What are the differences between staking crypto and interest? One of the most important questions that often come to the minds of crypto investors is which is the best way to earn more crypto assets.
They often wonder whether it is more profitable to leave them in a wallet to earn interest or lend them to another person or simply stake them for a certain period and participate in validating transactions to earn staking rewards.
Well, all these are popular strategies to increase crypto holdings and you will need to choose the right one for your needs.
Crypto staking is actually a mechanism through which you can gain rewards in exchange for pledging your digital assets to the top nodes in a network.
They are called the validators and their primary job is to confirm the transactions made on the blockchain and record them in it.
Of late, crypto staking has gained a lot of popularity among crypto users.
In fact, according to a recent survey report of April 2021, the staking market cap has reached more than $600 billion to prove that.
Crypto staking is, however, not the same as interest which you can also earn by lending your coins to someone else apart from leaving your crypto simply in a wallet.
You will need to know the differences between them in order to make a proper comparison and if you do not know the differences between them already, this is the right place to be.
This article has all of it covered.
6 Differences Between Staking Crypto and Interest
You can make money using crypto coins in a number of ways other than trading them on an exchange.
Two such ways are by staking them and earning interest in them.
A lot of people mix up crypto staking with crypto lending and interest thinking that they are the same thing, which, in general, is far from true.
This is in spite of the fact that they have some similarities between them, one of which is that they are both good techniques of passive investment.
Well, here are a few major differences between crypto staking and interest listed for you so that you do not make the same mistake and choose a strategy that does not fit your style and needs.
One of the most significant differences between crypto staking and interest lies in the randomness. Usually, the rate of interest is either fixed or variable.
However, whether it is a fixed rate of interest or floating interest rate, in both the scenarios there is no element of chance.
This is because if you leave your crypto coins in a wallet or when you lend to some entity, that person has to repay you the principal amount along with the interest as per the loaning agreement.
On the other hand, the earning from crypto staking is essentially variable and that too it varies day by day though the rate varies according to the network traffic.
Yes, it is true that some crypto staking platforms such as Binance will show you an annual rate of return before you stake the coins but the actual rate is typically subject to daily variations. These rates may often vary during the lockup periods even.
Next, you can differentiate between crypto staking and interest based on the risk factors. If you intend to earn interest by lending your crypto, perhaps the biggest risk in it is that of default.
This is when the borrower fails to return your money. Even if you leave your crypto in a digital wallet this risk is said to be big and more serious in the crypto scene because almost all crypto platforms are unregulated much unlike the banks and other conventional lending institutions.
This means that you will have little or no support from the law enforcement agencies if any such untoward incident happens in the future.
On the other hand, in crypto staking the risks involved are not that prominent or serious. The largest risk in this case is the volatility factor.
This may affect the value of your crypto coins that you have locked up with the exchange for a specific period of time.
You will not be able to access and do anything else with them to limit the losses during this particular period.
However, in some cases you may be able to redeem your crypto coins within 24 to 72 hours but then you will give up all the possible staking rewards in the process.
3. Suited for
Crypto staking is a worthy move for those users who have a fairly high risk appetite and expect good returns in the long term. You should also be able to perform as a validator and a good one at it too for staking your crypto coins successfully.
On the other hand, it will be most suitable for you to earn interest on your crypto coins by keeping them in a wallet if you are risk-averse and do not want to go through the hassles of being a validator.
All you want to do is fund your interest bearing account, sit back, relax, and start earning interest on them while your crypto holdings grow.
4. Suitable Coins
Since not all crypto coins are suitable for staking, you should choose the right ones. Some of the best crypto coins to go ahead are Cardano, Polkadot, Ethereum, Solana, and Avalanche.
On the other hand, if you want to earn interest on your crypto, you should only choose those coins which you believe will have a higher price down the road. Some of such coins are Bitcoin, Ethereum, Uniswap, and Litecoin.
There are some significant benefits of earning interest on crypto such as the amount of interest grows as and when there is a price appreciation of the crypto coins.
Also, this process involves low or no locking up of the crypto funds. And finally, if you want to open an interest bearing account typically there will be no minimum amount required for it.
Apart from the primary benefit of crypto staking, which allows you to earn more crypto coins at a much more generous rate than interest, it will also give you the pleasure of knowing that you are contributing to the efficiency as well as the security of the blockchain.
Some of the most significant downsides of staking crypto coins are that the value of the coins may fall significantly at the end of the locking period, which is pretty long in this case as compared to the interest bearing accounts.
And, in some exchanges you will need to have a minimum number of crypto coins to start staking.
As for earning interest on your crypto coins, the most significant demerits of it are the amount of earned interest and capital will reduce when the value of the crypto coins held depreciates and if it has a floating rate of interest then it cannot be guaranteed that the rates will remain high in the long term.
Which is Better – Staking Crypto or Interest?
In order to understand which among crypto staking and interest is a better process of making a passive investment for you, you will first need to know a bit about Proof of Work or PoW blockchain and Proof of Stake or PoS blockchain.
The Proof of Work blockchain such as Bitcoin the users mine new coins and in the process they validate a transaction.
This means that they confirm that the transaction is authentic and good to be included in the database.
This way the process eliminates any chances of a user manipulating the data of the network and stealing the crypto assets of other people on the blockchain.
However, the PoW mechanism is an excessively computationally intensive one and needs a lot of energy.
It is for this reason several blockchain networks have now adopted the better and more energy-friendly Proof of Stake protocols as a scalable alternative.
It is this PoS blockchain such as Ethereum, EOS, Cardano, and others that secure a network.
This is called staking where the users commit their crypto to the network which then selects the users randomly who can validate transactions and add new blocks.
This means that, the more coins you stake in the network and the longer time you stake them for, the more chance you have to become a validator and get rewards.
As said earlier, there are some similarities in these two processes.
One of the most significant similarities between crypto staking and interest is that you lose access to your coins in both the cases.
If you are lending your crypto coins to someone, you cannot access them until repayment.
Well, in crypto staking, the concept is quite similar and is referred to as the ‘lockup period.’
In spite of the fact that you cannot access your funds, the good thing about crypto staking is that you will receive your rewards for staking on a daily basis. You can use these in any way you like.
Also, if you consider the Return on Investment or ROI factor, the staking rewards are usually much higher than the rate of interest offered in crypto lending.
Therefore, crypto staking seems to be a much better option to earn passive income from your investments.
There is a little chance of losing your money, provided you choose a trustworthy platform and a reliable token.
However, the market risks, volatility and liquidity factors are always there to consider because it can decrease the value of the token substantially and in turn lower the returns on your investment.
Therefore, if you choose to go with crypto staking instead of leaving them in a wallet and earning interest along the way, here are a few things that you should consider.
Consider the staking returns because different coins offer different returns and you should go with ones that offer a higher return.
Also, consider the liquidity based on the market cap and trading volume of the token you want to stake.
You should not choose the crypto coins with low trading volumes and market cap to stake even if they offer a higher return because you will not be able to convert them into dollars when the lockup period is over.
The lockup period should be another concern because you will not be able to access your crypto during this time even if you need them for an emergency or there is an unfavorable price swing.
Check and analyze the historical price of the token you want to stake as well so that you can anticipate its move and what you can expect from it at the end of the lockup period.
Finally, choose a crypto coin with a proven track record, transparent policy, and a good team of developers.
Just make sure that you consider all these factors when you make a choice and do not choose a coin with the highest APY only.
Also, be wary about the scams especially if you are not very tech savvy.
And, always choose a site after thorough research on the internet and social media.
This is important because in some sites the cost of running a node as a validator may outweigh the staking rewards gained in the end.
Remember, you can stake crypto on your own, or stake them on a wallet, or use any staking service provider.
However, or staking crypto on your own you will need to have the right type of hardware to run a validator node as well as a minimum number of tokens depending on the blockchain you choose.
If you choose to stake on a wallet, it is pretty simple.
All you have to do is install the required app, create an account, and transfer your coins to the wallet.
And, if you want to use a staking service provider, you will not need any technical knowledge and can start with a low initial investment.
However, the offerings, terms and returns may vary and you will have to pay a portion of your staking reward to them in return for availing their services.
Now, with all these aspects known to you, make your final choice as per your needs and preferences.
Crypto staking and interest are two of the nicest ways to make passive income and expand your crypto portfolio. However, knowing the differences between the two is elementary to make the right choice, which this article will help you in.
I have special interest in crypto and intend to help common people to gain knowledge about the digital asset as well as its potential. Follow Me at Linkedin.