Whether you’re new or a veteran in the world of cryptocurrency, you’ve probably heard of the term “staking” before. It’s a process wherein token holders deposit some of their tokens to become participants in actively running the network. Specifically, these stakers become what we call “validators,” and they play significant roles in a network’s ecosystem. Namely, they propose and verify any new data that gets added.
The process of choosing a validator is random, but those who do get chosen earn rewards. To lessen spamming from users, those who deposit more have a higher chance of being chosen. It’s similar to a lottery system, where locking away one ADA token is equivalent to one lottery ticket. In other words, the more ADA you stake, the greater your chances are of being chosen.
Cardano’s Delegation Process Makes Staking Easy
In the case of Cardano, “stake pool operators” are responsible for staking. As the name implies, participants of this entity will pool together all the staked coins—individuals or groups who have the necessary knowledge and equipment to perform staking run these pools.
However, it’s worth noting that anyone can choose to become their own staking pool operator if they don’t want to join another group’s pool. You have the freedom to choose which pool you want to join, and you can even check the pool’s size, uptime, and if it’s performing well.
After choosing your pool, you can enter your tokens using a process known as “delegating.” You see, you have the freedom to stake and re-stake coins as often as you want and with as many pools as you’d like. You simply have to wait until the next epoch comes around because you can relocate your assets.
Cardano separates time into “epochs,” while each epoch comprises 432,000 one-second intervals known as “slots.” In other words, one epoch usually lasts about five days. After an epoch has passed, the blockchain will create a snapshot. These snapshots make a record of the staked ADA being distributed to pool participants. It’s also used to calculate how many rewards a participant is owed.
So, if you notice rewards deposited into your crypto wallet, those are your stake rewards a few epochs ago. As such, you won’t be able to see your first rewards right away, and there will be some instances wherein you’ll only receive your rewards once you take out your tokens from the pool.
Note that you’ll receive a percentage of the coin you delegated, and it’s not based on the percentage of that coin’s value in USD. So, ADA’s dollar value could still change while you’re staking.
How Is Staking Possible?
It’s possible to stake crypto on the Cardano blockchain because it uses a consensus mechanism called Proof-of-Stake (PoS). This system ensures that all the users on the network are honest and only want what’s best for the network. Since most blockchain networks are decentralized and don’t have a central authority to make up the rules, anyone can participate.
That’s why these consensus mechanisms are crucial. They’re coded into the blockchain and are the ones to select who gets to do vital tasks for the network, such as adding new data to the blockchain. You can think of consensus mechanisms as a selection test that is specifically made to choose honest and worthy users.
On the other hand, cryptocurrencies like Bitcoin uses another type of consensus mechanism called Proof of Work (PoW). Instead of using stakers, PoW uses miners to validate and add new data. Unlike staking, where you only have to lock away some of your crypto assets, mining involves using heavy and energy-intensive equipment to compete against other miners. The person who gets the winning code first will be chosen to validate transactions and add new blocks to the blockchain.
Now, there are a couple of issues with this kind of system. First of all, PoW is terrible for the environment because mining uses up so much energy. Not only that, but it has a high barrier for entry. However, the Proof of Stake mechanism doesn’t require heavy or high-range equipment. In other words, it’s accessible to more participants and doesn’t slowly hurt the environment.
How to Start Staking Cardano (ADA)
You can download two different wallets to start your ADA staking journey: Daedalus and Yoroi. Daedalus is a digital wallet you can download onto your computer, and it’s ideal for crypto users who are more on the intermediate level. On the other hand, the Yoroi wallet is much better for those at the beginner level. Once you download it, you can easily access it on your web browser.
Nevertheless, the staking process is still the same no matter which wallet you choose. For the sake of this article, we’ll use the Yoroi wallet as an example to ensure that beginners can also keep up.
As soon as you’ve created an account and installed the wallet’s software, go ahead and tap the browser extension to be redirected to the Yoroi dashboard. This is where you’ll find the tab with the “delegation list.”
You’ll find a couple of different stake pools with crucial information. Some examples include:
- ROA: ROA means Return of ADA, and it’s essentially your interest rate.
- Share/Pool Size: This shows how much ADA is already in the stake pool and whether its capacity is close to complete.
- Costs: The costs are separated into tax percentage and fixed rate.
- Pledge: Pledge shows the amount of money the pool operators have entrusted in their own pool.
- Blocks: Finally, this show’s the history of the pool and how many blocked were minted already.
It would be best if you did extensive research on staking pools before making a final decision. Once you’ve found the pool you want to delegate your ADA tokens to, the next step is to click on the delegate button. From there, type in your spending password, which you created when you initially set up your wallet.
Double-check the transaction fees, and if you agree to them, you can complete your transaction. You’ll have to wait a few minutes before the transaction is fully complete, but once it’s confirmed, you should see your assets staked in your pool of choice.
Can You Profit From Staking ADA?
If you invest $1000, you could get 1030 ADA in return based on current rates. According to data from Cardano staking calculators, staking this same amount in a year could earn you 46.31-59.63 ADA or approximately 0.63-0.82 ADA every epoch.
Of course, some factors come into play as well, including fees, how many people are participating in a pool, how many blocks have been successfully proposed by the pool, and more.
The Risks of Staking ADA
Investing will always come with risks; that’s why you must do extensive research before making any final decisions. The first risk that comes with staking ADA or any cryptocurrency is the possibility of the token dropping down to zero. Another risk includes unstable interest rates.
When a pool is almost at total capacity, it will have a much lower interest rate than pools with fewer participants. This is because having more people in a pool means you’ll need to distribute the rewards to more people. Also, you won’t be able to use the ADA you’ve delegated while it’s still locked, although you can choose to move it anytime you want.
Lastly, staking pools require you to pay fees. The top pool currently is called Goat Stake, and it charges users a 2.5% tax on the rewards earned.