Staking vs Lending

With the recent Gemini Earn program halted withdraws and Genesis Trading rumors of bankruptcy, let's explore the difference between staking and lending in crypto.

https://twitter.com/Gemini/status/1594866655489933312

Staking is a type of consensus that allows participants to enter the validation process through Proof of Stake. The staking process enables the holder of the token to validate transactions while holding the token. In some sense, holders of token is a proof of ownership and rewards of such holding status. Lending is another form of cryptocurrency reward where lenders will take their loan from a third party, who in turn will repay the loaner’s loan. Let's explore the differences between them, each with separate definitions and examples.

What is staking?

Staking is the process of rewarding participants to hold and validate blockchain transactions in some sense of the ownership and a reward system of holding such token.

Cryptocurrency lending

A user creates a virtual account with a digital wallet called a “crytpo wallet.” The wallet can hold cryptocurrencies, such as Bitcoin, Ethereum, and Litecoin. When a user wants to borrow money from a third-party, such as an online banking provider, he can use his digital account to store the required amount of coins. When the third-party walks away from the loan, the wallet contains the funds from which the loan was repaid.

Lenders use a network of centralized or decentralized lenders to make payments to borrowers. Borrowers give up their control of their own money when they agree to repay a loan with a third party. The third-party acts as lender and earns interest on the loan amount. The lender can choose which assets or payments to make, and which parties to refer to in the agreement.

Differences between staking and lending

Staking requires a bit more effort on the part of the holder of the digital token to maintain ownership. It is controlled by the holder, not the lender! Staking requires participants to hold token to proof of ownership. But it is more important that you "lend" token to protocol but people and earn rewards not interest rates! Lending doesn’t involve ownership, but rather a set-aside of the value of the assets (i.e., collateral) that flow through the digital account. That way, the lender will get a “free” amount that doesn’t belong to them.

Different risks involved in staking and lending

You can potentially lose everything in both cases. But lending losses are more toward human errors than staking does.

Staking risks:

Market Risk 

Liquidity Risk 

Lockup Periods 

Rewards Duration 

Validator Risk 

Validator Costs 

Loss or Theft

Lending risks:

Margin calls

Illiquidity

Loan Counterparty Risk 

Risk of Platform Insolvency 

Custody & Security Concerns 

Unclear Cryptocurrency Lending Regulations

Gemini vs Gemini Earn

Gemini Dollar or GUSD is advertised to be 1:1 backing. But Gemini Earn is a lending service without any regulations. So staking service from Gemini is also separate from Gemini Earn.

When Gemini Earn halted, there is a loan counterparty risk that Genesis is insolvent or liquidity issue while Gemini operates regularly because staking depends on the protocol.

Summing up

Now that you know the differences between staking and lending, you’ll be able to protect your own assets.