Many people have been able to grow their money through blockchain technology. Since Bitcoin was first introduced in 2009, people worldwide have taken their chances on the cryptocurrency market. In turn, they have enjoyed the financial rewards of their efforts.
There are many ways to grow one's fortune in the world of blockchain and cryptocurrency. Two popular methods to generate passive income through the crypto market are staking and lending. What's the difference between the two anyway?
This article will delve into the basics of both concepts. It will give you a better understanding of the benefits of these methods. It might even inspire you to try your luck in staking or lending in the future.
How does crypto staking work?
Crypto staking allows users to earn money with their digital assets by helping keep a blockchain network active and running. When you're engaged in crypto staking, you agree to have your crypto locked up for a specific period in exchange for staking rewards.
The crypto network creates new coins that are given to users as rewards. In turn, the number of crypto coins in circulation increases. You can determine how much you make from your crypto investment through annual percentage yield (APY). However, APY changes regularly as the value of cryptocurrency is very volatile.
You can stake your crypto through a crypto exchange or wallet. Staking is done only with cryptocurrencies that use the proof of stake model consensus mechanisms like Cardano or Ethereum. You can't stake your assets on a digital asset that uses a proof of work consensus mechanism like Bitcoin.
In essence, an individual or group uses computers to process and validate transactions on the network. The staked assets serve as the collateral for these actions. While you can set up your computers with high computing power and do everything independently, the more practical option is to stake your crypto on a crypto wallet or exchange. After all, validating transactions can be a power-extensive endeavor, and you need special equipment.
When crypto staking, your crypto gets added to a validator's stash. You get a proportion of their rewards in return. However, validators can get penalized and have some of their digital assets slashed if their machines go offline or they try to bypass the entire system. As a result, you might look at some of the cryptos you invested in if a validator breaks the rules.
How does crypto lending work?
First, let's get into the basics. Crypto lending is similar to staking when generating passive income. However, these concepts work differently. When it comes to crypto loans, users lend their digital assets or cryptocurrency to other users. In return, the borrowers pay interest to their lenders.
The crypto lending platforms usually accept all types of cryptocurrency and stable coins. Furthermore, you can choose a decentralized or centralized platform when you're engaged in lending.
On the one hand, crypto lending is as widely available as staking. However, it can be a simple way to earn passive income where it is available.
Some crypto exchanges offer lending or earning options to their users. You can start doing so by simply depositing crypto assets into their platforms. As an alternative, you can opt to make money by lending your crypto assets through decentralized finance (DeFi) app, like Aave or Compound. To use DeFi platforms, you must buy and add a compatible coin into your crypto wallet. Then, you have to deposit your funds into the app.
Instead of connecting borrowers and lenders like some peer-to-peer lending platforms, crypto lending works like a savings account at a traditional bank. You earn interest like you would with fiat currencies. You deposit or lend your digital assets to a pool of funds from which other users can borrow. You can then withdraw your loaned amount and the interest you earned via lending later.
However, crypto investors don't have insurance or protection from possible losses, unlike a traditional bank. Given that the returns of cryptocurrency lending are more significant than your usual high-yielding checking account or other investment methods, many people still risk more significant lending their cryptocurrency to others.
Staking vs. lending: what's the difference?
The borrowers and lenders involved in lending crypto are usually connected by a third-party platform like a centralized finance platform. Thus, three parties are involved in a crypto loan: the crypto lending platform, the lender, and the borrower.
Lenders are crypto holders who intend to grow their assets by letting others borrow them. Crypto platforms are third-party online platforms that link all parties and automate their transactions. Meanwhile, borrowers are people who intend to borrow funds for various purposes and use crypto as collateral to receive the funding they need.
Your crypto holdings are locked up to the cryptocurrency protocol when staking assets. From these users, the protocol chooses validators to confirm blocks of transactions. When engaged in cryptocurrency staking, you can select the amount you stake. You can do this through any crypto staking platform.
When you're crypto-staking, the coins remain in your possession. The coins are just put to work. You can withdraw the coins anytime in case you intend to trade them.
The benefits of crypto loans and staking rewards
Crypto loans are not less inexpensive as compared to mortgage loans. However, they're a cheaper alternative to credit cards and personal loans. Plus, there are crypto loans with low-interest rates (below 10%).
The entire loan amount depends on the lender's asset value. A user can borrow up to 50% of their portfolio value. However, many crypto lending platforms can go as high as 90%. In addition, users can choose a digital currency depending on the platform they're using.
Unlike traditional banks, having a poor credit score or no credit history doesn't make much difference when applying for credit in any crypto lending platform. The process of loaning is also fast. You can get the money in a matter of a few hours.
When it comes to staking, you don't have to invest in equipment, which is the case when you're involved in mining. It is also much more environment-friendly than mining. You also support that blockchain network's security and efficiency as you earn rewards.
What are the available staking and crypto lending platforms?
There are several crypto lending platforms on the internet. One example is BlockFi, a credit service-based platform established in 2017. The accepted collaterals in this platform are BTC, ETH, LTC, and PAXG, while the minimum loan amount is $10,000.
Another popular lending platform is Binance. Binance supports all popular tokens in circulation. What's great about this platform is that there are hourly calculations for loan interest rates, depending on when the loan is made.
Hodlnaut is a company that was established in 2019. This platform supports crypto lending and borrowing. The minimum loan amount on Hodlnaut is $50,000.
Established in 2017, Kucoin is another popular platform that supports all types of tokens. The interest rate for this platform is 0-2%.
Meanwhile, Crypto.com is a platform that offers users the opportunity to lend and borrow cryptos. However, this platform is unavailable for users in Hong Kong, Switzerland, and Malta. In addition, the maximum loan is $100, equivalent to stablecoins.
With the help of the best staking platforms, you must put your assets to work and earn rewards in return. Choosing the right venue is key to making rewards in staking. One popular staking platform is eToro. eToro offers users world-class staking crypto services. This user-friendly platform has high-interest rates. It also provides support for multiple asset classes.
Binance also provides users the opportunity to stake their tokens. What's great about Binance is that users can stake up to 100 different digital assets. There's also a large liquidity pool for staking crypto. This secure crypto-staking website offers insurance for user funds, providing you with a safety net in case things go south.
Coinbase is a platform that enables users to earn extra income by holding their cryptocurrency through staking. On the other hand, only a few currencies are available for staking on this platform. This platform offers custodial services for larger institutions, and it's a public company, ensuring that it's well-regulated.
Kucoin has introduced a new concept of soft staking wherein users can stake their funds without locking up their assets. Users can expect regular rewards from this platform, meaning you don't have to wait long periods to enjoy your income. Kucoin has a large staking pool where users can earn up to double daily rewards.
Meanwhile, Poloniex is a platform that offers users feeless staking, and users can enjoy up to 100% of their rewards without paying any fees. There's no lock-up period, so Poloniex is an easy way to gain rewards by holding and depositing their assets.
What are the drawbacks of staking and lending?
While crypto staking and lending provide opportunities to grow one's income, there is an inherent risk as you're earning rewards. First, because of the rise of theft online, many people are concerned about the security of platforms that offer lending services. Your money might go to waste if things go south.
In addition, borrowers can only borrow up to a certain amount, depending on their platform. Hence, it's essential to be selective on the platform you lend your assets to get high rewards. Plus, some platforms require you to lend your cryptocurrencies for a fixed period. Thus, your funds are inaccessible for a certain period.
Lastly, you must deposit your digital assets into a crypto wallet before participating in crypto lending. This digital wallet is less secure than storing your money in a physical wallet.
Crypto staking has several drawbacks as well. While the concept of receiving rewards sounds attractive, you can't expect a tremendous amount unless you're also staking a significant amount. How crypto staking works is that you can get as much as you're willing to give. In addition, staking crypto has lower rewards than regular block rewards issued by the network.
When crypto staking, you must lock up a minimum holding of their crypto assets in exchange for rewards. Despite the minimum holding requirement, there's still a chance that you might lose all your money.
In addition, some assets don't provide daily rewards. Hence, you might have to endure a long waiting period before you reap the rewards of staking. Some assets have lock-up periods, so you cannot access your funds if the asset's value depreciates dramatically.
Which method is safer?
When discussing staking and lending, it's vital to discuss their safety. After all, you want your investment to be secure. Crypto staking is safe because users contribute to the network's security. However, there is still some risk involved.
For example, staking cryptocurrencies require users to lock up their assets for a certain period. Hence, they can't use their funds for other investment opportunities if they arise.
Crypto lending can also be considered safe, but there are risks involved. There's no guarantee that the borrower will return the amount they loaned from you. This is the primary reason why most crypto platforms secure only 80% of collaterals in case of a loss.
Staying and lending have risks, so you shouldn't pour all your money into these endeavors. While you can gain more rewards by using more crypto, you also can't be too sure about the future. You might lose everything if you're not smart about your investments.
With risks come rewards
If you're willing to take a leap of faith, you can enjoy the benefits of the cryptocurrency market. It's vital to take some time for independent research, so you trust your assets with good platforms. This is much like how you choose your financial institutions carefully.
Past performance has shown that the future looks bright for people willing to explore their luck in staking and lending. It all starts with a crucial decision. You might reap the same rewards other people enjoy if you're willing to take the first step.