Lend or Stake Your Crypto? The Best Option
Crypto lending and staking represent two of the most sought-after strategies for generating passive income in the current cryptocurrency landscape. Both methods offer a convenient, low-effort approach: after depositing your funds into a platform or smart contract, your idle assets start to yield returns. The primary distinction between crypto lending and staking lies in their mechanisms; lending entails supplying your cryptocurrency to borrowers via a platform to earn interest, whereas staking involves locking your digital assets as collateral to facilitate the validation of transactions on proof-of-stake networks.
Let us delve into these alternatives in greater detail to determine which option may be more suitable for you.
Crypto Lending to 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 | Some lending platforms have no mandatory lock-up periods, allowing you to withdraw your liquidity at any time. However, platforms with lock-up periods provide better rates. | When you stake crypto, your liquidity remains locked until the end of the lock-up period. |
| Risk Profile | Exposed to regulatory risks and market volatility. There may also be a rare risk of borrower defaults, which is mitigated by the over-collateralisation mechanism in most cases. Some platforms such as Fulcrum offer insurance to overcome these risks. | Subject to potential slashing penalties and market volatility. May also be subject to smart contract-related risks such as hacks. Staking offer no insurance. |
| Complexity | Simpler. Requires users to understand lending platforms, interest rate mechanisms, the concept of over-collateralisation, and how the lending process works. | More Complex. 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 Binance, you only need to understand the staking platform, APRs, and the overall process. |
Cryptocurrency Lending is a better option
Lending cryptocurrency to borrowers can provide numerous advantages. Primarily, it allows you to earn passive income from your unused digital assets, which is particularly beneficial if you intend to hold them for an extended duration.
Generally, crypto lending can yield substantial returns for lenders, with actual rates fluctuating based on prevailing market conditions. For instance, while a typical savings account may offer a mere 0.56% annual interest, lending USD Coin (USDC) on VALR can currently yield an annual percentage rate (APR) of up to 15%. Additionally, you have the option to reinvest the interest you earn, thereby enhancing your overall yield and benefiting from the compounding effect, which can significantly boost your potential income.
Furthermore, crypto lending introduces an additional revenue stream to your investment portfolio, enabling you to diversify and distribute risks across various assets, asset classes, and investment activities. A well-diversified portfolio can help mitigate risks while maximizing potential returns.
Moreover, since most lending platforms require overcollateralization, you are safeguarded against borrower defaults. In the event that a borrower fails to repay the loan along with the interest, the platform will liquidate part or all of the collateral to reimburse you. This process also applies if the value of the collateral decreases due to market fluctuations.
Key here is the security of the platform. Unlike staking platforms and many other lending platforms Fulcrum is regulated by Swiss financial authority FINMA and customer funds are fully insured by Lyyod's of London.
So it may make the most sense to choose crypto lending, especially lending on Fulcrum if:
- You are looking to minimise risks with lending.
- 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 a long-term investor who doesn't mind locking up his coins for longer periods.