Lend or Stake Your Crypto? Discover the Best Option for You
Crypto lending and staking are two of the most popular methods for earning passive income in today's cryptocurrency market. Both share a hands-off appeal: once you have deposited funds to a platform or smart contract, your idle coins begin generating revenue. The key difference between crypto lending and staking is that lending involves providing your crypto assets to borrowers through a platform to earn interest, while staking requires locking up your cryptocurrency as collateral to validate blockchain transactions in proof-of-stake networks.
Let's explore these options in detail and see which one might be the better fit for you.
Crypto Lending vs. Staking: A Direct Comparison
| Crypto Lending | Crypto Staking | |
|---|---|---|
| Potential Earnings | Crypto lending interest rates can range from 3% to over 15% APR, depending on the platform, the cryptocurrency, and market conditions. | Staking rewards can range from 5% to 20% APR, varying by network and staking conditions. |
| Liquidity | Most crypto lending platforms have no mandatory lock-up periods, allowing you to withdraw your liquidity at any time. However, you can't use your staked assets on other protocols or services during the lending period. | When you stake crypto, your liquidity remains locked until the end of the lock-up period. But if you stake with a staking platform like VALR, you can unstake your coins at any time. |
| Risk Profile | Exposed to regulatory risks and market volatility. Also, to counterparty risks (if lending crypto via a custodial platform) or smart contract risks (if lending coins via a DeFi protocol). There may also be a rare risk of borrower defaults, which is mitigated by the over-collateralisation mechanism in most cases. | Subject to potential slashing penalties and market volatility. May also involve counterparty- (if staking crypto via a centralised provider) or smart contract-related risks (if staking crypto via a non-custodial platform). |
| Complexity | Requires users to understand lending platforms, interest rate mechanisms, the concept of over-collateralisation, and how the lending process works. | If you are staking natively, you need extensive technical knowledge to operate your own validator node. However, if you stake crypto at a provider like VALR, you only need to understand the staking platform, APRs, and the overall process. |
What Is Crypto Lending?
When you lend crypto, you deposit your crypt assets to a lending pool or platform that lends them to borrowers.
As a lender, you earn interest by providing capital. This annual percentage rate (APR) is determined by the supply and demand for the deposited cryptocurrency among market participants, the flexibility and length of lock-up periods, the collateralisation of borrowers' collateral, and additional factors.
How Does Crypto Lending Work?
To better understand it, let's take a look at how the crypto lending process works in action:
Lenders Deposit Crypto: As a lender, you deposit cryptocurrency to a lending platform or a digital asset exchange with a lending service (like VALR).
Borrowers Apply for Loans: Next, as borrowers apply for loans via the service, the platform uses your deposited funds (along with other lenders') to provide them extra capital. To protect lenders, the platform requires borrowers to deposit collateral for requesting loans. Loans are overcollateralised on most crypto lending solutions, meaning that borrowers can borrow less from lenders than the value of their collateral.
Earn Interest: You earn interest on the funds you have deposited to the lending platform based on the APR of the provided token.
Loan Repayment: When the term ends (or at any time for loans with flexible terms), the borrower repays the principal and interest to the platform.
Withdrawal: As a lender, unless you have committed to fixed lock-up periods, you can withdraw your funds from the platform at any time and without any restrictions. Once you do so, you will stop earning interest on your assets.
Benefits of Crypto Lending
You can realise multiple benefits by lending cryptocurrency to borrowers. First, you can generate passive income from your idle digital assets, which can come in especially handy if you are planning to hold onto them for longer periods.
In general, crypto lending offers high returns for lenders, with actual rates varying by current market conditions. Compared to the average savings account that yields only 0.56% per annum, you can currently earn an annual percentage rate (APR) of up to 15% by lending USD Coin (USDC) on VALR. Moreover, you can also reinvest your earned interest to maximise your yield and take advantage of the compounding effect, further increasing your potential earnings.
Crypto lending also adds another income stream to your investment portfolio, which you can leverage to spread your risks across multiple assets, asset classes, and activities. With a diversified portfolio, you can minimise your risks and maximise your potential returns.
Moreover, as loans are overcollateralised on most lending platforms, you are protected against lender defaults. If a borrower fails to return the loan's collateral and interest to you, the platform will simply liquidate a part or all of his collateral to compensate you. The same is done when the value of the borrower's collateral drops due to market volatility.
Risks of Crypto Lending
In addition to its benefits, you should also be aware of the potential risks of crypto lending, which may include the following:
Counterparty Risks: If you are lending funds on a centralised service that holds your funds in custody, you should be mindful of potential counterparty risks. These increase the chances of a loss of funds due to a security breach, an exit scam, or platform insolvency. However, counterparty risks can be minimised by lending crypto on a reputable digital asset exchange regulated in multiple jurisdictions and employing transparent security practices to protect your funds. An excellent example is VALR.
Smart Contract Risks: In contrast, if you lend your funds on a decentralised finance (DeFi) protocol that takes no custody over your funds, you don't have to face counterparty risks. But as it employs smart contracts to eliminate intermediaries, you should consider the risks of potential contract vulnerabilities, bugs, or errors that attackers could exploit to steal your assets. These risks can be mitigated by regular audits by prominent auditor firms.
Market Volatility: Market volatility can negatively impact both lenders and borrowers. As a lender, the extreme price swings that characterise even major cryptocurrencies like Bitcoin (BTC), Ethereum (ETH), Solana (SOL), and Avalanche (AVAX) could decrease the value of your deposit and eat into your lending profits. A volatile market could have the same negative effect on borrowers' collateral, potentially making the loan undercollateralised in some cases. Volatility-related risks can be minimised by lending exclusively stablecoins like Tether USD (USDT) or USD Coin (USDC).
Regulatory Risks: Regulations around crypto vary greatly across nations, and changes to these frameworks can have a major impact on activities such as digital asset lending. You should stay up-to-date with the latest news and monitor the market for regulatory changes to prepare for such developments.
What Is Crypto Staking?
Crypto staking refers to the practice of locking up cryptocurrency as collateral to validate blocks in blockchain networks based on the Proof-of-Stake (PoS) consensus mechanism. In exchange for your contribution to the ecosystem's security, you receive staking rewards in the native digital asset as a validator (or a delegator).
You can stake your coins by running your own validator node or via a staking platform. While the first option provides the most freedom, it requires technical expertise and a minimum deposit that often poses a significant barrier to entry for newcomers. On the other hand, it is a convenient choice to stake crypto via a platform like VALR, which runs its validator node on your behalf. Here, you are not subject to a minimum deposit amount either, yet you may face certain fees and risks.
How Does Crypto Staking Work?
Here's how the crypto staking process works in practice on a staking platform:
Deposit: First, you deposit the PoS blockchain's native cryptocurrency (e.g., ETH for Ethereum, SOL for Solana, AVAX for Avalanche) to a staking platform. If you are short on crypto, you can buy some on VALR with a few clicks.
Stake Your Coins: Next, lock up your coins via the staking platform or in a smart contract (if the service is non-custodial). Until you unstake your coins, you won't be able to access them.
Earn Staking Rewards: Locking up your digital assets makes you eligible for staking rewards. You will continue to earn these in the form of yield during the staking period. Your staking APY is determined by the block rewards, the price and inflation rate of the staked digital asset, platform fees, potential slashing risks, and the number of users staking the same coin.
Unstake Your Crypto: After a certain period, you may decide to stop staking and withdraw your coins. To do that, you should unstake your digital assets, which will unlock them in your wallet (usually after the end of a short unstaking period).
Benefits of Crypto Staking
Like crypto lending, the primary benefit of staking your digital assets is a passive income you can generate on idle coins. Staking is especially useful if you are a long-term holder, and you can boost your APY with compounding and the potential price appreciation of staked assets.
By staking your crypto, you contribute to the security of the blockchain, making it more resilient against both internal and external threats. It is an activity that benefits all parties involved—you (the staker), the validator (if you stake via a platform or as a delegator), and the network.
For the same cryptocurrencies, staking is considered less risky than lending due to the possibility of borrower defaults (although overcollateralised loans aim to minimise these chances on most platforms). However, when compared with lending stablecoins on reputable platforms, staking could involve greater risks due to increased market volatility.
You can also lower the barriers to entry if you stake your crypto on a staking platform instead of running your own validator node. This makes the process significantly more seamless, accessible, and beginner-friendly.
Risks of Crypto Staking
Similarly to lending, crypto staking involves various risks, such as:
Lock-Up Periods: While lock-up periods are optional for lending, they are mandatory for staking, as your coins are used as collateral to validate blocks. Until the end of the lock-up period, you can't access your cryptocurrencies, reducing your liquidity. With a liquid staking protocol like Lido, however, you can put your staked coins to work on DeFi platforms to generate additional yield.
Price Volatility: The native cryptocurrencies of PoS blockchains are also subject to the wild price swings commonly associated with digital assets. Thus, when prices move in an unfavorable direction during the lock-up period, you could end up with decreased returns or even losses.
Slashing Risks: Slashing is a mechanism in PoS blockchains designed to penalise inefficient or malicious validators. It involves partially or fully liquidating a validator's collateral as a consequence of misconduct. When staking through a platform, the provider operates validator nodes on your behalf. However, if their validator misbehaves, you may face penalties even without any wrongdoing on your part. To reduce slashing risks, choose a reputable staking platform with a strong track record of responsibly managing validator nodes on their users' behalf. For example, platforms like VALR are known for their reliable staking services.
Counterparty or Smart Contract Risks: Like in the case of crypto lending, staking coins via a custodial staking platform may involve counterparty risks. On the other hand, non-custodial staking protocols could come with smart contract-related risks.
Crypto Lending or Staking: Which One Is Right for You?
Choosing between crypto lending and staking may depend on your investment goals, risk tolerance, technical expertise, and personal preferences.
It may make the most sense to choose crypto lending if:
You are looking to minimise volatility-related risks with stablecoin lending.
You are comfortable with the associated counterparty or smart contract risks, as well as potential borrower defaults and regulatory risks.
You prefer earning interest without participating in blockchain networks as a validator or a delegator.
On the other hand, you may choose crypto staking over lending if:
You want to earn rewards while contributing to the security of blockchain networks.
You are looking for a potentially lower-risk option to generate passive income.
You are a long-term investor who doesn't mind locking up his coins for longer periods.
Start Earning Crypto With VALR Today
Crypto lending and staking both empower you with the ability to earn passive income by putting your idle coins to work. While lending enables you to minimise volatility risks with stablecoins and generate revenue through loans to borrowers, you may face decreased risks with staking as you accumulate rewards for supporting the network.
Ready to embark on your crypto-earning journey? VALR offers a secure and user-friendly platform where you can both lend and stake your digital assets—in addition to trading them in the spot market with margin. On VALR, you can enjoy:
Flexible options between lending and staking based on your preferences
Competitive APRs for both crypto lending (up to 15% APR) and staking (up to 5% APR)
A secure platform regulated in multiple jurisdictions, employing robust measures to ensure your funds' safety
The seamless management of your crypto assets with our intuitive interface
Don't miss out on the opportunity to maximise your crypto earnings. Sign up for VALR today and take control of your financial future!
Risk Disclosure
Trading or investing in crypto assets is risky and may result in the loss of capital as the value may fluctuate. VALR (Pty) Ltd is a licensed financial services provider (FSP #53308).
Disclaimer: Views expressed in this article are the personal views of the author and should not form the basis for making investment decisions, nor be construed as a recommendation or advice to engage in investment transactions.
