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 money 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 into 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 make the network secure. The blockchain then selects validators from among these participants to confirm transaction blocks.
Important: If you commit more coins, you are more likely to be chosen as a validator.
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. These payouts are sometimes made using the same cryptocurrency that the participants have staked. Other times, the payouts are in other cryptocurrencies.
The graph below shows your estimated monthly and yearly earnings from staking Ethereum. If you stake $1,000, you will earn an annual return of 4.36%. This rate may change due to market conditions.
Important: When you stake your coins, you retain ownership of them. 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 require 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 can be unstaked in 7 or 15 days instead of 30. 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.
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 the PancakeSwap token (CAKE) on the Binance website. Each stake pool has a limited allotment, though. So the best bargains may sell out fast. Binance does not charge its users any staking fees.
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.
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.
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 require a 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 same massive computing power as in 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.
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 watched in horror as their prices plummeted.
Unstaking and Lockup Period:
Even though you still own the crypto you staked, you must unstake it before you can trade it again. When you're about to unstake, you might get some unpleasant surprises. 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 possibilities. Even large, well-known exchanges can be hacked. Crypto.com is an example of this.
Staking your crypto is a high-risk strategy. But it could also offer high rewards. It's good for crypto investors who want to lock up their money for a certain amount 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. Regardless of where it's practiced, the core principles remain the same.
It's worth noting that most crypto lending platforms accept stablecoins as well.
For 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. A third party could be an exchange or a cryptocurrency lending platform.
The following are the general phases in the crypto lending process:
In the first step, the borrower chooses a platform for crypto lending and applies for, say, a $500 loan. 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.
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, you will have to pledge $1000 in crypto to get a loan of $500.
In the third phase, the borrower locks the collateral amount into the lending platform. In this case, it is $1000.
In the fourth phase, the borrower receives the crypto loan from the platform.
In the fifth phase, the borrowers start paying the interest payments to the platform. The platform shares these interest payments with the lender.
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:
For example, let's say you take a loan of $500 with collateral of $1,000. If the price of your crypto falls below $1,000, 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.
Take a look at the most popular crypto lending platforms.
Pros and Cons of Crypto Lending
Lending companies have gained popularity in a short period of time. Let's look at the pros and cons of crypto lending.
Here is a list of the 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 meet the collateral requirements, you are eligible for a crypto loan. This attribute makes them more likely to get a loan than a traditional one. They also don't need a credit score.
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.
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 do not provide the funds to match the value, you will be forced to liquidate. 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 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 conduct 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.