One of the misconceptions that trigger controversial discussion in the crypto space is the comparison of crypto lending to staking – even though – both methods enable crypto users to earn interest on their assets, they operate in a very much different way.
If you’re a crypto newbie or you’re confused about how they work and you wish to know the difference between crypto lending vs staking, read this article carefully and attentively as I will be explaining to you in a simplified manner.
So, what is the difference between crypto staking vs lending? The answer is right here with you, but for you to grasp it fully, you need to have some knowledge about how they operate.
Hence, I’ll be giving you a complete guide to how “staking” and “lending” works before I give you full details on their differences.
So, let’s get started by knowing how crypto staking works first.
What Is Crypto Staking And How Does It Work?
To understand what “staking” is in crypto, let’s have a glimpse of how the blockchain ecosystem operates.
Transactions on the blockchain are processed through a different category of consensus mechanism – a timely operation that occurs on the blockchain network.
Without it, no transaction can be recorded on the blockchain ledger.
While they are categorized into different methods, the two prominent among them are “PoW” (proof-of-work) and “PoS” (proof-of-stake).
The proof of Work consensus mechanism requires computational power to verify transactions on the blockchain, although, our major focus here is the Proof-of-stake (PoS).
Proof of stake requires the locking up of assets on the blockchain network to validate transactions, and that’s where “crypto staking” emanated.
To maintain and secure a proof-of-stake blockchain network, validators are needed — and these are people that own and stake an adequate amount of its native coin.
They are selected based on the number of assets they staked in the blockchain, and the higher the stakes, the higher the chance of getting selected as a validator.
When validators are selected, they start operating in the blockchain and make sure genuine transactions are processed and validated on the blockchain while they earn rewards in return.
Whenever a certain transaction is verified by a validator, a new block is created, which results in new coins being produced into circulation. To incentivize the validator, they’re being rewarded a portion of it.
Is Staking Crypto A Good Idea?
Staking crypto is a very good idea, but you should be aware of the risk involved.
Crypto asset is volatile and it can cause a huge loss if the asset you stake decline in value. Not only that, but as a validator, you must not go against the rules of the network.
If you do, you’d be penalized and all your asset might get terminated.
One of the reasons why crypto staking is a good idea is also that if you don’t have the required fund to become a validator; you can leverage DeFi services where you can lock up your asset and sit back to earn a flexible or fixed APY (Annual Per Yield).
What Is Crypto Lending?
Crypto lending is a way of earning interest on your asset by lending it to the borrower.
Crypto lending allows you to borrow Bitcoin or other types of crypto assets.
Crypto lending allows you to lend your cryptocurrency and receive interest on it.
However, crypto lending is not for everyone. You need to be comfortable with the idea of loaning your cryptocurrency in return for interest. If you’re concerned about risk by loaning out your coins, then this isn’t the service for you.
For people who want to earn interest on their crypto, this can be an excellent option. With this service, some crypto investors make more money off of their crypto than they do off of traditional investments.
Crypto lending also enables you to earn interest on your holdings without having to pay a fee to an outside entity like a bank or credit card company.
Lending out your coins is a good way to earn some extra income but it comes with its own risk as well.
Crypto Staking Vs Lending
There has been a debate on “crypto staking vs lending” — this usually comes from the argument that which way of earning with cryptocurrency between the two is the best.
Firstly, from the definition given to crypto staking, it’s worth noting that before you can partake in “crypto staking”, you’d lock up your fund and wait till the staking period is up before you can gain back access to your staked asset.
If you want to be a validator and you have the required assets to stake, you need to be active enough to validate transactions on the blockchain network or else, you might get penalized.
But in “Crypto Lending”, the borrower that you’re lending your asset to needs to provide collateral before taking the loan; this means that you have a backup fund for the asset you loan out.
However, both methods of earning with crypto are good — so, no one is better than the other. You should understand the risk and reward, then go with your preference based on your risk tolerance.
What Is The Difference Between Crypto Lending Vs Staking
Lending and staking are two of the most popular ways to earn cryptocurrency. The main difference between the two is that lending involves the creation of a temporary debt or note, while staking is when you own some cryptocurrency and earn interest on your holdings.
Lending and staking are similar in that both require holding some crypto, but there are some important differences. Staking is useful if you want to participate in Proof-of-Stake (PoS) blockchains, whereas lending can be used in almost any PoW blockchain.
The biggest difference between these two methods of earning crypto is that lending requires you to deal with other users while staking doesn’t.
We discussed the difference between crypto staking vs lending in this article, and by now, you must have understood how each of the methods operates.
Most people don’t know there are numerous ways to earn passively and actively in cryptocurrency, crypto lending and staking provide a seamless way to generate interest on your crypto asset.
However, cryptocurrency is highly volatile and you should do your due diligence before partaking in any staking or lending services.