Staking vs lending crypto, what is the difference?

The difference between staking and lending is where the return comes from. When you stake, a blockchain pays you for helping secure it. When you lend, borrowers pay you interest to use your coins. Apps show both as a yearly percentage, but the risks differ.

How does staking differ from lending crypto?

Staking is part of how proof-of-stake networks work. On Ethereum, validators earn ETH for voting on blocks on time, proposing blocks and taking part in sync committees, according to ethereum.org. Rewards scale with the validator's balance and fall as more validators join. Validators that miss votes lose the reward they would have earned, and those caught acting dishonestly can be slashed, losing part of the stake.

Lending does not involve securing anything. On Aave, for example, supplied tokens go into a pool that borrowers draw from against collateral. Aave says the supply rate depends on utilization, meaning how much of the pool is currently borrowed, and rates update every time someone supplies, borrows, repays or withdraws.

What are the main risks of each?

Staking risks include:

• Price. Rewards are paid in the staked coin, which can fall in value.
• Penalties and slashing. These are rare for well-run validators but possible.
• Lockups. Some networks make you wait to withdraw, covered in how long unstaking takes.

Lending risks include:

• Borrower and collateral risk. If prices crash faster than liquidations can run, a pool can be left with bad debt.
• Smart contract and oracle risk. A bug or a faulty price feed can drain a protocol.
• Platform risk. With a centralized lender, the company itself can fail. When Celsius went bankrupt, a US court ruled in January 2023 that crypto in its interest-bearing Earn accounts belonged to the company, leaving roughly 600,000 account holders as unsecured creditors.

How does staking compare with a liquidity pool?

A liquidity pool holds two tokens so traders can swap between them. Liquidity providers deposit both and earn a share of the trading fee charged on each swap. Uniswap's help center says fees are split among all providers in proportion to their share, and that version 3 pools use fee tiers of 1%, 0.3%, 0.05% and 0.01%.

Unlike staking, a pool's income depends on trading activity, not on network security. The distinctive risk is that when the two token prices move apart, the provider can end up worse off than if they had simply held the tokens.

Is staking or lending better?

Neither is better in general, and the answer depends on what risk someone is willing to carry. Comparing them means asking who pays the return, what must go wrong for money to be lost, and how fast coins can be withdrawn. Staking ties the return to one network's rules. Lending ties it to borrower demand and the soundness of the platform. Rates for both change often and are not guaranteed, and neither is a bank deposit.

Tax treatment of rewards and interest differs by country and changes often. Check the tax authority or a qualified professional for your own situation.