Staking vs. Lending: Which Is Right for You?
Published July 2, 2022.
If you're a digital asset holder and have already got your feet wet in the crypto industry, you've probably heard the terms staking and lending. So what do these words mean, and why are they relevant? Keep reading to find out.
What Is Staking and How Does It Work?
Staking refers to earning money with crypto while helping maintain and keep a particular blockchain network active. Staking rewards are incentives from blockchains, each one having set rewards for validating a block of transactions. So when you stake your assets and are given the job of validating transactions, you can earn those crypto rewards.
The process of staking crypto means that:
- You commit to dedicating your crypto in return for rewards. Unstaking could take days or weeks.
- The network creates new coins to provide rewards, increasing the amount of that type of crypto in rotation.
- APY determines how much you will earn, but it can change without warning.
You can stake crypto assets through a wallet or an exchange. However, DeFi staking is optional only for crypto that uses proof-of-stake (PoS) mechanisms.
What Is Lending and How Does It Work?
Crypto holders can also earn money by lending their crypto assets and collecting interest from borrowers taking out DeFi loans. DeFi lending is not as readily available as staking because it is newer. However, certain exchanges offer lending options, which work by depositing money into an account. It's important for both lenders and borrowers to select the best crypto lending platform.
Crypto lending mimics a savings account. Money is deposited or put into a pool of funds that others may borrow from, and later down the line, you can withdraw your initial amount plus your share of interest.
The Advantages & Disadvantages of Staking vs. Lending
- Benefits for stakers The main advantage of staking is that you can earn more crypto as interest rates can be quite generous. It can be a profitable way to invest your assets.
- Benefits for the blockchain Staking helps secure the network by rewarding users with newly minted coins.
- Benefits of lending Lending is also a fantastic investment opportunity, as your assets can gain more value while holding them. Crypto lending allows you to do exactly that.
- Benefits for borrowers Benefits of crypto-backed loans include speed and flexibility, as borrowers can typically secure a loan in just a few hours. Repayment terms are also flexible.
Which Option Is Safer?
Funds in a crypto interest account are not protected. So if some unforeseen event occurs and that exchange fails, you risk losing it all.
Unlike staking, lending is under regulatory thumb at the moment. Crypto hit a $2 trillion market cap in August. High-interest lending and borrowing are occurring with no oversight, making the SEC, or Security Exchange Commission, uncomfortable. Comparing crypto lending platforms to the "wild west."
The SEC also threatened Coinbase with a lawsuit over their lending services, known as Coinbase Lend. Ultimately, Coinbase pulled Lend from their platform but insisted they did not know what they would have been sued for and that the SEC will not explain their reasoning.
What Cryptocurrencies Can You Stake or Lend?
You can only stake coins if they are PoS. Only newer coins that use proof of stake can be staked. Currently, there are 291 total reported coins in circulation.
Some of the most popular staking coins with higher rates include:
- Ethereum 2.0 (ETH)
- Cardano (ADA)
- BitDAO (BIT)
- Hydra (HYDRA)
- Binance (BNB)
Lendable coins aren't as restricted, so there is no actual limit on what types of coins can be lent to borrowers. The current list is relatively small, but it is growing.
BlockFi supports lending for around 13 types of crypto, much less than 291 regarding stake-able coins. However, since crypto lending is a newer idea, the list of coins should grow as demand grows.
Should You Stake or Lend Cryptocurrency?
- You should stake if: You're not planning on selling your stake-able crypto in the next six months. Then, staking can be an effective way to earn passive income while supporting the blockchain.
- You should lend if: You want to earn passive income on non-stake-able crypto and are not concerned with the consequences of the SEC interfering in the market.
Other options to consider include liquidity pool vs. staking and yield farming vs. staking, as many DeFi options can help to generate passive income and profit. But beware, each comes with unique risks. Do your own research (DYOR), and never stake more than you can afford to lose.
