Staking vs. Crypto Lending

Crypto investors always look for the best ways to earn passive income from their digital assets. If you are a crypto holder, staking and crypto lending are two concepts you will hear about a lot.

Crypto investors love earning passive income from their digital assets. As a crypto holder, staking and crypto lending are two concepts you will often hear about.

Staking and lending are two ways for crypto investors to earn passive income. They do not have to sell their holdings to earn through these two methods. What's the difference between the two, though? Is one a better and safer strategy than the other?

This article will compare crypto staking and lending. We will also discuss everything you should know about both strategies. 

What is Crypto Staking?

Staking means locking your crypto assets in a blockchain network. This helps to sustain and secure the network and confirm transactions. In return, you will get rewards for your holdings.

Important to Note: Staking is not compatible with all cryptocurrencies. Only cryptos that use the proof of stake (PoS) consensus mechanism can stake.

PoS cryptocurrencies sometimes pay very high interest. So, you can make a living through crypto staking. But it's essential to understand how crypto staking works before getting started.

How Crypto Staking Works

The PoS consensus mechanism is the mechanism that powers crypto staking. It uses Validators to confirm transactions and maintain consensus in a blockchain network. The participants first pledge to the blockchain network using their coins. This helps to make the network secure. The blockchain then selects validators from among these participants to confirm transaction blocks.

Important to Note: You're more likely to get picked as a validator if you commit more coins.

After that, the blockchain mints new coins every time a block is added to the network. It pays these coins as staking rewards to the block's validator. Sometimes these payouts are the same cryptocurrency that the participants stake. Other times, the payouts are in other cryptocurrencies.

The graph below shows your estimated monthly and yearly earnings from staking Ethereum. If you stake 1000 dollars, you will earn an annual return of 4.36%. This rate may change due to market conditions.

Revenue over time
As stated before, you must hold a coin that employs the PoS mechanism to stake crypto. Then you may decide how much you wish to stake. Many prominent crypto exchanges allow you to stake on their platform. They also offer different staking rewards for different networks.

Important to Note: When you stake your coins, they remain in your ownership. You're putting your staked coins to work to earn some passive income, and you may unstake them if you want to trade. 

The unstaking procedure may take some time. Some coins and exchanges may also need you to stake coins for a set period.

For example, Binance has locked staking, which means it locks your coins for at least 30 days. Other coins and exchanges allow for a shorter unstaking term of 7 or 15 days. For example, Kraken reserves up to seven days.

Crypto Staking Plaforms

These cryptocurrency platforms allow you to earn rewards by staking your coins.

Let's take a look at some of the most popular staking platforms.

1. Binance

Binance is one of the top crypto-staking platforms. It can handle more than 100 distinct staking coins. Also, the platform allows you to lock up your coins for any duration you prefer. The duration usually lasts 10, 30, 60, 90, or 120 days.

For example, you can stake PancakeSwap token (CAKE) on the Binance website. If you stake CAKE for 120 days, you earn a super-high yield of 79.87% at the time of writing. Each staking pool has a limited allotment, though. So the best bargains may sell out fast Binance does not charge its users any fee for staking.

2. Kraken

Kraken is a well-known cryptocurrency exchange. It operates in 48 US states and 176 other countries. Kraken lets you trade over 90 coins and allows you to stake most of them. It also offers very high yearly payouts for some of its staking coins. Kraken gives instant rewards with no waiting or lockup periods. Like Binance, Kraken also does not charge a staking fee.

3. eToro

eToro is an SEC-regulated cryptocurrency broker. It offers industry-low account minimums and industry-leading staking fees. There is no need to keep your crypto tokens locked up at all. You only need to hold your tokens in your eToro crypto wallet. Doing so qualifies you to receive automatic staking rewards.

eToro carries out the staking process on behalf of its users and charges a tiny part of the profit as a fee.

Pros and Cons of Crypto Staking

Staking has several pros and cons. Let's discuss them.

Pros

There are several benefits of staking your cryptocurrency. Here are the most important ones:

  • Source of Passive Income:

This is the main advantage of staking. It allows you to earn extra cryptocurrency with little risk. The interest rates can also be pretty high. You can also form a staking pool for long-term crypto token holders. That way, you will earn more if the token increases in value.

  • Account Setup is simple:

Staking is straightforward and can be completed in a few simple clicks. The process is even simpler now that major exchanges offer staking services. Staking also does not need significant initial investment.

  • Staking helps the blockchain:

Staking is a way of showing your support for a cryptocurrency's blockchain. These blockchain networks use staking to verify transactions and keep things operating well. Staking also helps to keep the network safe and secure.

  • Staking is energy efficient:

Another benefit of staking is that it is friendly to the environment. You don't need the massive computing power as in the proof of work (PoW) consensus networks. To illustrate, check out the graph below. It shows the relative energy consumption per transaction of PoW and PoS coins.

Relative energy consumption per transaction
Cons

There are some risks you should consider before locking up your crypto:

  • Crypto Price Volatility:

This is the most significant drawback of crypto staking. Sometimes you may come across coins with unusually high staking reward rates. If that is the case, consider this:

Many smaller crypto startups tempt investors with high returns. These investors later watch in horror as their prices plummet.

  • Unstaking and Lockup Period:

Even though the crypto you stake remains yours, you must unstake it before trading it again. You can receive any unpleasant surprises when you're about to unstake. So it is better to determine if there is a  lockup time and how long the unstaking process takes. It varies from exchange to exchange.

  • Hacks and Exploits:

Hacking and exploits on the protocol or exchange are a possibility. Even large, well-established exchanges can suffer hacking. Crypto.com is an example of this.

 Staking your crypto is a high-risk strategy. But it could also offer high rewards. It is suitable for crypto investors willing to lock their money away for a certain period.

What is Crypto Lending?

In crypto lending, investors lend their crypto holdings to borrowers. In return, they receive interest payments from these borrowers. The interest payments are also known as crypto dividends. Crypto lending is available on both centralized and decentralized platforms. Regardless of where it's practiced, the core principles remain the same.

Important to Note: Most platforms that lend crypto accept stablecoins as well.

On earning passive income, crypto lending is comparable to crypto staking. And yet, it still has its differences.

How Crypto Lending Works

The crypto lending process is simple. There are three main parties. The lender is the one with the crypto holdings. The borrower needs a loan, and a third party mediates the process. The third party can be an exchange or a crypto lending platform.

The following are the general phases in the crypto lending process:

 1. In phase one, the borrower selects a crypto lending platform and applies for a $500 loan (for example). There are loads of platforms out there. So compare and contrast well before choosing. Compare factors like interest rates, platform risks, fees, deposit limit, lending duration, etc.

 2. The second phase is the collateral payment. The lending platform determines how much crypto you need as collateral. It depends on the Loan-to-Value ratio (LTV) and the loan amount you need. For example, if a lending platform has a 50% LTV, that means you will have to pledge $1000 in crypto to get a loan of $500.

 3. In the third phase, the borrower locks the collateral amount in the lending platform. In this case, it is $1000.

 4. In the fourth phase, the borrower receives the crypto loan from the platform.

 5. In the fifth phase, the borrowers start paying the interest payments to the platform. The platform shares these interest payments with the lender.

 6. In the last phase, the borrower repays the total loan amount with interest. They then receive their collateral back.

The chart below illustrates the whole process:

Crypto Lending Process
Lenders place their crypto assets in a smart contract, which locks up their funds for a set period. For borrowers to avoid liquidation, they must top up the collateral with changes in the price.

For example, let's say you take a loan of $500 with collateral of $1000. If the price of your crypto falls below $1000, you will have to add more funds to match the collateral value. Otherwise, the platform will liquidate your collateral and repay the lender.

Crypto Lending Platforms

Now that you know how crypto lending works, it is time to select a platform. There are loads of new lending networks or platforms out there. These platforms connect borrowers and investors. They also provide competitive APYs on several tokens.

Let's take a look at the most popular crypto lending platforms right now.

1. BlockFi

 BlockFi is a specialist in lending and earning crypto and manages over $10 billion in assets. Although, you can also buy and sell crypto as well.

 It deals with several cryptocurrencies, and as a lender, you can earn up to 7.5% APY and get paid monthly.

You won't have to worry about any hidden fees or balance requirements. You may save all your coins in one location and also increase their earning potential.

For borrowers, the rates are as low as a 4.5% annual percentage rate (APR). You can also get up to 7.5% on stablecoins like USDT, BUSD, etc. But the APR is low (4.5%) on the non-stablecoins like ETH, BTC, etc.

Creating an account on BlockFi is simple. You can start by providing your name and email address.

2. MakerDao

MakerDao is one of the biggest DeFi lending protocols, with a Total Volume Locked (TVL) of $9.54b as of May 2022. It has created a cryptocurrency called Dai (DAI).

Dai is a stable, DeFi currency that is accessible to any individual or business.

You may deposit up to 25+ crypto assets as collateral as soon as you establish a vault on MakerDao.

The MakerDAO protocol brings a lot of liquidity to the crypto lending space. For example, when the collateral value for a loan falls below the loan amount, liquidation sets in. As a result, the platform can sell ETH collateral to cover the running of DAI loans.

3. Compound

The Compound protocol has a TVL of $4.17b as of May 2022. This makes it one of the most popular platforms for lending and borrowing crypto.

It has a native token, COMP, which enables users to earn even greater returns. They do this by lending their cryptocurrency to the platform to improve liquidity. The protocol also supports a wide range of coins, including Ethereum.

Compound's most intriguing feature is its security. It is currently one of the safest crypto loan platforms.

Furthermore, Compound also has a live price feed. This enables easy tracking of prices on platforms based on available liquidity.

Pros and Cons of Crypto Lending

Lending companies have gained popularity in a short period. Let's look at the pros and cons of crypto lending.

Pros

Here is a list of benefits of crypto lending:

  • Source of passive income:

As a crypto holder, you can deposit your coins in a vault and start earning without much stress. It is a great way to earn passive income.

  • Easy to access:

If you match the collateral requirements, you are eligible for a crypto loan. This attribute makes them more likely to get than a traditional loan. They also don't need a credit score either.

  • Fast Funding: 

You can get your loan within a few hours, given that the platform has approved you.

  • Interest rates are generally low:

Crypto loans are cheaper than personal loans and credit cards. They aren't as cheap as a mortgage loan, though. A crypto loan with an interest rate of less than 10% is very common. 

  • Efficient and Scalable:

Smart contracts manage crypto loans. It makes the lending and borrowing process more efficient and scalable.

Cons

Now let's discuss some of the cons of crypto lending. 

  • Risk of forced liquidity:

This happens when the price of your collateral falls below a set value. The lender can issue a margin call, requiring you to raise your holdings to keep the loan. If you don't provide funds to match the value, forced liquidation happens. The possibilities of this happening are significant since cryptocurrencies are quite volatile.

  • Insurance risk with the interest account funds:

If you are lending your own digital assets, then you might lose everything if the exchange fails. This is because the funds in your interest account are not insured.

  • Liquidation fines:

Borrowers who miss payments are also charged a liquidation fee. For example, Binance charges 2% of the total amount borrowed as a fee.

  • Security and Fraud risks:

Crypto lending platform security is becoming more of a worry. For example, an attacker robbed Beanstalk Farms of $182 million in cryptocurrencies.

Crypto lending is a good way to earn passive income from crypto holdings.

Both lenders and borrowers can enjoy crypto lending. But it is important to carry out thorough research before selecting a platform.

DeFi vs TradFi?

TradFi stands for Traditional Finance. It relates to traditional banking, and investments that aren't based on blockchain technology. DeFi is different because it is built on an entirely new technology that enables multiple parties to engage in financial activity without the need for a central institution like a bank or trading company.

Wrap-Up: Crypto Lending vs Staking

Both staking and crypto lending are great strategies to earn passive income. Crypto lending platforms are on the rise. Also, all major blockchains are shifting to the PoS consensus mechanism. It seems clear that staking will later replace mining.

To summarize, you don't always have to trade to earn from crypto. If you are not interested in trading, you can consider staking or lending. The safety of these two strategies is dependent on whether you select the right platform.

Sponsored

YouHodlerEasy DeFi with huge APY

  • Earn up to 365% interest rate on your crypto

  • Participate in staking with a single coin

  • No strings attached - your profit is your profit. Always