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Crypto Lending vs Staking: Where's The Money?

Dec 14, 2020

One of the most important questions for any investor often relates to how they can earn more with their crypto assets. While crypto lending allows users to lend digital assets via crypto exchanges with an interest rate, crypto staking involves participating in transaction validation on a Proof of Stake (PoS) blockchain and earn Staking rewards. Both have become popular strategies for crypto investors to increase their holdings but how do the two strategies compare? Let’s have a look.

1 User-side Differences

From a user’s point of view, crypto lending is a quite straightforward process as it involves a lender making their crypto assets available to a borrower, to be returned with interest. This is offered by most crypto exchanges and is easy to understand, particularly for new investors in the crypto space.

On the other hand, crypto staking involves a bit of understanding about how a PoS blockchain works. It involves active participation in the transaction validation process wherein a certain amount of cryptocurrencies are locked away in a wallet. As the popularity of staking has grown, there are many PoS protocols that are offering staking services to users.

2 Risks and Returns

Kyle Samani of Multicoin Capital expects that lending and borrowing rates will generally be higher than staking rates. Take Vauld - which offers returns in the range of 3 to 11% for several cryptos.

But when it comes to risks, crypto lending involves counterparty risks. On the contrary, crypto staking, at least within each ecosystem can be considered risk-free because it is native to the protocol and eliminates additional layers of risk. There are some practices you can indulge in to make sure your crypto lending returns are safe, though. More on that, below:

3 Complexity

When it comes to complexity, crypto staking is relatively more complex while crypto lending works much like traditional financial lending. While staking, you need to be aware of the workings of the protocol, the locking period, the liquidity and volatility, validator commission, duration of rewards, and behavior.
There are slashing penalties involved if the node encounters problems. Therefore, having a good knowledge of the protocol is essential while making the decision to stake.

In this respect, crypto lending can be simpler for investors. It also allows for a wider range of assets. Very often, users of lending platforms can switch between assets with ease. The ease of navigating the crypto lending space, particularly with the right exchange, coupled with relatively higher yields can be quite attractive for a wide range of investors.

4 Safety

Network security is a potential risk that could adversely affect the crypto lending ecosystem. Contrary to this, in PoS blockchains, token holders participate in a network by staking holdings and play a role in its governance and maintenance. Therefore, network security increases with a higher number of stakers and with greater dispersion.

Crypto Lending vs Staking: Which One Should You Pick?

There are no definitive answers when it comes to which of the two - crypto lending vs staking - is better. For crypto enthusiasts who are well-versed with blockchain protocols and are confident about their investments, staking seems to be the better option. But in terms of money alone, crypto lending appears to be more attractive. Moreover, so much depends on selecting the right crypto exchange. For example, if an investor chooses the crypto lending strategy but is apprehensive about the risks and network security, can balance out a lot of this by selecting a reputed exchange that is committed to enhancing security and minimizing counterparty risks.

Vauld, for instance, has partnered with BitGo for custody of crypto assets, a step that is likely to alleviate the apprehensions of many who are concerned about forfeiting ownership of their assets.

Another aspect here is the tokens you invest in. Often, investment in the right assets results in the best yields regardless of the method used. This is where choosing a lending platform that offers a wide variety of assets and the option of switching between assets can prove to be useful.

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