Crypto Coins & Tokens Which Pay Dividends To Hodlers
- Your Guide to the Tax Rules Around Day Trading Crypto - March 23, 2020
- MyFX Markets Crypto Margin Trading - February 28, 2020
- Estonian Company ITEZ Enables BTC Trading Via Visa/MasterCard Credit Cards - January 24, 2020
Inspired by a blog post I recently read on cryptocurrencies which earn you a passive income, I decided to write my own article on dividend paying cryptos. I will use this article to highlight some cool projects which got missed off the lists in the blog post mentioned above (there are quite a few to choose from so this wasn’t hard), but also to explain some of the different ways in which you can earn dividend payments from holding cryptos (or some kind of passive rewards anyway, as these payments aren’t really dividends). By looking at the basic economics behind these different models, and also what you need to do in order to earn a profit from them, this article will hopefully help you to identify the best opportunities for your personal situation.
Proof of Stake: earn dividends by running a cryptocurrency node
Perhaps the most common way that cryptos pay dividends to holders is through some kind of ‘Proof-of-Stake’ system. This can come in the form of plain proof of stake, where anyone with coins in their wallet and the wallet software running on their computer will earn coins, or more complex systems involving ‘masternodes’ or ‘service nodes’.
Nodes are individual computers running the full version of the software for the cryptocurrency’s peer-to-peer network. So if you have the full wallet (i.e. not a light wallet or web wallet) open on your computer then you are running a network node. Generally speaking, the more nodes a network has, the healthier it is.
As an alternative to proof-of-work mining some coins use something called ‘proof of stake’, in which nodes contribute towards processing transactions and earn rewards based on how many coins they hold. This is done automatically by the wallet software, so anybody who owns coins and has a desktop wallet running on their computer will receive what is effectively a kind of dividend payment.
If you deep-dive into the details you will find there are many different ways this can work. Some will require that your coins stay in your wallet for a certain period of time before they start earning, or that you keep your wallet open for extended periods for the full reward to flow in. Others require very little and simply allow you to collect your ‘interest’ payments whenever you wish; a good example of this is NEO, which pays an annual interest rate of around 5.5%.
Some coins have more stringent requirements to participate in this proof-of-stake system and earn dividends from it. Any node which fulfils the requirements laid out in the programming code to earn rewards for helping to support the system will usually be known as a ‘masternode’.
The main requirements for running a masternode are usually that you keep a certain minimum number of coins in your wallet, and that you keep your wallet running 24/7/365. If you can’t do that on your home computer, they will usually provide step-by-step guides to do it using popular web hosting services.
Sometimes the minimum coin requirements require you to lock up a lot of money in order to get paid. For example DASH, the original masternode coin, requires 1000 coins for a masternode: currently valued at over $300,000. You can, however, club together with other holders to earn passive income from a shared masternode hosted by a masternode service provider.
Obviously there are also other coins with lower minimum requirements.
Crypotos with profit sharing smart contracts
Some cryptos are associated with apps or businesses which provide services and earn revenue beyond just blockchain payment fees. Often these are tokens running on an established blockchain, such as Ethereum, rather than coins designed to be a currency with their own blockchain.
One way for these apps or businesses to encourage investment and stimulate economic activity around their token is to pay a proportion of their profits to token holders. These are perhaps the closest parallels to traditional dividend payments, although it is still not quite the same thing.
Sometimes these businesses may simply promise to make pay payments out of their profits. But of course in the world of cryptocurrency trust in authority is not needed, so many of them will implement smart contracts within their business arrangements which automatically divide money and pay out investors before the company themselves even get their hands on their own share.
One of my favourite examples of this is SingularDTV, This project is building a decentralised entertainment ecosystem, including a crowdfunding platform for media producers and projects and a Netflix / Spotify style distribution platform for consumers, amongst other things.
Not only do they plan to pay out part of their profits to token holders, automatically through smart contracts in the case of the distribution platform, but they also allow media creators to do the same. Project’s which use the Tokit platform for crowdfunding distribute their own tokens to backers, which can then be used to share revenue from sales, in some cases using smart contracts.
Another category of projects pay out a share of revenue to token holders, but require some form of participation in running the app or business to be eligible for payments.
At the extreme end of the scale this can involve the creation of a ‘decentralised autonomous organisation’ or ‘DAO’ which is run entirely by token holders and those people or entities that they choose to hire, through some kind of voting system.
But even short of this extreme end of the scale there are projects which incorporate some element of decentralised management. For example Blocktix, a decentralised event ticketing service and app, designed to reduce scalping and fraud while reducing costs, will pay a share of revenues to token holders – but only if they take part in activities like vetting event submissions.
Feel the burn – another way cryptos pay dividends
Sharing revenue with token holders does not always require sending out payment that look dividends to people’s wallets. Some projects choose instead to burn some of their tokens whenever a sale is made, or using a certain percentage of their profits.
My favourite example of this is Bitcrystals, a gaming company which produces rare digital assets such as collectable cards for use in video games. You need to use their BCY tokens in order to purchase cards, and half of the tokens received in each sale are effectively destroyed. This serves to reduce the total supply, and through the laws of supply and demand this in turn increases the value of all remaining tokens. The benefit of this method for the company is that they save the substantial cost of transactions fees involved in sending out thousands of payments. For holders there is also a benefit in that they don’t need to do anything to claim rewards, and even tokens held on exchanges and third party wallets will gain in value from the burn.