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.
Staking and crypto lending are two methods for investors to profit from their crypto holdings without having to sell them. What's the difference between the two, though? Is one a better and safer strategy than the other?
In this article, we will compare crypto staking and lending and find out everything you should know about both strategies.
What is Crypto Staking?
Staking is the practice of locking your crypto assets to a blockchain network in order to sustain and secure the network and validate transactions. In return, you will get rewards for your holdings.
Important to Note: It's only compatible with cryptocurrencies that process payments using a consensus mechanism called proof of stake (PoS).
Crypto staking earns you passive income because certain cryptocurrencies pay very high-interest rates for staking. It's critical to understand how crypto staking works before getting started.
How Crypto Staking Works
Validators are used in the PoS consensus mechanism to validate transactions and maintain consensus in a blockchain network.
Participants first make a pledge to the blockchain network using their coins. This helps 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.
New coins are minted and paid as staking rewards to the block's validator every time a block is added to the network.
The payouts are almost always the same cryptocurrency coin that the participants are staking.
On the other hand, some blockchains utilize a different form of cryptocurrency as a staking reward.
The graph below shows you estimated monthly and yearly earnings from staking Ethereum. If you stake a 1000 dollars, you will earn an annual return of 4.36% (at the time of writing), taking your investment value to 1043.65 dollars.
Important to Note: When you stake your coins, they remain in your ownership. You're effectively 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; certain cryptocurrencies and exchanges require you to stake coins for a set period of time. For example, Binance has locked staking, which essentially allows them to retain your money for a minimum of 30 days.
However, a few 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
A crypto staking platform is a cryptocurrency exchange, broker, or application that allows you to earn rewards by staking your coins.
Let's take a look at some of the most popular staking platforms.
Binance is one of the top crypto staking platforms. It can handle more than 100 distinct staking coins, covering many projects and annual percentage yields (APYs).
In addition, the Binance platform provides a variety of settings and options for how long you want to keep your tokens locked. The duration usually lasts 10, 30, 60, 90, or 120 days.
For example, PancakeSwap is available to stake on the Binance website on a 120-day lockup period alongside a super-high yield of 79.87% at the time of writing.
The best bargains may sell out rapidly because each staking pool has a limited allotment. Binance does not charge its users any fee for staking.
Kraken is a well-known cryptocurrency exchange operating in 48 US states and 176 other countries. Kraken lets you trade over 90 coins and allows you to stake several tokens, including Cardano, and Ethereum, all of which offer very high yearly payouts.
Kraken gives instant rewards with no waiting or lockup periods. Kraken, like Binance, does not have a staking fee.
eToro is an SEC-regulated cryptocurrency broker with industry-low account minimums and industry-leading staking fees.
There is no need to keep your crypto tokens locked up for any amount of time. On the contrary, until you decide to payout, you will continue to receive staking rewards on qualifying tokens held in your eToro crypto wallet.
The staking process is carried out by eToro on behalf of its users. As a result, eToro keeps a tiny portion of the profit as a fee.
Pros and Cons of Crypto Staking
Staking has several pros and cons. Let's discuss them.
There are several benefits of staking your cryptocurrency. Here I have highlighted the most important ones:
Source of Passive Income:
The main advantage of staking is that you earn additional cryptocurrency, and interest rates can be quite high. For example, here's a snapshot of potential rewards on Kraken as of May 2022.
It is good to form a staking pool for long-term crypto token holders, as you will earn yield in addition to capital gains from token value increases.
Account Setup is simple:
Staking is straightforward and can be completed in a few simple clicks, especially now that major exchanges are offering staking services. Staking does not require a large initial investment.
Staking helps the blockchain:
Staking is a method to show your support for a cryptocurrency's blockchain. These blockchain networks use staking to verify transactions and keep things operating smoothly. Staking also helps to keep the network safe and secure.
Staking is energy efficient:
Another benefit of staking is that it is eco-friendly. You don't need the massive computing power needed in crypto mining for proof of work (PoW) consensus networks. The graph below shows relative energy consumption per transaction and is essentially comparing Bitcoin and Ethereum PoW vs Ethereum PoS.
There are some risks you should consider before locking up your crypto:
Crypto Price Volatility:
The most significant drawback associated with crypto staking is that the prices are extremely volatile. If you come across coins or tokens with unusually high staking reward rates, consider this:
Many smaller crypto startups, for example, tempt investors with high returns, only to see 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, so it is better to determine if there is a minimum 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 with their branding on UFC sponsorship agreements like Crypto.com have been hacked severely.
Staking your crypto is a high-risk but possibly high-rewarding strategy to generate passive income. It is suitable for crypto investors willing to lock their money away for a certain period of time.
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, and the core principles remain the same.
Important to Note: Most platforms that lend crypto accept stablecoins as well.
When it comes to earning passive income, crypto lending is comparable to crypto staking. And yet, it works slightly differently.
How Crypto Lending Works
The crypto lending process is simple. Three main parties are involved: a lender with crypto holdings, a borrower in need of a loan, and an intermediary or a third party to carry out the process and complete transactions. 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. There are loads of platforms out there, so compare factors like interest rates, platform risks, fees, deposit limit, lending duration, and collateral.
2. The second phase is the collateral requirement. The lending platform determines how much crypto is required as collateral. It mainly 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 required cryptocurrency as collateral to the lending platform. In this case, it is $1000.
4. In the fourth phase, the borrower receives the crypto loan (in this case, $500) funded by the lender through 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, when the borrowers have repaid the total loan amount with interest, they receive their collateral.
The chart below perfectly depicts the whole process:
For borrowers to avoid having their collateral liquidated, they must top up the collateral with the price change. For example, if you take a loan of $500 with collateral of $1000, and the price of your crypto falls below $1000, then you will have to add more funds to match the collateral value. Otherwise, the platform will liquidate your collateral and send the money back to 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.
If you want to make money off your crypto assets, lending platforms provide competitive APYs on several tokens.
Let's take a look at the most popular crypto lending platforms right now.
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 minimum or maximum balance requirements. You may save all of your crypto assets in one location while also increasing their earning potential.
For borrowers, the rates are as low as a 4.5% annual percentage rate (APR). BlockFi offers up to 7.5% on stablecoins like USDT, BUSD, USDC, etc. However, the APR is low (4.5%) on the non-stablecoins like ETH, BTC, etc.
Creating an account on BlockFi is fairly simple, as they just ask for your name and email address.
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, decentralized currency that can be used by any individual or business.
You may deposit up to 25+ cryptoassets as collateral as soon as you establish a vault on MakerDao.
Liquidity was brought to crypto lending and borrowing through the MakerDAO protocol. For example, when the collateral value for a given loan, such as ETH, has fallen significantly below the amount of the loan in DAI, the loan is liquidated. As a result, the platform can sell ETH collateral to cover the costs and penalties associated with DAI loans.
Compound protocol has a TVL of $4.17b as of May 2022, making it one of the most popular platforms for lending and borrowing crypto.
It has a native token, COMP, which enables you to earn greater returns by lending your cryptocurrency to the platform to improve liquidity.
The protocol supports a wide range of cryptos, including Ethereum, any of which can be deposited or borrowed.
Compound's most intriguing feature is its security. That's why it is currently one of the safest crypto loan platforms.
Furthermore, Compound's live price feed enables easy and flexible 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.
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 collecting APY without having to monitor the loan. 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, and they don't require a credit score either.
You can acquire 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, albeit they aren't as cheap as a mortgage. 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.
Now let's discuss some of the cons of crypto lending.
Risk of forced liquidity:
When the price of your crypto (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, liquidation is forced. 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.
Borrowers who miss payments are liquidated and 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, especially as incidences of crypto theft rise. For example, an attacker robbed Beanstalk Farms of $182 million in cryptocurrencies.
Crypto lending is a viable alternative for crypto investors looking to earn passive income from their crypto holdings.
Both lenders and borrowers can benefit from crypto lending. However, it is important to carry out thorough research before selecting a platform.
Wrap Up: Crypto Lending vs Staking
Both staking and crypto lending are great strategies to earn passive income. The crypto lending platforms are on the rise, plus all major blockchains are shifting to the PoS consensus mechanism. It seems clear that staking will eventually replace mining.
To summarize, if you are a crypto investor who isn't interested in trading, both staking and lending are viable alternatives. The safety of these two strategies is dependent on whether you select the right platform.