In a previous article, we explored the concept of staking and how institutional investors can use staking to earn passive income on their cryptocurrency holdings. However, staking isn’t the only way for investors to earn yield. Collateralized lending is another passive investment strategy.
Lend/Borrow protocols have become one of the most popular functions of decentralized finance (DeFi) in recent years. Similar to a credit market in traditional finance, lend/borrow DeFi protocols allow investors to lend their tokens for an APY or borrow crypto at a variable rate. Unlike traditional finance, however, crypto lending is instantaneous. Borrowing and lending rewards are accrued in real time.
There are a number of pros and cons to consider when deciding between staking or lending your crypto. One of the key distinctions between staking and collateralized lending is the level of risk associated with each process. When staking crypto on a Proof-of-Stake blockchain, the risk is transferred to the validator and the blockchain. Validator risk is actualized if and when a validator, or the person confirming transactions, acts in a malicious way. However, if an investor uses a trusted, third-party, crypto asset custodian to stake, as opposed to staking on their own, this risk is very low.
With lending, the risk lies with the lender and the platform. DeFi systems lack traditional finance mechanisms like credit checks and deposit insurance, so investors assume the risk because there’s no protection if the borrower or platform defaults. Crypto borrowers are typically required to put up collateral, but the risk can be compounded if defaults extend beyond just one borrower.
The liquidity of the lending platform is also a consideration. With the recent case of Celsius, multiple liquidations led to the insolvency of the platform. It was one of the biggest crypto lenders before it filed for bankruptcy in July of 2022. While investors may seek higher rates being offered by particular platforms, these rates can come with significantly higher risk.
Both staking and lending are effective ways for investors to earn passive income on their cryptocurrencies, and the benefits of both will likely accelerate the institutional adoption of cryptocurrency and other digital assets in the near future. Whether future institutional staking and lending products look like traditional, fixed-rate vehicles, or something completely new to finance, the current benefits forecast a strong foundation for the institutional adoption of digital assets.
When Protego Trust Bank states that it allows for institutional crypto staking, it strictly refers to the PoS staking and not lending. Protego will never lend your assets to a third party and remains the custodian of all your assets. This is to ensure that your assets are in the best care and is our way of helping institutional investors securely benefit from emerging digital asset offerings.
Protego Trust Bank N.A (in formation) is a purpose-built, conditionally federally chartered trust bank, exclusively serving the needs of institutional clients. With a firm belief that the future of all assets is digital, Protego Trust is defining the next generation of financial services by providing regulated infrastructure, advanced technology and safeguards that allow institutional clients to securely participate in cryptocurrencies and digital assets. In 2021, Protego Trust received a conditional federal charter from the U.S. Office of the Comptroller of the Currency, in addition to its Washington state charter. It plans to launch in 2022. Learn more about our institutional custody solutions today.