Staking vs Lending on PoS Blockchains

Oct 29, 2020

4 min read

Staking vs Lending on PoS Blockchains

Hi Readers👩‍💻,

Lending and Staking are two hot topics in the Decentralized Finance (DeFi) realm. These have respectively grown to around $11bn in total value locked. In today’s article, we’re looking at the differences between Staking and Lending digital assets. We’ll also be breaking down what we’d recommend for different situations.

🚀 Staking Digital Assets

Most of you are probably familiar with Staking digital assets, as this is, in Proof-of-Stake (PoS) networks, a rather common thing to do. Staking is a famous avenue for earning passive income in the blockchain world. It is predicted that with Ethereum, the second-largest cryptocurrency by market cap, shifting to PoS later this year, it will become even more popular.

To earn staking rewards, you need to “stake” your assets (any amount that you like) either by locking them into your wallet or delegating them. By staking your assets, you participate in block validation and earn a set percentage of stake as a reward. So, when is staking a good option for me? Staking is a good option for those who are interested in being able to contribute to the PoS network, its governance, and the future of blockchain.

According to Stakingrewards, the total staking market cap is currently at $36.8 billion USD (see image below), and $19 billion is locked in staking. Keep in mind that when it comes to staking rewards, different digital assets offer a different result.

Image first published by Stakingrewards.com

When you compare lending with staking, at first glance, staking looks like the obvious choice as staking rewards appear more attractive compared to lending rates. However, as with any financial activities, there are inherent risks involved. Especially since you will be staking digital assets that are very volatile in price, and when your rewards are paid in the same asset, a market slide puts you at more risk.

Furthermore, most current blockchain networks, if not all networks, are highly experimental, and there is no future guaranteed. While it is more secure to stake coins with larger market caps and lower volatility, their returns are typically smaller than riskier assets.

That said, staking and PoS opens up more ways for anyone wishing to participate in blockchains’ consensus and governance. It is also an easy way to earn some passive income by holding your assets. Furthermore, it is getting more accessible and easier to stake, with entry barriers to the blockchain ecosystem getting lower.

💻 Lending Digital Assets

As in traditional finance, lending digital currencies seems to be the most straightforward method for earning in a passive matter within the crypto world. DeFi platforms offer lending, borrowing, staking, trading, investment, and custodial services without a centralized middleman — which means they provide financial services through trustless protocols.

The total value locked in DeFi applications currently stands at $11 billion, according to DeFi pulse at the time of writing. Of that, $4,32 billion is locked in lending. Compound and MakerDAO, both DeFi applications build on Ethereum, are the top two in lending. Both platforms have over $1 billion secured in lending.

MakerDAO is unique because it functions to maintain the 1 DAI (MakerDAO’s native digital asset) to $1 peg. Other platforms allow a more traditional lending experience, where you can start earning interest as soon as your capital enters the lending pool. Furthermore, most platforms have lending rates determined by algorithms. Whenever a large number of digital assets is lent out, interest rates change accordingly.

If you compare traditional banking rates with the DeFi lending projects, you’ll see that it offers much higher passive income yields. However, lending digital assets is not without its unique challenges that need to be overcome.

So, what are those challenges? Firstly, while DeFi projects can offer a passive income stream, most are not quite ready for security. Cointelegraph, for example, posted last February that the bZx platform was hacked twice, in a matter of days. These kinds of security lapses make a big dent in the market’s confidence.

Another challenge for DeFi projects is their entry barrier; users must buy a supported digital asset before using the platforms. Often, purchasing digital assets still involves a traditional bank account and an exchange.

As stablecoins surge, driven by financial and other crises worldwide, a shift towards digital assets is realized. With digital assets becoming more and more popular, more possibilities for lending arise. DeFi platforms are likely to attract more users and potentially improve the acceptance of cryptocurrency around the world.

When should you consider lending? If you already hold different crypto-assets, you can make them work for you by placing some in high-interest accounts. Be careful to read the fine print and do your research as there are many different platforms out there. Lending means you give up custody of your coins. If that’s not a problem for you, or you are not that experienced with digital assets, and you’d like to make some additional income. Lending is the right solution for you.

🕵️‍♂️ Conclusion

If you are a blockchain and crypto enthusiast like we are, we recommend that you give staking a try. Staking rewards are often higher than those of lending. Furthermore, staking and PoS let you contribute to the consensus and governance of blockchains. And as it is becoming more and more mainstream, staking possibilities are bound to increase.

If you’re not that interested in participating in consensus or governance of blockchain networks, lending is a good option for you. You can also consider lending when you’re trying to spread risk. Both lending and staking have their pros and cons. Therefore, you must do your research before you decide what to do.

Furthermore, consider including both options as not to put all your eggs in the same basket. If you have any questions regarding staking or lending, we’re happy to help out. Please shoot us a message at our Telegram or Twitter.

🧐 More Information & Sources


DISCLAIMER: This is not financial advice. Staking, delegation, and cryptocurrencies involve a high degree of risk, and there is always the possibility of loss, including the loss of all staked digital assets. Additionally, delegators are at risk of slashing in case of security or liveness faults on some protocols. We advise you to do your due diligence before choosing a validator.

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