Crypto Lending vs Staking — What’s the Most Prudent Choice?
As economic systems around the world collapsed due to the Covid crisis of 2020 and financial institutions were shaken to their core, more investors have been turning to the crypto markets and the still developing DeFi sector for profitable passive income ideas. Now, the crypto industry already offers several options for users to generate more income with their existing crypto assets. However, in recent times, I have noticed that crypto lending and crypto staking have become the most widely used passive income solutions.
According to Stakingrewards, the total staking market cap is at about $367 billion at the moment, with around $102 billion locked in staking. And as data from DeFipulse shows, MakerDAO, Aave, and Compound — the most popular DeFi lending platforms as of right now — all have around $5 billion locked in lending, with Maker having $5.95 billion.
A question I have seen crypto enthusiasts asking many times is this: which of the two aforementioned strategies helps you make more money out of the crypto you already hold? Before I give you an answer to that question, let’s first take a look at what crypto lending and crypto staking are all about, shall we?
What’s Crypto Lending?
Crypto lending is fairly similar to the traditional lending and borrowing process in banking, but for crypto. As you have probably already guessed, crypto lending provides users with the opportunity to lend fiat or digital money to other users. There are several DeFi platforms in the market that offer crypto lending and borrowing services.
Crypto lending, much like fiat lending, involves two parties — the lender and the borrower. The lender receives a fixed interest payment from the borrower in exchange for the loan. The borrower, on the other hand, has to deposit their own crypto assets on the lending platform as collateral so as to safeguard the lender’s investment.
Crypto lending has lately become quite popular among users for two primary reasons. I mean, you can get a loan instantly instead of having to go through the lengthy procedure associated with traditional lending, and there are no limits to the amount you can take out as a loan. What’s not to love?
And What’s Crypto Staking?
Crypto staking allows investors to participate in block validation and generation on a blockchain that follows a consensus algorithm known as Proof-of-Stake (PoS), and receive ‘staking rewards’ in return. The PoS algorithm requires all participants on the blockchain to ‘stake’ their cryptocurrency to earn said staking rewards.
Crypto staking is basically the act of locking your crypto assets (any amount you wish to deposit) in a specific PoS blockchain network of your choice for a certain period of time, so that you can receive the staking rewards from the network once that time period is over. By staking your coins, you are also helping the blockchain network remain active, and ensuring its security.
The method for calculating the staking rewards for users might vary with different PoS systems, but generally, once a blockchain network selects a staker to validate a new block, they are rewarded with a portion of the trading fees users pay while using the network. It’s important to keep in mind that the larger your staked amount, the more your chances of being selected by the network to validate new blocks.
Now, let me talk a little about the distinctions between crypto staking and lending.
So, What are the Main Differences between Crypto Lending and Staking?
Since the crypto lending process is not much different from traditional lending, it’s much easier to comprehend for investors looking for a passive income. On the other hand, crypto staking is a more complex process, and might prove to be a struggle especially for investors new to the cryptocurrency space.
With crypto staking, you need to first develop an in-depth understanding of the workings of a PoS blockchain. Plus, you’d require to be aware of how the particular blockchain network of your choice functions, the lock-in period (the amount of time you’d need to keep your crypto assets deposited to earn the staking rewards), how the rewards are calculated, etc. Not to mention that you’d also have to actively participate in the transaction validation process on the network.
Before deciding between crypto staking and crypto lending, it’s important for you to understand the different risks associated with both. To begin with, the lock-in period in case of staking is something you should carefully consider before putting your money behind it, since you won’t be able to use your funds to invest in any other opportunities that might arise during the staking period.
There are also some risks related to the ever-volatile crypto prices. If the price of your crypto assets fluctuate downwards during the lock-in period, it could cause you to lose out on profits.
Crypto lending, on the flip side, comes with counterparty risks. Additionally, most DeFi lending platforms in the market are still in the development stage. This means that the crypto platform you are using to lend out your assets might get hacked, which would result in you losing your investment.
As mentioned above, investing in crypto lending platforms involves the risk of losing all your funds. Therefore, in terms of security, crypto staking is a much safer bet than crypto lending. When you participate in a blockchain network as a staker, you make the network secure and are involved in its governance. Moreover, a PoS blockchain network’s security increases as a greater number of stakers join the network.
Crypto Lending vs. Staking: Which One Should You Choose?
Now that you are aware of the primary differences between crypto staking and crypto lending, we finally come back to the question: which one out of these two strategies would be the more beneficial choice? Well, in my opinion, there’s no absolute answer to this question. Both of these options can turn out fairly profitable returns. However, it’s important to remember that a lot depends on the market conditions at the time you stake your funds or lend them out.
As I’ve said before, crypto staking requires the investor to have some knowledge of the PoS blockchain networks and how they work. Therefore, if you are new to the cryptocurrency world, you’d probably better try out crypto lending. That being said, it’s undeniable that crypto staking opens up a horizon of exciting opportunities for investors truly wanting to participate in a blockchain network’s governance and maintenance. Crypto staking rewards are also quite often higher than the returns from crypto lending. Moreover, as entry barriers to the blockchain ecosystem get lowered with every passing day, crypto staking is gradually getting more accessible to the general populace.
Well, there you have it — a look at the advantages and disadvantages of both crypto lending and staking. I hope this helps you decide which avenue you want to invest your money in! As a DeFi enthusiast, I know where I’m headed.