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Is Staking Crypto The Same As Interest?

Coinwut | Casper | May 22, 2021

staking crypto - Is Staking Crypto The Same As Interest?

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

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.

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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.

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.

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.

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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?

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