If you have been following the news, you may have heard of an NFT (non-fungible token) selling for $69M or NFT collections like CryptoPunks and Bored Ape getting hyped up on mainstream media. Over the last few years, NFTs have attracted the internet’s attention as people started jumping in on the trend to figure out what they are and how to participate. We will explain how NFTs and passive income work and three ways to earn passive income from NFTs.
Key Takeaways
- NFTs are unique digital assets encoded on the blockchain. While most headlines focus on trading NFTs to profit, there are ways to earn passive income from NFTs.
- Three ways to earn passive income from NFTs include staking NFTs, renting out NFTs, and NFT royalties.
NFTs and Passive Income Explained
Benefits of Passive Income
Passive income is a great way to make money while you sleep, travel, or do anything else you love. But what is passive income? In simple terms, it is income generated with minimal effort needed from you once you set up the process and system.
For example, if you have a rental property that generates rent money from long-term tenants each month, that would be considered passive income. Or, if you have a blog with ads that generates revenue each month, that would be considered passive income.
There are lots of different ways to build passive income streams. The key is finding one or more things that work for you and build them up systematically so that they run automatically.
So why should you start generating passive income? Here are a few reasons:
- It is a great way to build wealth over time – the more passive income streams you have going at once, the more money you will make over time.
- Passive income can help reduce stress levels by providing a steady stream of revenue even during tough times (e.g., job loss, medical issues, death of a loved one, etc.).
- You will have diverse revenue streams and will not be overly reliant on any single income source.
Understanding NFTs
A non-fungible token, or “NFT,” is a unique digital asset encoded on blockchains, such as one-of-a-kind artwork. “Fungible” assets refer to items like Bitcoin or the U.S. dollar, which are not differentiated and are interchangeable. For example, one U.S. dollar has the same value as another U.S. dollar.
With NFTs, anyone can have equity ownership in digital assets:
- Artists can sell their work from anywhere around the world, allowing for broader wealth distribution across countries and possibilities for innovations that exceed the limitations of physical art, such as generative art or async art.
- Musicians can sell their music without paying a label or getting pennies per listen on streaming services like Spotify and Apple Music.
- Gamers can play video games to make money on play-to-earn crypto games like Axie Infinity and eventually transfer paid items from one game to another.
- Creators can have greater ownership over the distribution of their content, path to monetization, and community building.
- … and the list goes on!
3 Ways to Generate Passive Income from NFTs
1. Stake Your NFTs
Staking is a mechanism where you deposit, or “lock away,” your digital assets to a blockchain network to earn rewards or yields, typically through receiving tokens. While your assets are staked, you will still retain ownership rights of your NFTs but cannot sell them or move them between wallets. In other words, your NFTs are temporarily illiquid. Depending on which platform you use, some require users to purchase their native NFTs for staking and yield distribution.
Some of the benefits of staking include:
- Security and stability to the network: By staking your tokens, you are helping to secure the network and keep it running smoothly. Staking is important for ensuring that transactions get processed quickly and efficiently.
- Bonuses and incentives: When you stake your tokens, you may get rewarded with increased transaction speeds, higher payouts for validating blocks, or other rewards. That provides an incentive to hold onto your tokens and participate in the network’s governance process.
- Development of new features and applications: By staking your tokens, you help finance the development of new features and applications on top of the blockchain that can benefit the entire community. This helps ensure that innovation continues to thrive on the blockchain platform!
Examples of platforms that facilitate NFT staking include:
- Only1: A Web 3.0 social and creator economy platform built on Solana (SOL)
- WhenStaking: In-Game NFT Staking from Onessus, a DApp development studio
- NFTX: Community-driven NFT Staking
- CyberKongz – BANANA: Passive earning through tokens
2. Rent Out Your NFTs
A recent trend that has been gaining traction is to rent out your NFTs. From art exhibitions to early access to media content or live events, new ways are emerging for NFT owners to list their digital assets on the marketplace.
Particularly within the gaming industry, several GameFi platforms allow players to rent out their digital assets, such as weapons, tools, and skins, to other players within the ecosystem. This scenario is a win-win situation as the gamers get to enhance their gaming experience at a fraction of the cost of purchasing the items themselves while you earn a passive income from your NFTs.
For example, some card trading games allow players to borrow NFT cards to increase their win rates. Or, within the Decentraland metaverse, only players with an ICE Poker NFT wearable in their wallet can access the ICE Poker online casino. Owners of this wearable can delegate it to other players and earn a cut of the rewards.
The terms for these rental deals are governed by smart contracts, which automate the transactions. That allows NFT holders the freedom to set the preferred lending rate and duration, and the blockchain will find a renter.
An advantage of renting out your NFTs is that the smart contracts can automatically find you renters and maintain a secure and auditable record. Additionally, you will receive your payments immediately once a transaction goes through. However, the downside is that if a game loses popularity, you might not be able to find any renters.
Examples of platforms for renting or lending NFTs include:
3. Earn Royalties From NFTs
The concept of royalties exists today among the arts, film, and music industries, but they are often a major source of dispute between creators and labels. Blockchain technology solves this massive issue by automating the process of royalty payments through smart contracts, similar to the NFT rental process.
Creators can set their terms to impose royalty fees whenever their NFTs get traded and receive the royalty automatically through this built-in mechanism. That means they can receive passive income from the sales of their creations indefinitely without manually doing the work.
Currently, the most common form of NFT royalties is to charge a percentage of the sale price every time the NFT is resold, typically between 2.5%-10%. For example, if you set a 10% royalty on your NFT and it gets sold for $1,000, you will receive $100. Every time it gets resold on a secondary market, you will continue to receive payments.
NFT marketplaces, such as OpenSea, allow creators to set predetermined royalty terms while minting new NFTs. So, even if you are not a well-known creator today, you can mint your content online, set royalty terms, and sit back and watch the process. As your assets appreciate over time, your passive income payments also increase. Note that if you mint NFTs, you will need to pay gas fees.
The Bottom Line
There are many ways to earn passive income from NFTs. Compared to traditional investment options, such as stocks or real estate, NFTs allow for greater potential returns but at greater risk. Like any investment, there are no guarantees that you will profit. Given how new the NFT market is, it is hard to predict what will happen in this space.
Think about your risk tolerance, financial literacy, and financial goals. If you would like to invest in NFTs, conduct some research on the NFT projects or NFT collections you are interested in beforehand. Whenever I evaluate web3 projects, some key things I look for are the community behind the project, the roadmap, the founding team, and the history of value creation, to gauge whether they are worthwhile investments.
