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This guide in crypto lending vs staking will cover all aspects both methods are offering when holding cryptocurrencies. Also, an incredible opportunity to earn passive income on your cryptos.
Contents show
Crypto Lending vs Staking: Introduction
Passive income has been a strategy used by investors all over the world in the last centuries. There were many ways to generate a passive income that are still available today. However, there are new options that are growing and expanding in the cryptocurrency market.
In the current period of crisis and since the last financial collapse in 2009, central banks have been pushing for lower interest rates in the market to re-activate the economy. However, these low interest rates have been very negative for savers and long-term conservative investors.
Nowadays, the cryptocurrency market and the Decentralized Finance (DeFi) industry are helping users find better passive income solutions. Two of the most popular ways of generating passive income in the crypto market includes staking and crypto lending.
Cryptocurrency Staking Explained
Crypto staking is an activity that allows users and crypto investors to participate in a decentralized blockchain and receive rewards for it. The blockchains that allow for cryptocurrency staking follow a consensus algorithm called Proof-of-Stake (PoS).
Bitcoin (BTC), the largest virtual currency in the world, is powered by the Proof-of-Work (PoW) consensus algorithm. That means that an extensive network of miners is providing processing power to confirm the transactions that take place in the Bitcoin blockchain and get rewarded for their effort.
Proof-of-Stake works in a different way. Rather than providing large amounts of computing power, PoS networks only require participants to stake their coins to get rewarded.
What does Staking Mean in Crypto?
So, what does staking in crypto mean? Particularly, cryptocurrency staking requires you to lock your tokens in a specific network to receive the rewards from this blockchain. Meaning that you are locking up your coins in a wallet for a specific period and you aren't able to send or sell them for this period.
There are different blockchains around the world, and many of them are using the PoS consensus algorithm. By staking your coins, you will be participating in this process that helps the network remain active and secure.
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Recommended read: What is the best time to stake crypto?.
How Does Crypto Staking Make Money?
In order to secure PoS networks, stakers are selected by the blockchain to validate new blocks. Large stakers will have more chances of being selected than small stakers, making it more profitable for users with a larger stake in the network.
Once the staker is selected to create a block, they will be rewarded with coins that usually users pay as fees in the network. If you are a large holder of a PoS cryptocurrency, you can start earning passive income with your digital assets.
Take into consideration that rewards will also be calculated according to the number of coins the validator holds, how long the validator has been participating in the network, the inflation rate of this specific blockchain, and many other things. Each PoS is different and would have a different way to calculate the rewards for users.
In General, How do I Start Staking Cryptocurrency?
Staking cryptocurrency is not going to be a difficult task. You need to have a cryptocurrency wallet that will be compatible with staking in different networks. The interface these wallets provide is going to be certainly intuitive and help you go through the whole process.
At the same time, there are some exchanges such as Binance that are already allowing users to stake digital assets directly from their platforms. This is going to make it very accessible to users that want to have a passive income with cryptocurrency staking.
Which platforms Can I use to stake Cryptocurrency?
With the rising popularity of PoS networks, the possibilities for staking and earning additional cryptos or dividends are rising as well. If you aren’t that tech-savvy to set up a local wallet, the best option would be to go to the bigger cryptocurrency exchanges and start staking there.
On the other hand, if you want to be in full control of your crypto, it’s also possible to stake from your local wallet like Nano ledger is offering.
For the usability and simplicity of staking on cryptocurrency exchanges, below is the table of exchanges that supports staking.
Exchanges that offer Crypto Staking
| For more information on staking cryptocurrency and in particular what options you have, read our article: Best places to stake your crypto and earn dividends. |
Crypto Lending Explained
Crypto lending or staking are alike in their goal to earn passive income, however crypto lending works quite a bit different. In particuler, crypto lending allows users to lend fiat currencies to borrowers.
In this way, borrowers will pay interest to the lenders. This is similar to how traditional borrowing and lending work. In general, crypto borrowers will be using their virtual currencies as collateral to make sure they are able to pay for the funds borrowed.
There are several crypto platforms that are currently offering crypto lending and borrowing services. Indeed, crypto staking vs crypto lending became very useful ways for users to generate an extra passive income at the end of the month.
A large number of cryptocurrency users prefer to use stablecoins. Stablecoins are those virtual currencies that are linked to a specific fiat currency and keep their value tied to this fiat currency. For example, Tether (USDT), the largest stablecoin in the world is currently representing the price of $1 USD. The USDT virtual currency rarely moves below or above $1 USD.
How does Crypto Lending Work?
As we have explained before, a borrower will be depositing his cryptocurrencies on a platform in exchange for a loan. The loan will be provided by a lender that can be another person on the same platform.
The big benefit of a crypto lending network is that you can borrow cash instantly and that the amounts are limitless. Of course, this depends on the amount of crypto you deposit, but hey….. ever tried to get a $100K loan instantly in traditional finance?
The lender will be depositing their funds waiting for the borrower to pay back the loan with an interest. In this way, both users get what they needed. One will pay a premium (interest) and the other will receive the initial investment and the interest paid by the borrower.
Is Crypto Lending Safe?
Crypto lending is usually safe. However, we recommend you to do your own diligence considering we are not financial advisors. The information provided in this post is just for educational purposes only.
The platform that you use to borrow or lend funds may be affected by a hack, meaning that you can lose your funds. Although this is the worst-case scenario, these things happen a lot in the cryptocurrency market. It is always a good thing to use 2FA and never invest more than what you are able to lose.
If the borrower is not able to repay the debt, the collateral will be used to pay back the lender.
Bitcoin loan vs Crypto lending: Is there a Difference?
As we mentioned before, there are different ways to participate in the loan and borrowing market. You can use traditional virtual currencies such as Bitcoin (BTC) or Ethereum (ETH), or you can use stablecoins.
This will depend on your needs and the currencies available. Take into consideration that interest rates may be different for some virtual currencies. For example, it may be more profitable to generate crypto passive income using a cryptocurrency rather than a stablecoin or vice-versa.
The interest rates will depend on the platform and the demand there is for one or another asset. The best thing to do is to evaluate the different possibilities available in the market and on different platforms.
Crypto Lending vs Staking Explained
Let’s refresh the main differences there are between crypto lending vs staking. Crypto staking will allow you to participate in a blockchain network and secure it. Crypto lending on the other hand, is a different thing and it allows users to borrow funds and pay interest. Borrowers will also be able to lock up their coins and receive the interest and initial capital invested.
Crypto Staking vs Crypto Lending: Which one is Safer?
When we talk of crypto lending vs staking it is definitely important to understand their safety. Crypto staking can be definitely safe. We are participating and making a network secure. However, there are some risks involved in staking.
For example, staking cryptocurrency requires a locking period and that could be something to take into consideration. If the locking period is very long, then you will not be able to use your funds to invest in other opportunities that may appear when you are staking your coins.
At the same time, there are some risks related to the volatility of your assets. We are talking mostly of virtual currencies that are not stablecoins. Thus, their value may fluctuate upwards but also downwards. If it goes downwards, we could lose in fiat terms even if we receive a juicy reward for staking our digital assets.
There may be other minor risks to staking. This is why it is always important to make our own due diligence in each of the projects we want to stake our coins in.
The main risks involved in Crypto lending
In this crypto lending vs staking comparison, we also need to see the risks of crypto lending. The main risk if you are a lender is that the borrower will not pay back to you. This is why crypto platforms are usually securing 80% of the collateral in case of a loss.
Furthermore, and as we mentioned above, it will be definitely important to take into consideration that the crypto platform you are using can be hacked. This is something that can make you lose all your funds.
Some Decentralized Finance (DeFi) platforms that are currently in the market(Uniswap or Aave) may not be yet 100% tested. A hacker may also be able to find an exploit and end up with the funds of a large number of users.
Crypto staking vs crypto lending have different risks and rewards for users. It is always important to understand them and take them into consideration before we place our money on these platforms.
Crypto lending vs DeFi lending: Differences and main risks
| Crypto Lending | DeFi Lending |
| Counterparty risk | Technical risk |
| Insured | Not Insured |
| Bank-like functioning | Use of Web3 wallets |
| Examples: Nexo.io, Celsius Network | Examples: Uniswap, Aave, Compound |
What role do stablecoins play when crypto lending?
Finally, if you are using stablecoins and other kinds of synthetic tokens, you may also be affected by a sudden drop in the price of the stablecoin or the synthetic token. For example, the DAI digital asset – one of the most popular stablecoins for the DeFi market – may lose its peg with the USD. Another thing that can happen is that if you are holding, let’s say, wBTC (Wrapped Bitcoin), an exploit may be found cutting the collateral of this token by half and directly affecting the value of the coins you hold.
Crypto lending vs Staking: Which one is more profitable?
There is not a clear answer to this question. Indeed, both can be very profitable for users. Everything will depend on the market conditions at the time of staking the coins or placing lending your funds.
For example, you can lend your funds for 6 months using USDT and receive an interest rate of 3% during that period. However, stalking may have offered you a better return on investment (ROI) during the same period of time because the coin you were holding surged by 20%; even if the real rewards received for staking were 2% (lower than the rewards for lending your funds).
Crypto Staking vs Lending vs Holding: Which one earns the most crypto?
Holding, staking and lending will offer different returns depending on market conditions. Each of these strategies can outperform the other. For example, if we decide to hold onto our BTC during the bear market that started in early 2018 would have been a losing strategy compared to lending funds using a stablecoin tied to the USD at 5% annually.
Another thing to take into consideration, altcoins fell massively against BTC during the bear market of 2018. Thus, if you decided to stake your coins, you might even be in a worse situation than if you only held BTC without re-investing them.
The analysis you make will be the key thing to make profits with lending, holding and staking. If you are able to recognize the opportunity and take action, then you may get some good profits.
What are the best platforms for lending cryptocurrency?
There are different platforms that will help you lend your cryptocurrencies. Some of them include Nexo.io, Celsius Network, and Blockfi.
Nexo is one of the most recognized and used crypto loans platform. They are now accepting over 40 fiat currencies and they are operating in more than 200 jurisdictions. That means that they have a large part of the countries of the world covered with their services.
Celsius Network is a platform that is providing financial services to crypto users from all over the world. The company claims that they are providing curated services that “have been abandoned by big banks.” These services include fair interest rates for your loans, zero fees for the services provided and quick transactions.
Finally, Blockfi is the right platform for you if you want to start earning cryptocurrencies on your crypto. You can open an interest account that would provide you with an 8.6% APY. You can also trade virtual currencies, borrow money and everything without having to sell your digital assets.
Conclusion
Since the definite breakthrough of crypto and fintech, the market for crypto lending is on the rise. Furthermore, there is a growing number of platforms in the market serving its users to earn interest on their funds. No matter if staking, holding or lending, the cryptocurrency market is offering great financial solutions to individuals.
All in all, if you are a crypto ‘HODLER’ and don’t have any interest in trading cryptocurrency crypto lending and staking are two very good alternatives. Just like traditional finance the cryptocurrency industry has found a profitable way to earn additional passive income.
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Carlos Terenzi
Carlos is an international relations' analyst specializing in cryptocurrencies and blockchain technology. Since 2017, Carlos has written extensively for leading cryptocurrency sites; with over 3,000 articles published.