market Volatility
Crypto prices are influenced by several factors, with the major one being market sentiment. This has, therefore, made crypto prices unpredictable as they can swing wildly, possibly reducing the value of your holdings. Even with dividends, a significant price drop could mean your “fruit harvest” isn’t worth much.
Scams and Untrustworthy Projects
There are thousands of crypto projects, with new ones entering the market daily. With no centralized body to verify these projects, scam artists are beginning to populate the industry. They come with juicy offers, promising high-rate dividends, only to leave you with no returns or take off with your investment. Ensure to research before investing!
Staking Lock-Up Periods
Staking often requires locking up your tokens. During this period, you can't sell or move them. Therefore, a market downturn during the staking would see you lose funds, and you can't do anything to prevent the effects.
Regulatory Risks
The laws governing crypto investments vary across jurisdictions. This is why you need to be extra careful when selecting a project that offers dividends. Why? If the laws change and there are restrictions, this would impact their operations and your potential earnings. At the end of the day, you might be forced to forfeit your investment.
Network or Smart Contract Failures
Even the best soil can’t protect against pests. In the crypto world, that means technical risks. Blockchain hacks or smart contract bugs can wipe out funds. This leaves you without your hard-earned "fruit." Therefore, always assess a project's security measures. This includes SSL encryption and two-factor authentication for the user.
How to Earn Crypto Dividends
So far, we have given hints on ways to receive crypto dividends, such as Staking and Yield Farming. However, there are other ways. In this section, we will briefly explain the most common ways of earning dividends in the blockchain space.
- Staking: This is the basis of proof-of-stake (PoS) protocols for network verification and security. By staking your coins, you essentially "pledge" them to the network, allowing you to participate in transaction validations. The more coins you stake, the higher your chances of validating transactions. Rewards are proportional to your stake.
- Yield Farming: This lets you earn rewards by providing liquidity to DeFi platforms. You supply tokens to a pool, enabling trades and earning interest or fees. While returns can be high, price fluctuations between paired tokens. This may lead to impermanent loss, where your investment’s value decreases.
- Airdrops and Revenue Shares: Whenever a new project is about to launch, they may host airdrops. This involves the distribution of tokens to users who complete specific actions. By following their guidelines, you get a piece of their total supply before they launch.
- Crypto Lending: From the name, you can tell it deals with lending your crypto assets for a while in exchange for a rate of interest you determined. Typically, you pledge your tokens as collateral in exchange for stable coins or cash. This can then be used to buy more cryptocurrency or other financial assets.
Popular Cryptocurrencies for Dividend Income
Looking for passive income crypto projects is time-consuming. To help you, we discuss the most popular crypto dividend tokens below. Note that they are solely based on research, and we don't recommend any of them. That said, here are the top five;
1. Airdrops and Revenue Shares
- KuCoin Shares (KCS): By holding KCS, investors receive a daily portion of the KuCoin exchange's trading fee revenue.
- VeChain (VET): VeChain operates a dual-token system where holding VET generates VTHO tokens.
2. Yield Farming
- Uniswap (UNI): Uniswap lets its DEX users provide liquidity to token pairs and earn a share of transaction fees.
- Aave (AAVE): Aave is a DeFi platform where users earn interest by depositing crypto into liquidity pools.
3. Staking
- Tezos (XTZ): Tezos holders earn rewards by staking XTZ with validators of the proof-of-stake network.
- Polkadot (DOT): The NPoS system lets DOT holders nominate validators and earn stake rewards.
4. Crypto Lending
- BlockFi: The platform provided accounts for earning interest on crypto deposits, with rates depending on market conditions (RIP).
- Celsius Network: Celsius provided a platform for users to lend their tokens and earn weekly interest payments (RIP again).
Staking vs. Holding for Crypto Dividends
The terms “staking” and “holding” are essential when it comes to crypto dividends. However, you should note that they differ.
As stated earlier, staking involves locking your tokens for a specific period, mainly to support blockchain operations as you become a validator. Because it involves a timeframe, we can say the tokens are “held” in order for you to receive rewards (dividends).
Properly defining holding, you simply keep eligible tokens in your wallet and earn rewards without any additional effort when the crypto is providing dividends, of course. Here, you have control over the funds and can cash out whenever you wish.
Key Takeaways
- Crypto dividends are paid to loyal users of a project or token holders
- Unlike traditional stock that pays between 2-5% dividends annually, crypto dividend tokens are known to pay better in a shorter time frame
- Ways to earn crypto dividends include staking, yield farming, airdrops, and crypto lending
Disclaimer: The content provided in this article is for educational and informational purposes only and should not be considered financial or investment advice. Interacting with blockchain, crypto assets, and Web3 applications involves risks, including the potential loss of funds. Venga encourages readers to conduct thorough research and understand the risks before engaging with any crypto assets or blockchain technologies. For more details, please refer to our terms of service.