This market along with the decentralized finance industry allows people to make some additional income.
Two of the most popular methods followed by people nowadays in the crypto space are crypto lending and staking.
If you too want to make some extra money but do not know how to go about it and what crypto lending and staking really are, this is the right place to be.
Basically, crypto staking is a process by which you can secure a network. As a reward, you are paid with some more coins.
However, these are just the fundamental differences between crypto lending and staking.
There are lots of others that you need to know as a crypto investor or trader.
This article will let you know about the differences between these two trading concepts and how exactly you can use these two methods in your trading strategy to make them adaptable to your needs, preferences, as well as your risk appetite and reward profile.
Therefore, go through this article very minutely so that you are confident in the end when you make your choice and start trading with poise on a reliable crypto exchange.
8 Differences Between Crypto Lending and Staking
Over the years, the crypto lending market has evolved and there are now more platforms allowing users to lend their crypto assets and earn interest in return.
However, crypto staking, which is a unique financial term that is used in the crypto space, is also on the rise.
The primary reason for it is that most of the major blockchains are now moving on to Proof of Stake consensus algorithms.
It is therefore quite evident that crypto staking will soon eclipse and replace crypto mining.
When you want to get involved in either of the two, or both, you should know how they differ and what exactly you can expect from crypto lending and staking. Well, here they are for you.
Crypto staking is a process in which you agree to secure a network by putting in some money to it. This will, in turn, help the network in validating the transactions.
On the other hand, crypto lending is a process where you basically agree to lend your crypto assets and, in return, get paid for it in terms of interest.
This way you not only facilitate crypto trading but also make some passive income.
2. Purposes Served
You are rewarded for your stake with a percentage of it in gratitude by the blockchain network.
Crypto lending, on the other hand, provides support to the so-called liquidity pool when you give your crypto coins or tokens to the network.
In this process you are actually allowing some other user in need to use it either as loans or swaps.
3. Working Process
The working processes of crypto lending and crypto staking are pretty different. As in the case of crypto lending, the borrowers and lenders involved in the process are linked via an online third-party crypto lending platform.
This means that in a crypto lending process there are three parties involved such as:
- The lenders – They give their crypto coins and stablecoins to make passive income in the form of interest on their loans.
- The borrowers – They are the users who borrow funds for different purposes and put up some collateral in the form of fiat or crypto assets to receive the funds.
- The third-party crypto lending platform – These online platforms connect the participants and also automate the transaction.
On the other hand, in the crypto staking process, the users need to lock up their crypto coins to the protocol.
After that, the protocol chooses the validators from those users to validate the blocks of transactions. The process involves:
- Holding a crypto coin that makes use of the Proof of Stake mechanism and
- Choosing the amount to stake via any staking platform.
When crypto coins are staked, the coins are typically in possession of the users and they can withdraw them anytime they want to trade with them.
It is just that the coins will be put to work by the platform until that period. Ideally, when you lock up a large number of coins, you will be able to make greater passive income.
4. Rates on DeFi Platforms
The rate typically depends on the money market that is taking the deposits as well as the demand for the particular coin.
And, on the other hand, in the world of crypto lending, you will get much higher returns in DeFi than others. This is because the rates vary typically with the prevailing conditions of the crypto market.
5. Time Factor
Crypto staking is quite a rewarding process but the process itself takes quite a long time to provide the rewards.
The time it would take also depends on the type of coin you choose to stake. Basically, you will need to lock up your coins for at least a couple of months before you are allowed to access them again.
And, if you want to make more profits then you will have to lock them up for years depending on the number of coins you own. Therefore, crypto staking typically is a long-drawn process.
In comparison, crypto lending takes a reasonably shorter time to get the rewards from it. In the case of taking a crypto loan, the money is issued within the same day.
6. Coin Type
Crypto staking is typically allowed only on those coins that use the Proof of Stake consensus algorithm.
This ideally means that you cannot use popular crypto coins such as Bitcoin, Monero, and Litecoin for staking.
You even cannot use Ethereum currently for staking as of now since it still uses the PoW consensus algorithm though it is going to move to the PoS consensus mechanism sometime this year.
On the other hand, in the case of crypto lending, you will have a wider range of options to choose from. In fact, you can practically use any type of crypto coin to commit as collateral which makes it much less limiting than crypto staking.
The diverse set of merits and demerits of crypto lending and staking can be summarized as under.
- Crypto Lending is a reasonably cheap alternative to personal loans and credit cards though it may not be much cheaper in comparison to mortgage loans. However, you will get crypto loans at quite a low rate of interest, with rates often below 10%.
- You can get as much loan as you want depending on your asset value. Most of the crypto exchanges allow the users to borrow up to 50% of the value of the portfolio but there are a few that can allow you to borrow as much as 90% of the worth of assets. Loaning currencies are also allowed by a few crypto lending platforms.
- When you apply for a loan on a crypto lending platform, it makes no difference whether you have a poor credit or a good credit as that is not considered for the approval of the loans.
The entire process of crypto lending is pretty fast and it takes only a few hours to complete, right from the loan application to its disbursal.
As for crypto staking, on the other hand, the most significant benefit of it is that it does not need any kind of equipment as it is required in crypto mining.
It is also more environmentally friendly as compared to crypto mining and at the same time it adds to the efficiency and security of the blockchain.
If there is a sudden and unexpected fall in the value of the network or if it becomes unpopular it will pull down the value of your asset along with it as well because the rewards are usually paid out in the native token of the network.
Moreover, the value of your investment will also fall if the network you have staked your coin in is hacked.
Few other demerits of crypto staking can be summarized as follows:
- Though the concept of receiving rewards from staking crypto coins seems to be attractive, in most cases crypto staking rewards are pretty low as compared to the regular block rewards provided by the blockchain network and therefore higher returns cannot be expected.
- Most of the crypto platforms may even ask you to lock up a minimum number of crypto coins in order to receive rewards. And, there is always the risk of losing them as well.
- There may be a few particular crypto assets that may not offer daily rewards which may add to the long waiting period to receive them.
- There may be a few specific staking assets that come with lock-up periods and therefore you will not be able to access them even if their prices fall significantly.
On the other hand, with crypto lending, the rate of interest is set by the company to whom you lend your coins and this rate can vary over time.
This can be quite significant depending on the popularity of the particular asset. Other downsides of crypto lending are:
- A limited amount is available to the borrowers to borrow and it depends on the particular platform they are using.
- There may be a few platforms that may ask you to stake your crypto coins for a particular period of time in order to receive interest in them.
- You will be asked to hold your crypto coins in an online digital wallet of the company in order to participate in crypto lending which is less secure in comparison to a physical wallet.
Another significant concern is the security of the platform given the fact that there has been a significant rise in the number of crypto thefts of late.
Which is Better – Crypto Lending or Staking?
Both crypto lending and crypto staking have grown exponentially over the years and both can offer great financial solutions to the users just as the crypto market on the whole does.
However, both these facilities seem to be a bit risky and at odds with the ethos of crypto which is ‘Not your key, not your crypto’ because in both you will be asked to move your crypto coins out from your wallet and hold in the wallet of the company.
However, you cannot say crypto staking is better than crypto lending, or vice versa, since they differ in their purposes, merits, and demerits.
Ideally, instead of finding that, you should find out which among these two options suits you and serves your purpose in the best possible way and means.
These additional facts and information about them will surely help you a lot in that regard.
Typically, if you do not have much interest in trading your crypto coins or do not want to hold them for a long period as well, both crypto lending and crypto staking can prove to be good pair of alternatives for you in that case.
All you have to do is choose the right platform for reaping the benefits from these two features.
Though crypto lending and staking both are useful processes that will allow you to earn handsome rewards, there is no way in which it can be said that one process is better than the other.
This is because the choice ultimately is of the users, which is you in this case, and it all depends on the type of investor you are.
Therefore, it will be more reasonable if you know the facts and factors that will influence your choice in the end.
Crypto staking will be a better option for you if you want to participate in a protocol directly.
On the other hand, if you are interested in getting an interest payment, then crypto lending will be just the right choice for you.
However, there is one thing that you should remember in the first place even before you start thinking of choosing one among crypto lending and staking.
In both these forms you will need to give up control over your coins.
If you are unwilling to do that or think that it is too risky for you no matter what, then you should not choose any of these techniques.
As said before, it is all up to you and therefore you should always consider what you want, your risk appetite as well as do your own research to make sure that you will be comfortable following any of these forms of trading.
When it comes to crypto lending, you will find several DeFi or Decentralized Finance companies that will allow the users to lend their crypto to other traders and in return they earn interest.
As of records, there are more than 20 billion dollars rolling in different lending companies such as AAVE, Maker, Compound, and more.
Lending pools are created by these companies where the investors deposit currencies and the interest rate is created and accrued daily.
The rates of interest may vary depending on the type of currency lent out.
Ideally, these rates of interest can range anywhere from a fraction of a percent and up to as much as 30% in a few instances.
However, there are a few pitfalls that you should know and avoid while lending or staking your crypto coins.
There are also a few other important facts to know about before you jump into staking your crypto coins.
This is a specific process that relies heavily on a consensus mechanism which is commonly known as Proof of Stake or PoS.
However, if you want to deal with specific crypto coins such as Bitcoin, their blockchain typically works on the Proof of Work or PoW consensus mechanism.
In this particular system, the miners spend a huge amount of resources, computing power and energy to solve a puzzle.
This helps the blockchain to validate a transaction within the block. This keeps the blockchain running.
In this process in particular, the user who can solve the puzzle first earns a reward.
This means that the other users who were working on it but failed to be the first one to crack it not only loses the reward but all their computational power and resources spent ultimately are of no use and therefore are wasted.
This is why experts and critics say that the PoW consensus mechanism is inefficient and unproductive.
However, on the other hand, in the PoS blockchain the process of mining is entirely different. In this process the machines do not compete while solving a puzzle.
Instead, a miner or node is assigned by the network with the responsibility to validate a transaction.
However, the right of the miner to perform such validation work largely depends on the stake or amount of coins owned by the node at that particular point of time.
When the network gives the nod to the node, it can start validating the transactions.
Once the puzzle is solved, the node is rewarded with coins and the stake is given back to the investors.
In this form of staking, a group of stakers can work together and create staking pools just like the mining pools.
This enhances the chances of being selected and at the same time makes the rewards for their effort are much more consistent.
If you wish to go with crypto lending, then you will have to do it through the P2P or Peer-to-Peer networks as it is done most of the time.
This acts as a substitute for financing and helps in getting loans via several online services by connecting borrowers with the lenders.
This eliminates the need for a financial institution such as a bank to act as the intermediary.
However, if you are looking for a novel way to make money that exists only in the blockchain, crypto staking is the right option to go for.
On the other hand, if you go for crypto lending, choose the right coins to get the best rates.
Remember, a platform may advertise high rates on deposits but that does not translate to all assets.
Most of these crypto platforms lend the coins to those traders in the market who are looking to arbitrage.
As a result, you will get the best rate of interest on those coins that have high trading volumes.
On the other side, the market will reduce the returns on coins if there are too many users depositing them.
The best way to go about while staking your crypto coins is:
- To go through a centralized company though that will need you to hold your crypto in web wallets and go through a KYC and AML process and the returns will be quite low and
- To go through a DeFi company that does not need identity verification and allows the users to have control over the crypto coins they stake.
Also, select the right type of crypto asset to stake. Typically, you should choose any one of the most widely and commonly traded in the crypto market.
However, you may even consider using both crypto staking and crypto lending if you are like those people who need extra money but are having cash-flow problems.
Crypto staking will offer more safety and security than a DeFi project or an entire network but will offer a low return on average.
On the other hand, crypto lending will compensate for it with higher returns but the market is more volatile and the rates may change pretty quickly. Now the choice is yours.
Crypto staking and crypto lending can prove to be good ways to make more money without trading coins only if you know the difference between them and which to choose. This article, by now, has surely helped you a great deal in it.