In yesterdays article 10 simple rules of avoiding cryptocurrency scams I had two comments, one from @beachbummer and one from @yanika, that both suggested Proof of Stake coins should be the exception to my rule "Never trust the words passive earnings or passive income".
So in this article I want to address that topic, and go into more details about Proof of Stake (PoS) coins.
I am going to start by saying, proof of stake coins are not passive income nor are they passive earnings. As such I don't actually think that PoS coins really apply to that rule.
Is Proof of Stake passive income?
Although it may appear to be passive at a first glace, there are things that separate PoS coins from being passive income.
Passive income is effectively promising someone returns. As an example, passive income is like saying "if you have $100 in our program we will give you $10 every month" . Of course these figures can be changed to nearly anything.
So a lot of people will associate PoS coins as being passive income but that is wrong. The reason it is wrong is because of how cryptocurrency works.
Lets assume there is a PoS coin called MPI (Mothly Passive Income). For simplicity sake, lets say these MPI start off with a value of $1 each. If you hold 1000 MPI you will earn 10 MPI a month in staking rewards.
So you find this coin and decide you are going to buy 1000 of them as it seems like a heck of a deal. $10 in passive income each month right? Actually no - that's wrong.
You buy 1000 of them, and then shortly after the value of the coin drops by 90% and is now only worth $0.10 each. So your $1000 investment into 1000 MPI just became worth $100. Your $10 a month just became worth $1 a month.
So much for that passive income. Now in order to break even on your investment, you have to remain holding those 1000 coins for the next 900 months. Thats 75 years of your life just to break even.
For this reason, proof of stake is not actually passive income at all. It is actually much more like a security. You are getting paid dividends on an investment.
Are all Proof of Stake coins securities?
First I want to say that the vast majority of PoS coins are actually just scams. This has been proven time and time again and many have found themselves being forced to issue refunds by the SEC of the United States.
This is because they have no real project at all, they are just coins created with a sole use case of making people money - and they quickly become pump and dump scams.
Setting the scams aside, whether a PoS coin is a security or not vastly depends on whether its a utility, an investment or a currency.
If it is a utility or an investment, it is very much a security and should follow the security laws of the country the issuers are from as well as the security laws of the countries its buyers are from. It is a security because it is paying dividends on an investment.
It is very arguable that Satoshi did not opt to create bitcoin using the PoS model for this very reason.
Satoshi specifically stated it was because bitcoin did not have any potential of issuing dividends that kept bitcoin from being seen as a stock.
Why are Proof of Stake currencies the exception?
I set PoS currencies in a topic of their own because they are actually elaborate ponzi scams, but unlike what I explained above about ponzi scams, these are ponzi scams we have come to accept as a society.
The masses of people involved with cryptocurrency will tell you that part of what makes traditional banking a scam is the fact that you can put money in a bank and earn interest on that money - making a huge nationally backed ponzi scam. You are being paid interest from new members of the bank joining, taking out loans, and paying back those loans with interest - thus making a huge ponzi.
We have come to accept this practice as standard banking.
As cryptocurrency is effectively a giant war against the fiat currencies and banking systems, its only fair if we get to use similar practices within our cryptocurrency. After all if they are going to violate laws and create giant ponzi's its only fair we can do similar - only with PoS the funds are not coming from new members, but rather from mathematical equations.
As long as the goal of a currency is to become a new form of money and as long as real efforts are being made to get merchants accepting those coins as a form of payment, this should absolutely be considered acceptable.
So whether right or wrong, in my mind PoS currencies are in a category all to themselves.
What are legit Proof of Stake Projects?
The following list is not an endorsement of these projects.
NEO - NEO is one of the few projects that I think does PoS correctly - you sake NEO and earn GAS. GAS is a oken on the neo platform, you do not earn more NEO for staking NEO.
Waves - although very much not a favorite project of mine due to recent changes in the way they work, Waves is a legitimate PoS currency. Unlike other coins, they have a delegated staking system which means holding the coins in a wallet does not automatically stake them. You have to specific set he coins to being staked.
VeChain - I honestly don't know much about this project but listed it because its a top 50 project with PoS.
There are plenty of other PoS projects that exist that are not scams. I suggest no matter what I or anyone else says, really investigate a project and do your own research about why the project exists and what its overall goals are and what actions have been taken to achieve the goals.