In this article, I will pose the question, should I stake or lend my crypto.comBoth methods allow crypto holders to earn passive income, but they work in very different ways.
So, how does one go about staking and lending crypto? What are the possible rewards? What are the risks, and which strategy best fits your investment objectives?
Overview
The demand for digital assets has resulted in the evolving acceptance of cryptocurrency in the main stream. Filling passive income gaps, cryptocurrencies staking, and lending can be used.
Despite the possibility of earning rewards, each has its own features, disproportional risks, and benefits. Differentiating the requirements that need to be met to fulfill passive income opportunities before engaging in lending or staking is essential.
Understanding Crypto Staking
Staking cryptographic currency is a process wherein an individual or a participant poetically refers to “locking” their crypto in a blockchain network to validate transactions and secure the blockchain to earn passive income.
In the staker’s PoV, the locked currency in the network is utilized for operations such as validating transactions and securing the blockchain, and for which they earn rewards which are additional coins or tokens, thus creating positive net passive income.
Staking is complex and it is often compared to earning interest of a traditional bank savings account. In the case of staking on crypto currency, the ‘bank’ is literally the network which the participant is the node of, so the interest is paid for the maintenance of the operational network.
Very popular staking coins which are used today across various platforms are Ethereum (ETH), Cardano (ADA), Solana (SOL), and Polkadot (DOT) coins.
Staking offers Several Advantages
Reward Frequency: Depending on the network and staking duration, the annual percentage yield (APY) could be anywhere from 5% to more than 20%.
Network Involvement: By engaging in staking, you help secure the network and even get to help govern it, at times, earning the ability to vote on significant issues.
Lesser Technical know How: There is little or no staking that is done through wallets or exchanges that require much advanced technical know-how, as it is democracy of light in much of the offered platforms.
Notable Risks:
Illiquidity: Certain networks convert your tokens to staked tokens, whereby, you migrate into not being able to access your funds due to the staked tokens that you cannot access.
Price Risk: Staking is done in the same currency, meaning that the currency can go down and you lose staking reward because of the change in the currency price.
Slashing Risks: In some networks, stakers who behave badly or are offline get punished, resulting in the original staked amount being reduced.
Understanding Crypto Lending
Borrowing involves loaning your cryptocurrency to borrowers on Centralized platforms such as exchanges or decentralized protocols like DeFi platforms.
In return, you are paid interest on your crypto, like banks offer on loans. Some platforms for lending include BlockFi, Aave, and Celsius and Compound (as historical references).
The main benefits lending provides are:
Passive Income: Lending crypto generates cons interest for a passive income, with lending rates usually from 3% to 12% on flexible platforms.
Liquidity: Borrowing platforms are more flexible than staking, allowing for withdrawal and immediate liquidity.
Diverse Strategies: Lending protocols are more simplistic with stablecoins and a greater yield opportunity with higher risk tokens.
All these benefits come with a few risks:
Counter-Party Risk: Centralized platforms pose greater risks as the borrower or the lending platform may ”default” and crypto may be lost.
Regulatory Uncertainty: Enhancements or freezing of assets may be enforced as some areas are watching crypto lending closely.
Security of the platform: Funds may unfortunately be lost due to hacking. Mismanagement may also pose a significant risk.
Staking vs. Lending: Key Differences
| Factor | Staking | Lending |
|---|---|---|
| Risk | Lower if using reputable networks; risk of slashing | Higher due to borrower default or platform risk |
| Liquidity | Usually locked for a period | Often flexible and withdrawable anytime |
| Rewards | Paid in native token, variable based on network | Paid in token of choice, often more predictable |
| Participation | Contributes to network security and governance | Simply a financial transaction with no network participation |
Which One Should You Choose?
How one decides to either stake or lend Cryptos is dependent on one’s investment accessory, level of risk one is willing to accept, and how involved they choose to be.
If one is interested in being hands-off and has a long-term approach willing to support the network, one can stake crypto. This is suitable to investors who have a bullish sentiment on the network’s growth and want to earn the native token on the network.
If one aims at having a flexible and stable income, lending would be more appropriate. This will help in preserving liquidity and will allow the investor to diversify over several assets to earn steady income.
There are investors that also integrate both strategies—where they stake some crypto for long-term growth while lending a portion of it for income to be gained in the short-term. This mixed approach lowers risk and increases the potential for profit.
Final Thoughts
In conclsuion Both staking and lending are distinct methods of expanding your crypto portfolio, albeit neither comes without some level of risk.
Assessing your objectives, grasping the full scope of potential downsides, and selecting reliable providers are key to optimizing your gains. By doing so, you would be mitigating the risks and take full advantage of your crypto, be it through staking, lending, or both simultaneously.
FAQ
Lending is providing your crypto to borrowers via platforms or DeFi protocols, earning interest on your funds.
Staking is generally safer with reputable networks, while lending carries counterparty and platform risks.
Returns vary; staking often pays in native tokens with variable APY, while lending gives predictable interest, sometimes lower than staking.
