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How Do Dividend Tokens Work and Is it Better Than Staking Coins?
There are many ways to earn money in crypto. One can engage in trading, crypto-lending, NFTs, or even create their own coin. While these are all valid ways to be productive on the blockchain, these are all time-consuming, and there are times when we need to take a break. "WHAT ABOUT THE GAINS?", you ask. Worry not! There are ways to earn in crypto even while we're sleeping.
What is Staking?
Staking is a way for people to secure a blockchain by putting their holdings at "stake" as they help validate transactions. In return, they receive a percentage of their stake as a reward.
Staking is available for Proof-of-Stake blockchains as opposed to the Proof-of-Work blockchains, which solve complex computations to secure the blockchain. Proof-of-stake blockchains generally consume much less energy than their Proof-of-Work counterparts. Several popular blockchains offer staking, such as Solana, Cardano, and now Ethereum.
Staking is the more eminent way to earn passive income that many in the crypto space first turn to when they want to do such. Let's look at why!
Pros
1. High Returns
Staking generally offers higher interest rates than most traditional yields. Depending on the coin, yields can reach double or even triple digits. It acts as a way to earn passive income while holding on to your crypto anyway, thus compounding one's earnings over time.
2. Minimum Equipment Needed
Unlike Proof-of-Work, which requires expensive mining equipment and uses a high amount of electricity constantly, a basic laptop or phone would be more than enough to start staking. Then, you need to have the minimum amount of funds, required for staking, in a crypto wallet or exchange; press a few buttons, and staking will begin.
Cons
1. Volatile Prices
While locking up your fiat in traditional interest-bearing products (bank yields, government debt) bears little risk to the value of your money, staking is quite different since you are gaining interest on a constantly traded volatile asset. It is possible that you earned 10% more "X" coin through staking, but the value of X coin may have dropped 20% within the same staking period, which still amounts to a net loss should you choose to cash out immediately.
2. Lockup Periods
Some forms of staking also require a minimum lockup period. While some only need a week or two, some lockup periods reach months to years, which may mean that it will take a long time for you to get your rewards. Furthermore, this is disadvantageous when coupled with the volatility of the markets since the trend may have changed bearish already, causing you to want to cash out. Yet, you are unable to due to the lockup period.
3. Security Risks
It is also essential to check how safe the platform you are staking on is. Your staked crypto could probably get stolen due to hacks, so the security of the platform should be studied before choosing to stake with them.
4. Custody / Ownership
In order to stake, you have to transfer assets to another contract out of your wallet custody, but it is still owned and accessible to your wallet.
With some forms of staking, you essentially trust another contract/third party, like an exchange with custody of your crypto. What this means is they control what happens to your assets. It is possible they just steal this or block your account access. Not your keys, not your crypto.
What are Dividend Tokens?
In traditional markets, a dividend is defined as "the distribution of a percent of a company's earnings to its shareholders". The board of directors decides the amount paid and is essentially a reward given to investors for their investment in the company's equity. The concept of dividend tokens works similarly.
Dividend tokens offer crypto dividends or profit-sharing from a project's earnings or fees in the form of regular payouts. Much like in equities, the percentage paid varies and is decided by the project's team. It is also a way to reward investors and incentivize them to continue HODLing their tokens over time as a way to earn passively. The more tokens a holder owns, the more dividends they get paid.
Dividend tokens aren't as common as a way of earning passive income through crypto, but they also have pros and cons, which we'll go over!
Pros
1. Simplicity/Passive Income
Most people think that in order to make a profit in markets, one needs to constantly monitor the charts and have insane technical analysis skills. Dividends offer a way to earn passively on the side without having to be an expert trader.
Earning through dividend tokens is so simple that you just need to buy and hold a token. One doesn't need to learn how to download different wallets or find an appropriate delegator like in staking. Just by holding on to a token, you will accumulate rewards over time.
2. No Fees
Almost everything in crypto has a fee. Trading on spot or leverage exchanges warrants a trading fee. Taking a crypto loan amounts to high interest to be repaid while dealing with DeFi and NFTs won't spare you from paying extra. Even staking, particularly through exchanges and staking pools, will take a cut from your rewards. On the other hand, since you are simply holding on to your dividend tokens and not engaging in transactions to accumulate rewards, you do not need to pay fees.
3. Self-Custody
As discussed with staking, "Not your keys, not your crypto". You can expose yourself to various vulnerabilities by offering up your coins' custody to other parties. Staking through various smart contracts, bridges, liquidity pools, and such has been historically risky, with several hacks occurring through the years, such as the $600 million Ronin bridge hack.
With dividend tokens, there is no need to lock and transfer to another contract. You can already earn just by the fact that you're holding the tokens and feel safe while doing so since you have custody over your coins.
Cons
1. Varied Payouts
Unlike a monthly paycheck and just like most investments, returns from dividend tokens aren't fixed. They depend on several external factors, such as how big the trading volume is on exchanges for exchange dividend tokens or how the team behind the dividend token generates revenue.
2. Subject to the organization's discretion
How investors receive dividends is always subject to the company/team behind the project. This is also the case in traditional markets wherein there are quarters wherein a company will not give out/give out fewer dividends due to a decision from their board. Investors have no control over how much they will receive per payout.
AltSwitch's Dividend Model
An example of a dividend-paying token would be AltSwitch (ALTS). Holders of ALTS are rewarded with the crypto of their choice found on the Binance Smart Chain (BEP20). The amount of the rewards is determined by 8% of the community's transactions in its US dollar value. Users can change what crypto they want to receive their rewards anytime.
AltSwitch has a supplemental smart contract that tracks all dividends of each holder. The smart contract provides accurate information about their rewards, such as total rewards paid, pending rewards, and recent rewards transactions.
Conclusion
Staking and Dividend tokens offer two different methods to earn passively without constantly trading charts. While each has its advantages, one cannot determine which is better than the other. The best way to ascertain that would be to try both methods and see what works for you!
References
https://www.coinbase.com/learn/crypto-basics/what-is-staking
https://medium.com/luniehq/non-custodial-staking-whats-the-difference-ba9d438280a8
https://www.investopedia.com/terms/d/dividend.asp
https://cointelegraph.com/explained/dividend-tokens-explained
https://cryptonews.com/exclusives/coins-that-pay-crypto-dividends.htm
https://altswitch.io/wp-content/uploads/2022/03/ALTS_Whitepaper_V1.51_A4_Document.pdf
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