Is Staking Crypto The Same As Interest?

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According to the website Staking Rewards, the staking market capitalization reached more than $600 billion in April 2021. 

So, what is staking? Is it the same as lending and receiving interest? What are the differences and similarities of these two methods?

Is Staking the Same As Interest?

In general, staking and interest aren’t the same thing. You earn interest on your money by lending it to others.

However, staking is a mechanism of gaining rewards in exchange for committing your crypto tokens to the top nodes in the network (known as validators) so that they can validate transactions and record them in the blockchain. 

Nevertheless, staking and earning interest have some similarities. For one thing, they’re both methods of passive investment. 

Secondly, you lose access to your funds in both scenarios. In lending, you give your money to a borrower and can’t access it until repayment. A similar concept exists in staking called the “lockup period.”

However, while you can’t do anything with your staked coins, you receive rewards daily, and you can use them in whatever way you like. 

Finally, there’s ROI to consider. Staking rewards are generally higher than interest rates.

Before digging deeper, let’s explain staking in more detail. 

In Proof-of-Work (PoW) blockchains like bitcoin, users validate transactions by mining, which is a computationally intensive mechanism. 

In blockchain terminology, validating transactions means confirming that the transaction isn’t fake and writing it to the database. This confirmation process makes sure no one can manipulate the network’s data (e.g., steal other people’s crypto). 

Since PoW algorithms burn lots of energy, some blockchains have adopted Proof-of-Stake (PoS) protocols as a more efficient and scalable alternative.

In PoS blockchains, like Ethereum, Cardano, and EOS, the way to secure a network is called staking. Users pledge their crypto, and the network randomly selects these users to validate transactions and create blocks.

Read Staking ETH On Coinbase

The more coins a user stakes in the network and the longer they stake them, the more chance they’ll have to become the validator and receive rewards.

Watch this video to learn more about PoW and PoS: 

What Are Other Differences Between Staking and Interest?

The first difference between staking and lending has to do with the randomness we discussed in the previous section.

In lending, the interest rate is either fixed or floating, but there’s no element of chance.

You give a loan to some entity, and that entity has to repay you the principal and interest. However, earnings from staking can vary day by day, depending on network traffic. 

Note that some staking platforms, like Binance, show you an annual return before you stake your coins, but even those rates are subject to daily variations and often change during your lockup period. 

Other than randomness, staking and lending are different in terms of risks.

Probably the most important risk of lending is the risk of default, meaning the borrower doesn’t return your money.

And if you’re lending crypto, the risk is more serious, because unlike banks and other traditional lending institutions, many crypto lending sites are unregulated.

So, in some situations, you won’t have the support of law enforcement agencies.

On the other hand, staking’s largest risk is volatility. In most POS networks, you have to lock up your crypto for some time.

So, for example, if TRX prices plunge while you’re staking your tokens on Tron, you can’t do much to limit your losses.

In some cases, you can redeem your tokens within 24 to 72 hours, but you’ll forfeit all your staking rewards. And who knows what happens by then? 

Read about the difference between staking and dividends.

Can You Lose Money by Staking?

If you select a trustworthy token and platform, you won’t lose your crypto through staking, but remember that market risks can substantially decrease your return or the value of your tokens.

So, before selecting a potential token for staking, you should assess these factors:

  • Staking Returns: Different coins have different returns. For example, currently, if you stake EOS on Binance, you can earn 0.5 to 1 percent a year. But if you choose ALGO, your gains increase to as much as 8 to 10 percent. You can even expect three-digit returns for some tokens like CAKE
  • Liquidity: Check out trading volumes and market cap to assess liquidity for each token. Avoid small-cap altcoins with low trading volume because even if you earn high rewards, you won’t be able to convert the tokens to dollars once the lockup period is over. 
  • Lockup period: If an adverse price move occurs or you need your money for an emergency, you can’t unstake your crypto during this period—or at least have to wait for 24 to 72 hours. 
  • Historical price: Analyze price moves in the past to understand what you should expect in the future.
  • Developers: Only trust crypto teams and projects with a transparent and successful track record.

Remember to consider all these factors together. Don’t just choose the token with the highest APY.

Read Is Staking Good for Crypto?

Is Staking Profitable?

Your staking profits depend on the token, lockup period, number of locked tokens, and platform you choose for staking. However, your return is better than just holding.

You can use online staking calculators like the one on the Staking Rewards to determine your estimated returns. But remember that those are just estimations and may change daily.

Consider this example: You stake $1000 worth of Tezos for 12 months on Binance with a 6 percent annual return.

Suppose the token’s price doubles during this time. At the end of the year, your investment would be worth $2120. Your ROI on this investment is 112%. Pretty profitable, right? But if Tezos loses 50% of its value. Your investment would be worth $530. You’ve lost 47%.

Nevertheless, be careful about scams, especially if you’re not tech-savvy. Do thorough research on reputable sites like CoinMarketCap and social media about any token before staking.

Read Is Ethereum Inflationary or Deflationary?

Is Staking Crypto Worth It?

It depends on your risk appetite and expectations. If you’re a risk-averse person, maybe investing in crypto (altogether) is not for you. Or if you’re looking for a way of getting rich overnight, staking is not the way!

If you want to stake on your own, you should also compare the costs of running a validator node with staking rewards. For some tokens, the rewards might not outweigh the costs.

To learn more, read our full guide on the topic: Is Staking Crypto Worth It?

What Cryptocurrencies Are Worth Staking?

Based on current data from Staking Rewards, the top 5 crypto assets by staked value are Cardano, Polkadot, Ethereum, Solana, and Avalanche. Staking rewards for these tokens are between 5 and 13 percent annually. 

Moreover, Tendies (a token with a market cap of about $1 million) rewards more than 200 percent in a year, while the returns for Feyorra, CAKE, DDKoin, and ChainX exceed 80 percent. Riskier, more volatile tokens generally offer higher returns.

Again, remember that staking return isn’t the only important factor. If you stake a token with a 100 percent annual return, but it loses 50 percent of its value during this time, you haven’t earned a dime with this investment.

How to Start Staking

After selecting the right token, the next step is to choose whether you want to stake on your own, stake on a wallet, or use staking service providers.

Staking on Your Own

If you want to do it on your own, then you should run a validator node. And to do that, you need two things:

  • The right hardware: Depending on the project, you may be able to get the job done using a low-cost raspberry pi computer. But in most cases, you’ll need relatively expensive equipment. For example, to become a validator on Solana, your server needs at least 128 GB of RAM and 12 CPU cores, not to mention constant internet connectivity! 
  • Minimum required tokens: On some blockchains, you need a minimum number of tokens to start staking. For instance, this number for Ethereum is 32 ETH.

As you can see, becoming a validator node requires technical knowledge and relatively sophisticated hardware. So, be careful how much you invest and how much you get in return. 

If you don’t care for any of these troubles, you can search for a wallet or a staking service provider.

Staking on a Wallet

Wallets like Ledger, Exodus, and Trust Wallet offer staking services.

Staking on wallets is pretty simple. For instance, to start staking on the Ledger hardware wallet, you just need to install your coin app, create an account on Ledger Live, and transfer your cryptos to your wallet.

Currently, you can stake five assets on Ledger, including Tezos, Tron, and Polkadot.

If you’re thinking of staking as a sort of passive income, then staking from your wallet is the safest choice.

Staking Service Providers

Exchanges like Binance, Coinbase, and Kraken or Staking-as-a-Service platforms like Stake Capital, Figment Networks, and MyCointainer belong to this category.

As opposed to exchanges and wallets, Staking-as-a-Service platforms exclusively provide staking services.

These platforms have numerous offerings with different terms and returns. Your initial investment will be much lower, and you won’t need any technical know-how, but your returns will be lower since they take a portion of the staking rewards in exchange for their services.

Final Thoughts

Aside from being an investment tool, staking is a more environmentally friendly mechanism for securing blockchain networks.

It has also provided new cheaper ways for people to have a passive income. That’s why staking has become popular these days and appears to have a brighter future.

But, if you want to invest in this relatively new space, note that you have to accept significant risks, especially volatility and liquidity.

One final piece of advice would be that “don’t put all your eggs in one basket.” Create a portfolio of stakable coins to reduce your overall risk.