Most new cryptocurrencies operate on consensus rules different from those of bitcoin.
It would be an euphemism to say that bitcoin has not yet convinced the masses, from the point of view of investors and users. Indeed, its high volatility, as well as the many uncertainties concerning the future regulatory framework, has led the majority of people to stay away from cryptocurrencies in general. Bitcoin is not just a great opportunity to make some money in the Financial Markets. It is also a way of creating passive income for those knowledgeable enough to learn how.
The advantage of bitcoin as a new payment solution and passive income generator has also highlighted the operation of its underlying technology. The blockchain, and more particularly the considerable energy consumption generated by the operation of the Bitcoin protocol.
The most fervent critics of bitcoin have moreover insisted on the non-ecological nature of its operation. According to some estimates, the bitcoin network would have consumed more than 1.7 billion kilowatt hours in February. That is more than 21 billion kWh in one year.
Which is the equivalent to the amount of production of energy of at least seven nuclear power plants. Obviously this is only an estimate since many parameters come into play. But again, how can someone create a passive income if the electricity bill goes through the roof?
Proof of work
The relationship between bitcoin’s energy consumption and the generation of passive income may seem obscure. However, these two phenomena have a common denominator which is the mode of governance or, more specifically, the rules that allow the network to reach consensus at the transaction level. Indeed, the use of a decentralized architecture poses the problem of trust between users.
How do you know if this individual, or a particular party, has submitted correct information in the database. In other words, how to make sure there are no fraudulent transactions? Surprisingly, the solution to this problem and the creation of passive income is quite simple since it relies on economic incentive.
In the case of Bitcoin, the chosen solution is the Proof-of-Work consensus. As you probably already know, this protocol consists in asking the user who wants to register new information – called minor – to solve a mathematical problem as quickly as possible.
The minor who solves the problem first wins the right to create the next block. Provided that the information in the block is correct he recives a fee in the network account unit. That would be one of the ways of creating passive income.
The cost generated by the resolution of this problem makes it possible to guarantee the reliability of the information included in the blockchain. In the case of bitcoin, the minor will be rewarded with 12.5 bitcoins per validated block. Note that compensation is a decreasing function of the “age” of the network. From May 2020, this reward will be only 6.25 bitcoins per block.
Unfortunately, it has been a long time since this activity is more profitable for ordinary users, as the network has become competitive.
Proof of stakes
However, all hope is not lost, since most new cryptocurrencies operate on different consensus rules. One of the best-known alternatives is the Proof-of-Stake. Contrary to the proof of work which is very greedy in energy. The proof of stake is much more ecological.
It requires the user only to prove the possession of a certain quantity of cryptocurrency which he puts then in deposit. It becomes at this stage a validator. The underlying logic is that a user who holds this cryptocurrency does not make decisions that could negatively impact the value of his investment and therefore the network.
The larger the deposit amount, the higher the probability of being chosen to produce the next block. This model comes in many variations that I do not cover in this article, including MasterNodes, ServiceNodes and others.
This basically means that the more Crypto you hold, the more chances you have to hold even more Crypto. Money brings money, and your passive income will grow accordingly.
The generation of income via the proof of stake is nevertheless not without constraint. It will generally require to maintain a permanent connection between your wallet and the network. The time factor is a decisive variable in the validator selection process for the next block. There are very simple solutions to overcome this constraint, such as renting a server or using a nano-computer (Raspberry Pi type).
Finally, the selection of cryptocurrencies (Bitcoin or others digital currency) for which you want to become a validator will be critical. As your yield will depend on the number of cryptocurrency units you have deposited. As well as your average purchase price.
Many very promising projects are more than affordable to create your very own passive income strategy, will you find them?