Crypto Staking and Lending: Everything You Should Know

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For years, stock investors had a pretty powerful trump card in the enduring stocks vs. crypto debate:

How do you make passive income?

And for the longest time, crypto fans had to grimace and fold their arms. Holding doesn't produce dividends, and mining has a high bar for entry.

But that all changes with staking and lending. Both are simple, straightforward ways for crypto investors to earn passive income on their holdings — sometimes as high as 15% APY.

But how does it all work? Which method is better? And are regulators going to shut down the party?

Here's everything you need to know about crypto staking and lending. 

What Is Crypto Staking and Lending?

The short answer is that staking is leasing your crypto to the blockchain, and lending is leasing your crypto to a borrower.

Both earn a trickle of interest, typically paid out in form of the crypto you lent or staked.

Crypto Staking

Staking involves locking up your crypto for a certain period of time to generate passive income from it (in the form of more crypto). You can think of it like a crypto certificate of deposit (CD). You can't touch it but at least you know it's generating interest while staying relatively safe.

It's also way faster than a CD — most staking is done in intervals of just 30 days.

The reason staking generates income is because you're being rewarded for pledging your crypto to support the blockchain network. Staking is similar to mining in this way — miners dedicate computing power to the blockchain, and stakers dedicate coins. Both are rewarded with more crypto.

Now, not all cryptos can be staked, but more on that in a bit.

The process for staking is pretty simple. Find a platform that supports staking. Then choose how much you want to stake and for how long, and you've got passive income.

In short, staking is ideal for long-term crypto holders who want stable gains while minimizing risk.

So how is that different from lending?

Crypto Lending

Crypto lending also involves pledging your crypto to a certain platform to earn more crypto but with three key differences.

The first difference is simply how the crypto is used. As the name implies, when you lend crypto, you let the platform lease it out to crypto borrowers. The platform charges those borrowers interest and splits the earnings with you. Crypto loans are secured using the borrower's own crypto as collateral.

The second is that staking locks up your crypto for a preset period of time, but many lending platforms let you withdraw your earnings anytime you like.

So if staking is like opening a CD, lending is like opening a savings account.

Does that mean the interest rates are a piddly 0.50% like they are with regular savings accounts? Blessedly, no. In fact interest rates on lent crypto reach as high as 14%.

The final differentiating factor between staking and lending is how U.S. regulators perceive them. The Securities and Exchange Commission (SEC) doesn't seem to view staking as a big threat (well, no bigger than crypto as a whole).

But they hate crypto lending.

In September 2021, when lending platforms Celcius and BlockFi boasted about their combined $35 billion in deposits, they stirred up a hornet nest of lawmakers claiming they were offering unregistered securities. Regardless of how we crypto owners feel about that, we have to admit that the ire that crypto lending is drawing makes it somewhat less appealing as a long-term passive investing strategy.

How Much Money Can You Make Staking or Lending Your Crypto?

Interest rates for staking and lending crypto vary from 1% to 15%. It all depends on which crypto you lend or stake and for how long.

In general, rates for most coins tend to hover around 6%. Compare that to the U.S. stock market, which has an average 10-year return rate of 12%.

For long-term crypto holders, the only advantage you have by not staking or lending your crypto is liquidity; if you need to cash out on a moment's notice, you can.

But if you have no plans to cash out your crypto investment anytime soon, you may as well put it to work earning interest for you.

Which Cryptos Earn the Highest Interest Rates?

Which cryptos pay the best changes on a daily — even hourly — basis. At the time of this writing it's ICX, the native token of the Korean blockchain project, Icon. It pays 10.60% APY.

But remember: Your interest rates are typically paid out in the crypto you lent or staked.

If you read Icon's whitepaper and believe in the skyward, long-term potential of ICX, then staking it makes a lot of sense. If not, then it makes more sense to lend or stake a crypto whose value you believe will increase in the long run.

What Cryptocurrencies Can You Stake or Lend?

The following statement might blow your mind, but you can't stake Bitcoin.

Bitcoin transactions are verified using a process called “proof of work” — basically a sheer wall of computing power. That's why mining requires massive rows of computers and why Greenpeace isn't a fan.

But now there's a new, more energy-efficient method called “proof of stake.” This uses coins, not power. The tech behind proof of stake is immensely complicated. But think of the two like this:

Proof of work is a gas-powered car, and proof of stake is an electric car.

You can stake coins only if they are proof of stake (PoS).

Naturally, only newer coins that use proof of stake are stake-able. As of this writing, Cryptoslate reports 291 total PoS coins in circulation.

Currently, some of the most popular coins to stake (with high rates) are:

  • Ethereum 2.0 (ETH)
  • Binance (BNB)
  • Hydra (HYDRA)
  • Cardano (ADA)
  • BitDAO (BIT)

The List of Lendable Coins Is Growing

Since lendable coins aren't restricted by proof of work or proof of stake, there's no limit to the types of coins that can be lent. The list is presently small but growing.

At the time of this writing, BlockFi supports lending for 13 cryptos. That's way fewer than the 291 stake-able coins. But again, crypto lending is much newer and thus the list of coins will grow based on borrower demand. If your preferred crypto isn't available for lending, keep an eye on the list.

How Is Staking and Lending Different From Mining?

The first major difference between staking/lending and mining is that the former pair doesn't require any hardware. You can lend or stake your crypto from a smartphone, if you wish — it's basically a glorified bank transfer.

Meanwhile, to mine effectively you need:

  1. A powerful mining computer, and
  2. An agreement with your roommates to pay more of the power bill

The other key difference is that you can mine only proof-of-work coins or stake only proof-of-stake coins. Since staking is similar to mining from a technical perspective, the crypto community has lovingly given it a new nickname: forging.

If you want to mine crypto, you can easily start doing so in just 60 seconds. But of course using just your home computer is not overly effective, so don't expect a huge payout.

How Do You Stake or Lend Your Crypto?

The staking and lending process is pretty simple and straightforward, with one small exception that I'll get into. Here are the basic steps:

1. Pick Your Platform

Most platforms support staking, albeit with a limited selection of coins. eToro, Coinbase, Binance, Kraken, Gemini and others support staking.

For lending, the two most popular platforms are BlockFi and Compound — and they could not be more different from each other.

BlockFi is a centralized finance (CeFi) platform and Compound is a decentralized finance (DeFi) platform. Veteran crypto traders prefer DeFi platforms because they embody crypto's original mission to remove third parties. Beginning lenders should stick with the support and customer service offered by a CeFi platform.

Compare >> Best Crypto Staking & Lending Platforms

2. Pick Your Crypto

Next, you pick which crypto to lend or stake. In most cases, you use one that's already sitting in your wallet. But if you buy one from scratch for the purposes of lending or staking, don't get too fixated on a high interest rate. Remember you're paid out in coin, not cash. So use a coin that'll appreciate in value.

3. Lend or Stake Your Crypto

BlockFi and the big staking platforms make lending and staking easy.

Using Binance as an example, you simply have to:

  1. Pick a coin from your wallet
  2. Click Deposit
  3. Choose between 30, 60 and 90 days
  4. Stake your coins and watch your interest accumulate
Best Cryptocurrency Coins to Stake
Best Cryptocurrency Coins to Stake

As for lending on BlockFi, simply follow the steps to opening a BlockFi Interest Account. You don't have to find borrowers — as a CeFi platform, BlockFi takes care of all that.

What Are the Risks Involved in Staking or Lending Crypto?

As with any crypto-related endeavor, staking and lending aren't entirely risk free; and one is certainly riskier than the other.

Staking Risks

Staking, like mining, is generally pretty low risk. Stakers aren't reporting their money disappearing into the bowels of the blockchain — put a little in, get more out, simple.

The only inherent risk with staking is your illiquidity — if the price starts to tank or you need to cash out in case of an emergency, you're out of luck. So if your crypto wallet acts as your emergency fund, you probably shouldn't stake it.

Lending Risks

With crypto lending, your holdings may still be tied up, but the risks go beyond just those associated with illiquidity.

As mentioned, unlike staking, lending is very much under the regulatory microscope right now. In August, crypto hit a $2 trillion market cap (for the second time) — and the fact that high-interest lending and borrowing is occurring with zero oversight scares the SEC. Elizabeth Warren called it “highly opaque and volatile,” and SEC Chair Gary Gensler said, “If we don't address these issues, I worry a lot of people will be hurt.”

In September, the SEC threatened to sue Coinbase in court over their lending service, Coinbase Lend. Coinbase pulled Lend from the platform but still insists they don't know what they would've been sued for.

“The SEC still won't explain why they see a problem,” the company wrote in a blog post.

Needless to say, lending is not a stable ship to be on right now as the SEC is firing shots across the bow and forcing white flags.

Pros and Cons of Crypto Staking

Staking Pros

  • Simple — Staking your crypto is a simple, three-step process (or thereabouts) that most major platforms support.
  • Support your favorite crypto — Staking, like mining, helps to maintain a healthy blockchain.
  • Doesn't require mining hardware — You can stake your crypto from your smartphone.
  • Environmentally friendly — Staking lets you engage in the more eco-conscious future of blockchain: proof of stake.

Staking Cons

  • Ties up your crypto — If you'd like to retain your ability to sell your crypto at a moment's notice, either due to market fluctuations or for emergency cash, you can't.

Pros and Cons of Crypto Lending

Lending Pros

  • Support unbanked borrowers — There are 1.7 billion people (PDF) without access to bank loans. Your crypto loan empowers them.
  • You can lend Bitcoin — Bitcoin operates using proof of work, so you can't stake it but can lend it.

Lending Cons

  • Small coin selection — At the time of this writing, the big lending platforms support only 10 to 30ish coins.
  • Limited platforms support it — Beyond the CeFi platforms BlockFi and Celsius and the DeFi platform Compound, there aren't many crypto lending platforms — and thus less competition.
  • Incoming regulatory scrutiny — The SEC has already threatened Coinbase Lend out of existence. Similarly, your chosen lending service may not exist in six months.

Should You Consider Staking or Lending Your Crypto?

Staking — If you have zero plans to sell your stake-able cryptocurrencies in the next 90 days, staking is a solid option for generating some passive income while supporting the blockchain in the meantime. If you can accept a period of illiquidity, there's very little downside.

Lending — If you'd like to earn passive income on your non-stake-able cryptocurrencies and aren't worried about the SEC threatening crypto, then lending may be the move for you.

Plus you'll get the warm fuzzies knowing that your loan may help someone in an unbankable country start a business or buy a house.

Final Thoughts

Staking and lending are both exciting and innovative ways to earn passive income on your crypto holdings.

Crypto staking is the proof-of-stake version of mining and involves dedicating some of your crypto to the blockchain for a preset period of time (usually 14 to 90 days) in exchange for a trickle of interest.

Crypto lending involves letting another person borrow your crypto through a platform like BlockFi or Celsius, which will split the interest with you. Lending is inherently riskier due to vigorous regulatory scrutiny.

Chris Butsch

Chris helps young people prosper - both mentally and financially. In addition to publishing personal finance advice for Investor Junkie and Money Under 30, Chris speaks on the topics of positive psychology and leadership through CAMPUSPEAK and sits on the advisory board of the Blockchain Chamber of Commerce.

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