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Crypto Lending and Staking Explained for Crypto Novices

January 19, 2022

Crypto Lending and Staking Explained for Crypto Novices

Leaving your tokens in a wallet in anticipation of a bull run sounds quite boring, right? The sudden, often unanticipated mood swings accompanying cryptocurrency volatility are discouraging factors for having idle crypto, though it is the known method we are acquainted with. Since we are optimistic about cryptocurrencies and the blockchain industry, it also would be illogical to remove money from our wallets because of an unfavorable market cycle. If we decide to keep buying the dip, what if the dip later dips further? 

The dilemma of long-term crypto investing is unmatched, but there is a better way to increase your returns. How can we then make money on our tokens without missing out on huge crypto runs? 

The answer is simple. Let's get into it straight away.

The Vast DeFi World

DeFi is making waves in our world, not just because it amplifies the tenets of blockchain technology but also because you can enjoy many side features by putting your crypto to work for you and earn passive income. Liquidity pools, crypto lending, staking, margin trading, and yield farming are a few passive earning features that do not exist in centralized crypto finance. These features make DeFi much more relevant than its counterpart, and being a relatively new space, the growth potential is endless. Let's look at two of them in detail and explain how you can enjoy earning passively from your tokens. 

Crypto Lending

Tagged as one of the screws that will unlock widespread cryptocurrency adoption, crypto lending is safe and more profitable than lending from centralized financial institutions.

Crypto lending allows investors to lend some of their tokens out in expectation of returns. These returns, which range from 7% to 16% annually, are much more than the average bank loan (0.5% - 2% annually). Since cryptocurrency offers a high level of security and some collateral in the form of tokens for the loans, the lenders can rest assured of capital preservation. Some lending platforms allow the lender and the borrower to agree on the terms of the loans.  

On the other side of the coin are the borrowers. Borrowing loans from traditional financial institutions is a difficult task. You'll need to show your credit score, proof of identity, a bank statement, and many other documents before you can be considered for a loan. Even as such, you are not guaranteed to get the amount you requested. Crypto lending allows for ease of getting loans. These loans can either be in fiat or crypto tokens, and your collateral could range from 25% to 50% of your loan. This kind of loan is useful when you need to cater to expenses in fiat currency while not wanting to touch your crypto holdings to meet them. 

Recently, institutional investors have been opening themselves to a level of exposure in cryptocurrency because of the annual percentage yield they can make from lending. Many top financial institutions have gotten in, and we expect many more to follow suit. If this is anything to go by, it may add more steam to the crypto lending sector as a whole. 

Apart from crypto lending, there is another popular way cryptocurrency investors, traders, or enthusiasts can make money passively. It is called staking. Let's look at what staking is and how you can stake your cryptocurrencies.

Crypto Staking

We can compare crypto staking to depositing money in a traditional bank where they lock up your funds and offer relative interest based on your deposit tenure. Simply put, crypto staking is a process of earning rewards by locking or delegating your crypto holdings. It is another well-known way of making money passively with cryptocurrencies; it operates with the proof-of-stake network, so not every cryptocurrency can be staked. With staking, you have two ways of earning. You can both earn from the increase in the price of your token and from extra tokens earned as a reward for staking. What do all these mean? Let's break it down. 

On proof-of-stake networks, each cryptocurrency block needs to be validated. The validation method here is different from proof-of-work systems that require you to guess a number closest to the network's random number. Here, the probability of being chosen to validate a block is based on the number of tokens the validator has (mining power). 

When you enable the "staking" feature on your wallet, your tokens are automatically assigned to a validator. You would still have your tokens, and you don't need to transfer them to anybody before you start earning. What happens is that when you enable staking, your validation rights are transferred to a validator. When the validator validates the next block, you earn some interest based on the number of tokens you staked. 

In professional language, staking is the act of protecting and securing a cryptocurrency's network by keeping your tokens in your wallets. It is as simple as earning from leaving your tokens in your wallet.

Please note that a few risk factors are involved when you are participating in the crypto staking process. You might have to bear the fees, and you can not access your funds whenever you need them. As a tip for staking, you should consider using more stable cryptos. The volatility surrounding altcoins can be a two-way thing, and don't forget that capital preservation is the first rule of investing. 

Conclusion

There are a few other ways of earning cryptocurrencies passively. None of them are without risks, but the benefits they offer far surpass the risks they pose. By earning passively, you are not just growing your tokens; you're also providing liquidity for the growth of the whole ecosystem. Another benefit is earning a steady flow of passive income irrespective of where the market moves. The reign of centralized finance would likely be short-lived following the improvements and the massive recognition DeFi features are receiving. 

Which of the above (crypto lending or crypto staking) would you be more comfortable doing? And why? Let us know in the comments section.

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