Staking is a process where token holders deposit – or lock away – a number of tokens to become active participants in running the network. More specifically, they become “validators” (also known as “stakers”) whose role is to propose and verify new data that’s added to the blockchain.
People are chosen at random to add new data to the blockchain, and those that are selected receive rewards for doing so. To reduce the number of people spamming the network, those who lock away more coins have a higher chance of being selected. You can think of it as a lottery system, where one ADA essentially equals one lottery ticket. The more ADA you stake, the greater your odds of being selected.
Cardano makes staking easy through delegation
With Cardano, individuals can hand over the responsibility of staking to entities called “stake pool operators.” As the name suggests, people who join these have their tokens pooled together. The pools are usually run by individuals or groups of people who have the specialist knowledge and hardware necessary to perform staking on the network – though anyone can become their own staking pool operator. Users have complete freedom to choose which pool they’d like to join, and can review each one based on their previous performance, uptime and size of pool.
Once a person chooses a pool to stake their tokens with, they must enter them into the pool in a process called "delegating." Coins can be unstaked and re-staked as many times and with as many pools as you like. You just have to wait for the next epoch to pass before your assets are relocated.
Cardano divides time into divisions called “epochs” where each epoch consists of 432,000 one-second intervals called “slots.” This means each epoch typically lasts for five days.
At the end of each epoch, a snapshot is created. Snapshots record the distribution of staked ADA to pool participants and use it to calculate what rewards are owed to each person.
This means that when rewards enter your wallet, you are actually being rewarded for staking that took place a few epochs back. Therefore, it may take some time for you to see your first rewards, and other times you can receive rewards after your tokens have been unstaked (taken out of the pool).
You will earn a percentage of the coin you have delegated, not a percentage of the U.S. dollar value of that coin. The dollar value of ADA may change while you are staking it.
What makes crypto staking possible?
Staking on Cardano is possible because its blockchain uses the proof-of-stake (PoS) consensus mechanism. This refers to the system the blockchain uses to ensure all network participants act honestly and in the best interest of the network.
You have to remember, anyone can participate in a blockchain network worldwide, and no central authority is in place to make sure people follow the rules. Consensus mechanisms like proof-of-stake are coded into the blockchain and decide who is selected to do the important task of adding new data, like transaction data, to the blockchain.
You can think of each consensus mechanism as its own type of selection test designed to choose honest, worthy participants.
Bitcoin uses a different consensus mechanism called proof-of-work (PoW), which uses miners instead of stakers to check and add new data to the blockchain. Miners have to compete with one another using energy-intensive computers to generate a winning code before anyone else in order to be selected to validate transitions and discover new blocks. Not only is this system bad for the environment, but it also involves a much high barrier for entry. With proof-of-stake, the hardware requirements are far lower meaning more people can participate and energy consumption levels are low.
How to begin staking ADA
There’s a choice of two different digital wallets you can download to store and start staking your ADA tokens:
Daedalus is a wallet that can be downloaded onto your desktop computer and is aimed at more intermediate-level users. The Yoroi wallet is a much more suitable option for beginners that, when downloaded, sits in your web browser such as Google Chrome or Mozilla Firefox. Irrespective of which wallet you download, the staking process is similar for both.
Let’s look at the Yoroi wallet as an example. Once you have signed up and installed the Yoroi software, click the browser extension to go to your Yoroi dashboard and find the "delegation list" tab.
Here, you will see a list of stake pools along with key information such as:
ROA: Return of ADA. This is your interest rate.
Share/Pool Size: How much ADA is in the pool as well as how close to full capacity it is.
Costs: The costs are divided into a tax percentage you'll be charged and a fixed rate the entire pool will be charged.
Pledge: This shows how much of their own money the pool operators have delegated in their own pool.
Blocks: This shows how many blocks have been minted in the history of the pool.
Take your time researching staking pools. You can do this by heading over to ADAPools.org for a more in-depth look at the pools.
Once you have found where you wish to delegate your ADA, simply click the delegate button. You'll then have to enter your spending password that you created when setting up your wallet and agree to the fees.
Now all you have to do is wait for the transaction to complete. This usually takes between a few seconds to a couple of minutes. Once it’s confirmed, your assets will be staked in the pool.
How profitable is staking ADA?
Investing $1,000 in Cardano’s native token will get you 1,030 ADA, at press time. According to Cardano staking calculators, staking this amount over the course of the year could roughly net you between 46.31 to 59.63 ADA, or between 0.63 to 0.82 ADA per epoch.
Of course, this depends on a number of variables including each individual staking pool’s fees, how many participants there are in the pool and how many blocks are successfully proposed by the pool.
Risks associated with staking on Cardano
As with all types of investing, there are always risks involved. The first and most obvious risk associated with staking any crypto asset is the token plummeting to zero.
More specific risks include fluctuating interest rates. Pools that are nearer full capacity will have a lower interest rate than those with fewer participants. That’s because in a larger pool there are more people to spread the rewards between.
Another issue with staking is that you cannot use the delegated ADA while it’s locked up, though it can be moved at any time.
Some centralized exchanges such as Binance allow staking via their platform but require tokens to be locked up for a defined period – 30, 60 or 90 days.
Finally, staking pools include fees. Currently, the top pool, Goat Stake, will charge a 2.5% tax on rewards earned. You will also be affected by the fixed cost that is applied to all Cardano pools once a pool produces a block. Currently, the fixed cost is 340 ADA and will be applied to the whole pool, not just your delegated tokens.
This article was originally published on
Jan 31, 2022 at 3:39 p.m. UTC
