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Crypto Terms:  Letter P

What is Passive Income?

Meaning:
Passive Income - income earned through investments during which the earner is not actively involved.
medium
3 minutes

Let's find out Passive Income meaning, definition in crypto, what is Passive Income, and all other detailed facts.

Passive income is money earned through investments that do not require the earner to be actively involved. The goal of passive income is to create a consistent income stream without the demands of a full-time job. Traditionally, passive income is used in spheres like rental properties, royalties, peer-to-peer lending, dividend stocks, and so on. However, it can also be used in many other types of investments.

The expansion of crypto and decentralized finance (DeFi) businesses is creating possibilities for investors looking for innovative ways to earn a passive income. DeFi is offering crypto investors the chance to earn annual percentage yields (APYs) that put most bank deposits to shame. 

There have been a number of options for investors to gain passive income since DeFi began in the summer of 2020, assisted by the sale of Compound's COMP token. Lending, staking, and yield farming are the main techniques for earning passive income in DeFi, and they all require crypto to do it.

The notion of lending is simple. Users lend their unused crypto assets to a platform, which is secured by a smart contract. In exchange, lending services give crypto holders an APY. Borrowers can access locked assets as loans, with interest paid back to the platform. There is no danger to the crypto lender if the borrower dodges to pay their loan because the process is governed by smart contracts. This means that anyone can withdraw their cryptocurrency assets at any time.

Staking is the process of a crypto holder locking or staking their assets in a smart contract. It originates from networks that use Proof-of-Stake (PoS) algorithms. A user can earn more of the same token by keeping their assets locked up for the long term. Staking is a means for users to make extra money by contributing to the network's security and decentralization in exchange for rewards.

Yield farming (or liquidity mining) also allows cryptocurrency holders to earn additional rewards while simultaneously supplying liquidity to pools. By doing that, liquidity providers (LPs) earn an LP token that represents their pool share. Trading expenses are frequently included in the benefits of being an LP when trades take place in the pool.

To receive additional rewards, LP tokens can be staked on a protocol or project. These rewards usually come in the form of the native token of the project or protocol. These tokens can then be staked for even more rewards, which makes yield farming a lucrative and passive income source. Though note that yield farming is often considered to be riskier than staking and lending.

The S&amp;P 500 index<\/a> <\/strong>is an example of an index that passive management could mimic. With passive management, there are no attempts to profit from market inefficiencies as it is with active portfolio management. Thus, passive management doesn&rsquo;t rely on subjective human judgments.<\/p>\n<p>The basic premise of passive management is that <strong>humans cannot really outperform the market.<\/strong> Instead, they should &ldquo;go with the flow&rdquo; of the market. This concept also correlates with <a href=https://www.bitdegree.org/"//crypto//learn//crypto-terms//what-is-efficient-market-hypothesis-emh/">the efficient-market hypothesis (EMH)<\/strong><\/a>. The theory states that current market prices reflect all available data. Thus, it implies that, in the long term, humans cannot outsmart the market.<\/p>\n<p>The primary benefits of passive management include <strong>cheaper fees and operating costs.<\/strong> In addition to that, it decreases investing risks. A passive management strategy usually constructs a long-term portfolio. The main task of such a portfolio is to track the performance of a stock market index. <strong>Mutual and <a href=https://www.bitdegree.org/"//crypto//learn//crypto-terms//what-is-exchange-traded-fund-etf/">exchange-traded funds (ETF)<\/a> <\/strong>are common examples of investment funds that employ this method.<\/p>\n<p>Thus, a much larger market performance affects the success of passive management. Market performance is usually measured with a certain index. Basically, this implies that, when it comes to asset selection, <strong>human error isn't a problem with passive management. <\/strong>Besides, due to their reduced expenses, passive portfolio management solutions usually outperform active management.<\/p>","definition":"an investment strategy that tracks an existing economic index rather than relying on active market exposure.","status":"published","meta_title":"What is Passive Management? Definition & Meaning | Crypto Wiki","meta_description":"Passive Management meaning: Passive Management - an investment strategy that tracks an existing economic index rather than relying on active market exposure.","meta_keywords":null}" :prev-section="{"id":626,"wikipedia_url":"https:\/\/en.wikipedia.org\/wiki\/Blockchain","level":"medium","author_id":1,"created_at":"2023-06-19T06:59:00.000000Z","updated_at":"2023-12-07T19:34:31.000000Z","slug":"what-is-participation-node","title":"What is Participation Node?","section":"P","keyword":"Participation Node","content":"<p>A <strong>Participation Node<\/strong> is a type of node that provides assistance in managing the Pure Proof of Stake (PPoS) process in the Algorand platform. Although, the definition can vary depending on the application. We will cover the participation node within the context of blockchains.<\/p>\n<p>In order to truly grasp what a participation node entails, you have to understand what a <a href=https://www.bitdegree.org/"//crypto//learn//crypto-terms//what-is-node/">node is in its simplest form. A node is a key element of a blockchain&rsquo;s infrastructure that&rsquo;s linked to the network with an IP address. Essentially, nodes transmit information between each other and allow the validation of transactions. For example, if you want to connect to a specific blockchain, you will have to use nodes.<\/p>\n<p>Now, when it comes to participation nodes, they&rsquo;ve been introduced by the Algorand platform.<\/p>\n<p>By <a href=https://www.bitdegree.org/"//crypto//learn//crypto-terms//what-is-staking/">staking Algo and generating a valid participation key, a network participant is able to become a participation node which is considered to be one of the most powerful nodes on the platform. Access is only granted to those participation nodes that have the user&rsquo;s participation key.<\/p>\n<p>Algorand categorizes nodes into relay nodes and participation nodes:&nbsp;<\/p>\n<ul>\n<li><a href=https://www.bitdegree.org/"//crypto//learn//crypto-terms//what-are-relay-nodes/">Relay nodes<\/strong><\/strong><\/a> operate within the information relaying area. This means that they efficiently transmit messages from one participating node to another creating a sort of network hub;<\/li>\n<li>Participation nodes<span> use participation keys to sign the consensus protocol communications and introduce and validate new blocks as a means to assist the PPoS protocol. All communication between participation nodes flows through relay nodes since participation nodes use Algorand&rsquo;s <a href=https://www.bitdegree.org/"//crypto//learn//crypto-terms//what-is-consensus-mechanism/">consensus mechanism<\/strong><\/a> to receive messages from the relay nodes.&nbsp;<\/span><\/li>\n<\/ul>\n<p>The processes of proposing and voting on blocks go through Algorand&rsquo;s PPoS consensus method which applies a two-tier block creation procedure. Participation nodes propose and vote on blocks in the interests of their user within the consensus protocol.&nbsp;<\/p>\n<p><strong>One participation node can hold numerous participation keys<\/strong> and, in turn, represent numerous participants. Anyone can run this kind of participation node, just like any regular node.<\/p>\n<p>Granted that the majority of participation nodes conduct the consensus process fairly, users are guaranteed that the blockchain remains secure and won&rsquo;t split in case of an emergency.<\/p>","definition":"is a term used within the Algorand platform that outlines how nodes assist with the consensus process of conducting the Pure Proof of Stake (PPoS).","status":"published","meta_title":"What is Participation Node? Definition & Meaning | Crypto Wiki","meta_description":"Participation Node meaning: Participation Node - is a term used within the Algorand platform that outlines how nodes assist with the consensus process of conducting the Pure Proof of Stake (PPoS).","meta_keywords":null}" :model="{"id":567,"wikipedia_url":"https:\/\/en.wikipedia.org\/wiki\/Passive_income","level":"medium","author_id":1,"created_at":"2023-06-19T06:59:00.000000Z","updated_at":"2023-12-07T19:38:43.000000Z","slug":"what-is-passive-income","title":"What is Passive Income?","section":"P","keyword":"Passive Income","content":"<p>Passive income is <strong>money earned through investments that do not require the earner to be actively involved<\/strong>. The goal of passive income is to create a consistent income stream without the demands of a full-time job. Traditionally, passive income is used in spheres like rental properties, royalties, <strong>peer-to-peer lending<\/strong>, dividend stocks, and so on. However, it can also be used in many other types of investments.<\/p>\n<p>The expansion of <a href=https://www.bitdegree.org/"//crypto//learn//crypto-terms//what-is-cryptocurrency/">crypto and <a href=https://www.bitdegree.org/"//crypto//learn//crypto-terms//what-is-defi/">decentralized finance (DeFi)<\/strong><\/a> businesses is creating possibilities for investors looking for <strong>innovative ways<\/strong> to earn a passive income. DeFi is offering crypto investors the chance to earn <a href=https://www.bitdegree.org/"//crypto//learn//crypto-terms//what-is-annual-percentage-yield-apy/">annual percentage yields (APYs)<\/strong><\/a> that put most bank deposits to shame.&nbsp;<\/p>\n<p>There have been a number of options for investors to gain passive income since DeFi began in the summer of 2020, assisted <strong>by the sale of<\/strong> Compound's COMP token. Lending, staking, and yield farming are the <strong>main techniques<\/strong> for earning passive income in DeFi, and they all require crypto to do it.<\/p>\n<p>The notion of <a href=https://www.bitdegree.org/"//crypto//learn//crypto-terms//what-is-peer-to-peer-p2p-lending/">lending is simple. Users lend their unused crypto assets to a platform, which is secured by a <a href=https://www.bitdegree.org/"//crypto//learn//crypto-terms//what-is-smart-contract/">smart contract<\/strong><\/a>. In exchange, <strong>lending services give<\/strong>&nbsp;crypto holders an APY. Borrowers can access locked assets as loans, with interest paid back to the platform. There is no danger to the crypto lender if the <strong>borrower dodges to pay their loan<\/strong> because the process is governed by smart contracts. This means that anyone can withdraw their cryptocurrency assets at any time.<\/p>\n<p><a href=https://www.bitdegree.org/"//crypto//learn//crypto-terms//what-is-staking/">Staking is the process of a crypto holder locking or staking their assets in a smart contract. It originates from networks that use <a href=https://www.bitdegree.org/"//crypto//learn//crypto-terms//what-is-proof-of-stake-pos/">Proof-of-Stake (PoS)<\/strong><\/strong><\/a> algorithms. A user can earn more of the same token by keeping their assets locked up for the long term. Staking is a means for users to make extra money by contributing to the network's security and decentralization in exchange for <a href=https://www.bitdegree.org/"//crypto//learn//crypto-terms//what-is-mining-reward/">rewards./n

Yield farming<\/strong><\/a> (or liquidity mining) also allows cryptocurrency holders to earn additional rewards while simultaneously supplying liquidity to <a href=https://www.bitdegree.org/"//crypto//learn//crypto-terms//what-is-liquidity-pool/">pools. By doing that, <strong>liquidity providers (LPs)<\/strong> earn an <a href=https://www.bitdegree.org/"//crypto//learn//crypto-terms//what-are-liquidity-provider-tokens-lp-tokens/">LP token<\/strong><\/a> that represents their pool share. Trading expenses are frequently included in the benefits of being an LP when trades take place in the pool.<\/p>\n<p>To receive additional rewards, LP tokens can be staked on a protocol or project. These rewards usually come in the form of the native token of the project or protocol. These tokens can then be staked for even more rewards, which makes yield farming a <strong>lucrative and passive income source<\/strong>. Though note that yield farming is often considered to be riskier than staking and lending.<\/p>","definition":"income earned through investments during which the earner is not actively involved.","status":"published","meta_title":"What is Passive Income? Definition & Meaning | Crypto Wiki","meta_description":"Passive Income meaning: Passive Income - income earned through investments during which the earner is not actively involved.","meta_keywords":null,"author":{"id":1,"user_id":1,"created_at":"2023-05-03T14:30:55.000000Z","updated_at":"2023-05-11T07:18:20.000000Z","title":"Editor-In-Chief","slug":"aaron-s-editor-in-chief","description":"<p>Having completed a Master&rsquo;s degree on Economics, Politics &amp; Culture for the East Asia region, Aaron has written scientific papers with a comparative analysis of the differences between US&rsquo; Western and Japan&rsquo;s Collective forms of capitalism, 1945-2020.<\/p>\n<p>With close to a decade of experience in the FinTech industry, Aaron understands all of the biggest issues and struggles that crypto enthusiasts face. He&rsquo;s a passionate analyst who is concerned with data-driven and fact-based content, as well as that which speaks to both Web3 natives and industry newcomers.<\/p>\n<p>Aaron is the go-to person for everything and anything related to digital currencies. With a huge passion for blockchain &amp; Web3 education, Aaron strives to transform the space as we know it, and make it more approachable to complete beginners.<\/p>\n<p>Aaron has been quoted by multiple established outlets, and is a published author himself. Even during his free time, he enjoys researching the market trends, and looking for the next supernova.<\/p>","user":{"id":1,"first_name":"Aaron","last_name":"S.","email":"aaron@bitdegree.org","email_sanitized":"aaron@bitdegree.org","email_verified_at":"2023-12-01T09:40:20.000000Z","must_verify_email":false,"is_registered_with_wallet":false,"status":"active","country":"LT","last_connected_ip":"88.119.132.125","image_id":2641,"referral_token":"05TMu2NysXOCn525","referred_by":null,"created_at":"2023-05-03T14:30:55.000000Z","updated_at":"2024-01-09T15:22:21.000000Z","full_name":"Aaron S."}}}" :chapter-list="[{"id":1,"title":"Blockchain","slug":"blockchain","updated":null,"chapter":"crypto\/assets\/crypto-book\/chapters\/learn-blockchain.jpg","chapter_simple":"crypto\/assets\/crypto-book\/chapters-simple\/blockchain-101.jpg","rating":100,"sections":[{"chapter_id":1,"order":1,"slug":"what-is-blockchain","title":"What is the Blockchain?","status":"published","modified_content":null},{"chapter_id":1,"order":2,"slug":"decentralized-blockchain","title":"Anonymous & Decentralized Blockchains: The Cornerstone of Crypto","status":"published","modified_content":null},{"chapter_id":1,"order":3,"slug":"blockchain-transaction","title":"What is a Blockchain Transaction in Crypto?","status":"published","modified_content":null},{"chapter_id":1,"order":4,"slug":"crypto-fees","title":"The Different Types of Crypto Fees Explained","status":"published","modified_content":null},{"chapter_id":1,"order":5,"slug":"what-is-bridging-in-crypto","title":"The Key Notion Behind the Concept of Bridging in Crypto","status":"published","modified_content":null},{"chapter_id":1,"order":6,"slug":"types-of-blockchains","title":"Different Types of Blockchains: What to Look Out For?","status":"published","modified_content":null}]},{"id":2,"title":"Cryptocurrencies","slug":"cryptocurrencies","updated":null,"chapter":"crypto\/assets\/crypto-book\/chapters\/learn-cryptocurrencies.jpg","chapter_simple":"crypto\/assets\/crypto-book\/chapters-simple\/cryptocurrencies-101.jpg","rating":100,"sections":[{"chapter_id":2,"order":1,"slug":"what-is-a-cryptocurrency","title":"What is a Cryptocurrency?","status":"published","modified_content":null},{"chapter_id":2,"order":2,"slug":"how-does-cryptocurrency-work","title":"How Does Cryptocurrency Work?","status":"published","modified_content":null},{"chapter_id":2,"order":3,"slug":"is-cryptocurrency-a-good-investment","title":"Is Cryptocurrency a Good Investment? The Pros & Cons","status":"published","modified_content":null},{"chapter_id":2,"order":4,"slug":"coin-vs-token","title":"Coin VS Token: How Do They Differ?","status":"published","modified_content":null},{"chapter_id":2,"order":5,"slug":"what-are-stablecoins","title":"What are Stablecoins, Altcoins & Wrapped Coins?","status":"published","modified_content":null},{"chapter_id":2,"order":6,"slug":"what-is-a-bitcoin","title":"Bitcoin: the Pioneer of the Crypto World","status":"published","modified_content":null},{"chapter_id":2,"order":7,"slug":"what-is-ethereum","title":"The Ultimate Blockchain for dApp Creation: Ethereum","status":"published","modified_content":null},{"chapter_id":2,"order":8,"slug":"what-is-cardano-in-crypto","title":"What is Cardano and What is It Used For?","status":"published","modified_content":null},{"chapter_id":2,"order":9,"slug":"what-is-shiba-inu-coin","title":"Shiba Inu: the Dogecoin Killer","status":"published","modified_content":null},{"chapter_id":2,"order":10,"slug":"what-is-solana-in-crypto","title":"Is Solana an Improved Version of Ethereum?","status":"published","modified_content":null},{"chapter_id":2,"order":11,"slug":"what-is-polkadot-in-crypto","title":"The Bridge Between Blockchains: Polkadot","status":"published","modified_content":null},{"chapter_id":2,"order":12,"slug":"what-is-polygon-in-crypto","title":"Polygon: the Essential Scaling Solution for Ethereum","status":"published","modified_content":null},{"chapter_id":2,"order":13,"slug":"what-is-luna-crypto","title":"The Bumpy Road of Terra (LUNA)","status":"published","modified_content":null},{"chapter_id":2,"order":14,"slug":"what-is-fantom-crypto","title":"Is Fantom (FTM) Yet Another Ethereum Killer?","status":"published","modified_content":null},{"chapter_id":2,"order":15,"slug":"what-is-aave-crypto","title":"Aave: Crypto Lending 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Standards","status":"published","modified_content":null},{"chapter_id":3,"order":5,"slug":"how-to-buy-crypto","title":"From Fiat to Crypto: How to Buy Crypto for the First Time","status":"published","modified_content":null},{"chapter_id":3,"order":6,"slug":"fiat-to-crypto","title":"Taking Profits: Turning Crypto Into Fiat","status":"published","modified_content":null},{"chapter_id":3,"order":7,"slug":"how-to-use-crypto","title":"You\u2019ve Got Crypto: What Can You Do With It?","status":"published","modified_content":null}]},{"id":4,"title":"Crypto Wallets","slug":"crypto-wallets","updated":false,"chapter":"crypto\/assets\/crypto-book\/chapters\/learn-crypto-wallets.jpg","chapter_simple":"crypto\/assets\/crypto-book\/chapters-simple\/crypto-wallets-101.jpg","rating":80,"sections":[{"chapter_id":4,"order":1,"slug":"what-is-a-crypto-wallet","title":"What is a Crypto Wallet?","status":"published","modified_content":null},{"chapter_id":4,"order":2,"slug":"hot-wallet-vs-cold-wallet","title":"Hot Wallet VS Cold Wallet: Which One to Pick?","status":"published","modified_content":null},{"chapter_id":4,"order":3,"slug":"non-custodial-wallet","title":"What are Non-Custodial Crypto Wallets?","status":"published","modified_content":null},{"chapter_id":4,"order":4,"slug":"what-is-metamask","title":"Metamask: The Leading Non-Custodial Wallet","status":"published","modified_content":null},{"chapter_id":4,"order":37,"slug":"how-safe-is-cryptocurrency","title":"The Key Crypto Wallet Safety Practices: How Safe Can Crypto Be?","status":"published","modified_content":null}]},{"id":5,"title":"NFTs","slug":"nfts","updated":null,"chapter":"crypto\/assets\/crypto-book\/chapters\/learn-nfts.jpg","chapter_simple":"crypto\/assets\/crypto-book\/chapters-simple\/nfts-101.jpg","rating":100,"sections":[{"chapter_id":5,"order":2,"slug":"how-to-trade-nfts","title":"NFT Trading: The Ins and Outs","status":"published","modified_content":null},{"chapter_id":5,"order":3,"slug":"buying-nft","title":"Tips and Tricks of Choosing the Right NFTs","status":"published","modified_content":null},{"chapter_id":5,"order":4,"slug":"how-to-store-nft","title":"How to Store NFTs: Best Practices","status":"published","modified_content":null},{"chapter_id":5,"order":5,"slug":"how-to-create-an-nft","title":"How to Create Your Own NFTs?","status":"published","modified_content":null},{"chapter_id":5,"order":6,"slug":"how-to-make-passive-money-with-nft","title":"Making Passive Money with NFTs","status":"published","modified_content":null}]},{"id":6,"title":"dApps & Defi","slug":"dapps-and-defi","updated":true,"chapter":"crypto\/assets\/crypto-book\/chapters\/learn-dapps.jpg","chapter_simple":"crypto\/assets\/crypto-book\/chapters-simple\/dapps-defi-101.jpg","rating":80,"sections":[{"chapter_id":6,"order":1,"slug":"what-are-nfts","title":"What are Non-Fungible Tokens 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