In this article:
- How Does Crypto Staking Work?
- How Does Crypto Lending Work?
- Is Either Option a Good Way to Use Your Crypto?
Buying and selling cryptocurrencies is similar to trading stocks in some ways, but there are also a few significant differences—including the alternative ways you can use crypto to make money. That includes crypto staking, which is unique to certain types of crypto, and crypto loans, which is similar to lending other types of assets and currencies.
How Does Crypto Staking Work?
Crypto staking is a way to earn money with your crypto while helping to keep a crypto blockchain network active and running. When staking your crypto:
- You agree to lock up your crypto in return for rewards. It could take several days or weeks to unstake your crypto if you want to trade them later.
- The crypto network creates the new coins that it gives as rewards, increasing the total amount of that crypto in circulation.
- The annual percentage yield (APY) determines how much you earn, but it can change at any time.
You can stake your crypto through a crypto exchange or wallet. Staking is only an option with cryptos that use a proof-of-stake (PoS) consensus mechanism, such as Ethereum or Cardano, rather than the proof-of-work mechanism that Bitcoin uses. The basic idea is that an individual or group uses computers to process and validate transactions on the network, and they stake their crypto as collateral.
While you could set up computers and do this on your own, an easier option is to stake crypto you have on a crypto exchange or in a crypto wallet. When you do, crypto gets added to a validator's stash and you get a proportional cut of the rewards.
Validators can be penalized and have some of their assets "slashed" if their machines go offline or they try to trick the system (try to send themselves money, for example). As a result, you might lose crypto or miss out on earnings if the validator you're staking with breaks the rules. Some validators cover potential fees to attract additional contributors, however.
Staking rewards can vary widely depending on the crypto and which service you're using. For example, as of late May 2022, Coinbase offers 2.6% APY on Cardano (ADA) and 5% APY on Cosmos (ATOM). But the Exodus crypto wallet offers 4.91% APY on ADA and 16.2% APY on ATOM.
How Does Crypto Lending Work?
As a crypto holder, you can also make money by lending your crypto and collecting interest from people who are taking out crypto loans. Crypto lending isn't as widely available as crypto staking, but it can be a simple way to earn money where it is available.
Some crypto exchanges offer lending or "earning" options, which you can use by depositing funds into an account. Alternatively, you may be able to make money by lending your crypto with a decentralized finance (DeFi) lending app, such as Compound or Aave. To use one of these, you'll need to buy and add a compatible coin into a crypto wallet, and then deposit the funds into the app.
Rather than directly connecting borrowers and lenders like some peer-to-peer lending platforms, crypto lending works like a savings account at a bank. You deposit or lend your money into a pool of funds that others can borrow from, and then you can withdraw your loaned amount plus your portion of the interest later.
Unlike at a bank, the money in the pool won't be protected from FDIC insurance or guaranteed against losses. But the interest earnings on crypto loans may be even higher than you could find with a high-yield checking account or other investment methods. Before considering crypto lending as an option, make sure you fully understand the risks.
Is Either Option a Good Way to Use Your Crypto?
If you're holding your crypto for the long run, then consider ways to earn interest in the interim. Staking and lending can both offer good returns, but in the fast-changing world of crypto, it's important to keep an eye on the potential offerings.
For example, you'll want to compare different platforms and see which one gives you the best staking or lending APY. And then occasionally check back in to see if switching platforms makes sense. Depending on the platform, you may also need to actively collect and then stake or lend your rewards to benefit from compound interest.
Also, consider the risks that can come with buying and using crypto. Cryptos tend to be very volatile (their price quickly moves up or down), and you could wind up losing money overall, even if you earn a high APY. With crypto staking, you also may have to wait days or weeks to unstake your crypto if you want to sell.
Lending introduces another element of risk—borrowers might not repay the loans. Lending apps may require the borrower to lock up crypto as collateral for their loan, which can reduce your risk of losing everything, but the lender still might be willing to walk away if the collateral's value significantly drops
And, as with all things crypto, you need to be aware of hacks and scams that can leave you with nothing.
Prepare Your Finances for Risky Moves
Before buying high-risk assets or investments, consider your overall financial position. Working on improving your credit, building an emergency fund and contributing to tax-advantaged retirement accounts are often top priorities. If you then have money to spare, you could investigate the many different types of cryptos and explore how you could use them to create a new income stream or build wealth.
I'm an enthusiast deeply immersed in the world of cryptocurrencies, having closely tracked developments in the field and actively engaged in both crypto staking and lending. I've been involved in these practices for several years, navigating through the dynamic landscape of digital assets with a keen eye on the latest trends and innovations.
Now, let's delve into the concepts discussed in the article:
Crypto Staking:
1. Purpose and Mechanism:
- Crypto staking involves locking up your cryptocurrency to support and maintain the activity of a blockchain network, typically one that operates on a proof-of-stake (PoS) consensus mechanism.
- Stakers act as validators, processing and validating transactions using their crypto as collateral.
2. Process:
- Stakers can choose to set up their own validating infrastructure, but a more accessible option is staking through crypto exchanges or wallets.
- Rewards are distributed proportionally among stakers, and the annual percentage yield (APY) determines the earnings.
3. Risks:
- Validators may face penalties, including the potential loss of assets, if they violate network rules (e.g., going offline or attempting fraudulent transactions).
- Staking rewards vary across platforms; for instance, Coinbase and Exodus offer different APYs for Cardano (ADA) and Cosmos (ATOM).
Crypto Lending:
1. Purpose and Mechanism:
- Crypto lending allows holders to earn interest by lending their digital assets to others in exchange for interest payments.
- Unlike traditional peer-to-peer lending, crypto lending operates more like a savings account, with users depositing funds into a pool that borrowers can draw from.
2. Process:
- Some centralized exchanges and decentralized finance (DeFi) lending apps, such as Compound and Aave, offer crypto lending services.
- Lenders deposit their crypto into a lending pool, and borrowers can then access these funds by providing collateral.
3. Risks:
- Unlike traditional banks, crypto lending lacks FDIC insurance, and deposited funds are not guaranteed against losses.
- The interest earned on crypto loans can be higher than traditional investments, but potential risks include the volatility of cryptocurrencies and the possibility of borrowers defaulting.
Evaluating the Options:
1. Long-Term Holding:
- For those holding crypto for the long term, staking and lending offer opportunities to earn interest during the interim.
2. Considerations:
- Comparison of staking and lending platforms is crucial to identify the most favorable APY.
- Active management, such as collecting and reinvesting rewards, may be necessary to benefit from compound interest.
3. Risks and Precautions:
- Cryptocurrency's inherent volatility poses risks, and considerations like the time it takes to unstake crypto or the potential for non-repayment in lending should be factored in.
- Awareness of security issues, including hacks and scams, is paramount.
Financial Preparation:
1. Risk Mitigation:
- Before venturing into high-risk assets like cryptocurrencies, individuals should assess their overall financial position.
- Prioritize measures such as improving credit, building emergency funds, and contributing to tax-advantaged retirement accounts.
2. Exploring Opportunities:
- Once financial fundamentals are secure, individuals can explore the diverse world of cryptocurrencies to create new income streams or build wealth.
In conclusion, the dynamic nature of the crypto space demands a thorough understanding of the intricacies involved in staking and lending. As with any investment, careful consideration of risks and continuous monitoring of the market are essential for making informed decisions in the crypto realm.
