When cryptocurrency did its thing, boomed, and eventually became popular, there have been newer ways for people to increase their wealth without necessarily selling or buying those digital assets. Among these newer ways include crypto lending and crypto staking. While the two methods allow one to grow his or her wealth without selling. They essentially work in very different ways. In this article, we will explain such differences in detail so you can decide which approach is suitable for your investment goals.
What Is Crypto Lending?
Crypto lending is the process of lending your cryptocurrency to a borrower through a third party. It is quite like traditional banking; you provide capital to someone who needs it, and in return, you get an interest rate on the loan amount.
Also Read: Crypto Liquidity Pools vs. Yield Forms: Understanding Key Differences
Typically, there are two parties in crypto lending:
Lender (You): You store your cryptocurrencies with the lending platform, and it serves as a middleman between you and the borrower. It then lends out your digital assets to the borrower.
Borrower: He or she could be an individual or an institution that takes loans from the lending platform for trading or investment purposes among others. The borrower pays interest on the loan, which, in turn is passed on to the lender.
Lenders are paid interest in forms of several different cryptocurrencies. The lending platform and the sort of cryptocurrency being lent vary the choices. Interest rates range extremely, with some platforms offering returns up to 10-15%, but higher returns generally increase the risk level.
Types of Crypto Loans
Centralized lending platforms such as Celsius and BlockFi are starting to appropriate the traditional banking model. You deposit your cryptocurrency and then the platform arranges the loan procedure and the payments of interest. The platforms are further regulated; their operations are more centralized.
DeFi: Decentralized lending. Lending is facilitated with DeFi applications like Aave or Compound with smart contracts; there aren’t any middlemen. Everything is automated. Lending and borrowing are owned by the code, and DeFi platforms seem to be a lot more transparent. Though it tends to be much riskier due to code reliance-sometimes exploited or with bugs.
What is Crypto Staking?
In Crypto staking, you are participating and making yourself a part of the security for the network of the blockchain and, in return, earn rewards. In simple words, staking is like a fixed deposit in the bank. Rather than giving liquidity to the borrowers, you lock up your assets for supporting the Proof-of-Stake blockchain network of any asset to help secure transactions and support the blockchain security.
Other cryptocurrencies based on proof of stake or its derivatives include Ethereum (ETH), Cardano (ADA), Polkadot (DOT), and Solana (SOL). So, any time you stake your tokens, that essentially sends them to a pool, which then gets to validate transactions on the network. And in return for that, you get rewards in the form of additional tokens.
Unlike lending in crypto in which your assets are lent to another. In staking the cryptocurrencies remain within the blockchain network and are heavily utilized for supporting its functioning. You receive a reward for taking part in the stacking process.
Types of Crypto Staking
Delegated Proof of Stake (DPOS): In this model. The owner of the token votes for delegates or validators to secure the network on their behalf. This means that the delegators would be rewarded depending on the amount they stake and how well their chosen verifiers perform.
Cold Staking. Cold staking allows users to stake their crypto while not needing to have it online. It’s very beneficial for people who worry about security as they can invest using a hardware wallet.
Crypto Lending vs Staking: Key Differences
Although this type of lending and staking allows you to acquire passive income, their operations, the associated risk, and the resultant returns on investment are clearly different. Here is how they differ below:
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Purpose of Use
Crypto lending is basically about providing liquidity to the borrowers. By lending your crypto, you are allowing others to use it for margin trading purposes. Liquidity mining, etc., for which you earn interest in return.
Basic idea of staking: Crypto staking essentially means donating to the security and life of a blockchain network. In proof of stake systems, your money is locked into accounts, and you are participating in transaction validation; the rewards are the stipulated returns.
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Risk level
Crypto Lending: Generally speaking, the risks associated with lending are always the creditworthiness of the borrower, or platform security, or even the prospect of an unfortunate market downturn because it could lead to a massive loss in value. Generally, most platforms over-collateralize loans in an attempt to minimize the possibilities of defaulting through borrowers, but there is still some risk. You also have to trust the security of the platform and its management if you’re using a centralized one.
Crypto Staking: Staking is less risky compared to lending as your assets are not loaned out to a third party. However, risks still exist, and they mainly come in through cases where the staking process has “reduction” penalties where the stak tokens are lost if a validator acts maliciously. Secondly, there exist risks associated with the value of the token you have an investment in, as drastic price falls can affect the overall gain.
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Incentives and Incentives
Crypto loans: The interest for lenders is usually paid in cryptocurrency. Which is subject to supply and demand, market conditions, and the type of crypto currency in which it is issued. APYs for crypto loans vary from as low as 3% up to 15%. Often, higher yields entail higher risks.
Crypto staking: Staking rewards will vary from 4% to 12% year-on-year based on the blockchain and the number of tokens staked in. This reward will sometimes be a fixed percentage split proportionally across all of the stickers.
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Liquidity
Crypto Lending You can usually withdraw at any time or after some set period when lending your assets on a lending platform. Depending on the policies of the lending platform. Some had flexible lending terms, where you could withdraw with little notice while others would lock up your assets for a certain period.
Crypto staking: Tokens are often ‘locked away’ for some amount of time in terms of the blockchain, sometimes many weeks or even months. Most networks allow withdrawal, but again, usually with some waiting period before your tokens become available again.
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Dependency on Platforms
Crypto Lending: Whether it’s a centralized entity like BlockFi or a decentralized application like Aave. Lending involves trusting the central or decentralized platform you’re interacting with. It’ll depend on how stable and secure the platform is to make your assets more secure.
Crypto Staking: Staking pretty much relies on the security strength of the underlying blockchain network. You have to trust the security measures in place for the network since your assets are essentially directly useful for securing that network.
Crypto Lending: Earnings from lending, interest paid, is normally income in most jurisdictions and, thus, subject to taxation. You can, therefore, keep track of any interest payments in order to ensure you can report them when the tax time comes.
Crypto Staking: Staking rewards are also usually consider taxable income to the recipient of it. However, in some countries, prizes are not taxable until the sold assets are realized.
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Which approach works best for you?
If you are a risk-taker who wants to generate passive income with high potential rewards but is still comfortable and prepared for the potential risks. That come with a lending platform, then crypto lending is a better choice. For someone not taking much risk but has a desire to contribute directly to the security of the blockchain, staking may be more suited to them.
The two main popular passive means of generating income on digital assets are through crypto lending and staking. While both hold a lot of appeal in terms of returns, they vary in terms of the styles of investors that will be drawn to them. In this regard, crypto lending tends to be considered more flexible while offering more leverage in terms of potential returns but is also accompanied by a risk that may be associated with it. Primarily when lent on a centralized platform. On the other hand, crypto staking refers to locking the assets into securing the blockchain network, and the activities are said to be maintain under a lower risk profile. The difference of these approaches must be clearly identified. This will tell you which approach can best adapt to your type of investment goals.
