Incentives are everywhere and exist since the beginning of mankind. They play a huge role in influencing decisions and encouraging mass adoption by offering numerous benefits to participants of a community or a society. Speaking of economic incentives, it has gradually evolved and manifested from bartering wheat to gold, from discounts to cashback, and from reward points to interest rates.

Cryptocurrencies and Incentives

Cryptocurrencies are ushering in a new wave of incentivization for community participants and there is a plethora of potential to explore. Economic incentives have got a whole new meaning acting as the crux of any blockchain platform. Why? Because it adds to the value proposition. This is enabled by compensating participants as a pay-for-performance rewards system via tokens.

As many platforms continue to offer incentives in DeFi (Decentralised Finance) landscape, it can be classified into the range of recurring incentives to one-time incentives, depending on the active or passive involvement of an individual.

Let’s explore the type of incentives existing in the world of cryptocurrencies and their scope as passive and active income. We will also go through some examples of each.

Recurring Incentives

Below are some rewards and incentives that can be earned regularly — depending upon active or passive participation and the nature of the transaction.

1- Block Rewards: A block reward is a portion of newly minted digital tokens assigned to a user who helps to verify transactions on a blockchain protocol.

Blockchains following the Proof-of-Work consensus mechanism needs volunteers to solve complex computational problems to create new blocks. Such volunteers or miners get incentives in terms of cryptocurrencies, for their contribution, and for putting their resources at work. These block rewards serve as the primary financial incentive for people to participate in the network. Upon successful mining of a block, Bitcoin miners get 6.25 bitcoins as a reward. (as of April 2022)

In a Proof-of-State consensus mechanism blockchain, validators get started by staking some cryptos and then go on to earn commission rewards for verifying legitimate transactions on a network. Commissions can be set by the validator and for public validators, they range between 0 and 10%.

2- Staking Pool Rewards: PoS blockchain participants can pledge their coins to a cryptocurrency protocol by delegating their crypto to validators. These validators share their commissions as an incentive to you. This is a great way to earn passive income, with your unused crypto coins for the pledged time period.

You can also pledge NFTs to support a project while you earn passive income. When you stake an NFT, the staking platform determines its worth based on the rarity and arrives at an annual percentage yield (APY). The rarer your NFT, the higher the APY you get. Some NFT staking platforms are Onesuss and NFTX

3- Yield Farming Rewards: Yield Farming is a process in which crypto holders lend assets to a decentralized exchange in return for rewards. The main motive is to create liquidity to enable large-scale transactions. These rewards come from trading fees paid by traders for swapping tokens. Fees average at 0.3% per swap and the total reward differs based on one’s proportional share in a liquidity pool. Yield Farming additionally offers farmers the governance tokens and thus is more rewarding than just Liquidity Mining.

4- Hold stablecoins and lend for interest incentives: On certain centralized exchanges, incentives are also disbursed simply by buying and holding dollar-pegged stable coins like DAI and USD Coin (USDC). As high as 2%-4% APY rewards are offered and additional incentives for lending afterward. One can also experiment with lending cryptos (stablecoins for beginners) — via DeFi protocols such as Compound or Aave.

5 — Credit Cards rewards — It is your usual credit card, but instead of offering fiat cash reward points, you get incentives in terms of cryptocurrency at each swipe. These cards seamlessly add to your crypto portfolio without the pain of converting fiat to crypto on an exchange.

One-time Incentives

Apart from the above incentive structures that reap regular crypto incomes, there are also vast passive income opportunities being awakened by DeFi. Below are some incentive structures in the crypto world offering one-time incentives.

• Airdrops: These are small incentives given free to the community for simply being early adopters, carrying on frequent interactions, engagements, and promoting projects. Airdrops are usually a part of a broad marketing strategy and the idea is to spread awareness by completing small tasks like tweeting about the project, doing a transaction, signing up, etc.
• Sign-Up and Referral Bonuses: These are bonuses given out on signing up on a centralized exchange, marketplace, or DApp and referring your friend on the same. Almost all centralized exchanges offer these under their crypto affiliate programs.
• Shopping CryptoBack (Cashback): One of the oldest tricks popularized in the era of eCommerce is Cashback. Moving from traditional cashbacks. Cryptoback solutions are in now and provide incentives while you shop — to stock up cryptos. This not only encourages mass adoption among users but also sets up a network for businesses where people spend their fiat and earn crypto without hassle.
• Perform To Earn: If you fulfill small tasks associated with a project, which increases user engagement in the project, you are likely to get some rewards and incentives. For example, have you heard about Brave Rewards? These are incentives offered to watch ads on Brave Browser, in form of BAT Tokens. Coinbase Learn academy offers crypto to you while you educate yourself. Perform-to-earn incentives include many categories like Learn-to-Earn, Play-To-Earn, and now even Move-To-Earn with Solana’s StepN! These rewards tend to be cryptocurrencies, or tokens, or can be NFTs as well.

Don’t forget to DYOR

There is always a risk involved when we talk about cryptocurrencies and incentives are not isolated from it. With recurring incentive options, there is a huge probability of impermanent loss and permanent loss. Speaking of airdrops, token distributions are common to kickstart a DEFI platform, however, it is important to research the credibility of the project before sharing the wallet address and other details. Both new users and veterans are equally susceptible to being vulnerable when it comes to choosing crypto exchanges. Cryptocurrencies are new, hyper-volatile and one should only invest the amount they are okay to lose. Thereafter, incentives will follow.