Module 12: Staking on Cardano
Module 12 will educate readers on how to earn rewards through staking on Cardano. It also covers Cardano staking pools and decentralization, plus the risks of staking.
What is Staking?
In the last module we examined the history of Cardano, this module will provide an overview of staking on Cardano.
Staking is a way users can earn rewards by holding certain cryptocurrencies, specifically proof of stake cryptos such as ADA. Proof of stake enables Cardano users to put their cryptocurrencies to work to generate income. It can be viewed as earning interest on crypto holdings, similar to interest earned on a savings account in a bank – except with higher rates.
Staking is usually subject to a lock up period. The lock-up period can last a few days or even a month before an investor can access their assets again. In extreme cases, the lock-up period can last months, or even years.
Even if the market crashes and the investor wishes to stop staking, the investor will still need to wait out the agreed staking duration before they can access their assets again.
Staking provides monetary benefits to ADA holders and benefits the Cardano network by allowing validators to build new blocks and process transactions. It is a fascinating concept that also remedies problems seen in the proof of work model.
PoS vs. PoW
The Proof-of-Stake (PoS) method is an alternative to Bitcoin or Ethereum's more well-known Proof-of-Work (PoW) mechanism. By validating transactions and blocks, PoS contributes to the network's integrity. However, to keep the network running, the PoW process necessitates a lot of computational power and electricity. In addition, a complex mathematical problem must be solved to validate each block. Unfortunately, this particular model has reached a stage where scalability is virtually impossible.
Unlike PoW, PoS requires transactions to be validated through staking. Overall, The PoS mechanism processes transactions faster and saves more energy.
How Does it Work?
Cardano investors can stake ADA to validate transactions. This keeps the network decentralized, and they are rewarded in ADA.
When staking, users have no control over how much ADA they assign to the pool. Since users are staking their addresses to the pool, it's either all of their Cardano balance or nothing. While the ADA is staked, users can continue to make standard transactions. A screenshot will be taken when it's time to get a reward, and the current balance will be utilized to compute the payout.
It only takes 5 ADA to begin staking, and it usually takes between 15 to 20 days to receive the first reward payout. After this, rewards will be paid out every epoch (which is every five days for the epoch that was active two epochs ago).
Also, note that ADA rewards are automatically applied. If you choose to stake your ADA, you need to check in on your pool regularly. This is to make sure that the pool you delegated to has not become oversaturated and also to make sure that the pool is still in operation. Stake pools can sometimes retire or stop minting blocks without warning.
How is Pool Saturation Regulated?
The maximum stake that can receive rewards in a single pool is known as pool saturation. If a pool has more than the full amount of stake, everyone who is delegated to that pool will be rewarded.
The k parameter, which is now set at 500, determines the saturation point. This means that the Cardano network is built to support 500 pools that are completely saturated. In actuality, there will be many more than 500 pools in use, and most of them will not be at capacity. The saturation point is about 64 million ADA and is defined as the total amount of ADA consumed divided by the k value.
Is it Better to Join a Pool or Operate a Pool?
Staking pools are relied heavily on in Cardano, while other blockchains rely more on individual staking nodes. To generate more funds, advanced users should consider starting their own pool.
For less experienced users, individuals can deploy their tokens into an existing stake pool. This can be done using a Daedalus or Yoroi wallet.
If you wish to run a stake pool, you will first need a continual internet connection and various technological skills. Pool managers, according to Cardano's website, must have the following:
Knowledge of running and maintaining a Cardano node 24 hours a day, seven days a week.
Understanding of how the system works
Development and operations experience (DevOps)
Server administration expertise is required (operations and maintenance).
Staking does not require a powerful computer, and ASIC devices do not provide any additional benefit. Unlike mining, staking uses very little power. You will, however, require reliable internet access.
On the other hand, when joining a staking pool, you do not need a constant internet connection and will not be required to continually monitor the pool's progress.
However, it is important to choose a pool that is reliable and offers low fees. You can check the status of each pool on websites like PoolTool and Adapools. Cardano's Daedalus Wallet and several other native Cardano wallets also help you choose a pool through the delegation screen:
Once you stake your ADA to a pool, you do not have to do anything as rewards are paid automatically. In addition, if you do not withdraw your initial stake, your ADA will remain staked, and you will continue to receive rewards.
In addition, your ADA is entirely secure during staking and remains under your control. The pools have no access to your money or rewards. The pools only deduct their fees from the total rewards generated by the pool, and if no blocks are made, no fees are deducted either.
Why Are there ADA Staking Fees?
The servers that run the pools are expensive, as is the management and maintenance of the pools. All of these running expenses must be covered. This is why there are fees attached to the pools.
On the Cardano network, the minimum fixed ADA staking fee is 340 ADA. The blockchain protocol determines this value, which cannot be decreased. Therefore, when joining a pool, make sure that this is the pool's minimum charge. Any pool that charges an exorbitant fee should be avoided.
The variable charge, or margin, is a fee that the pool's owner and the operator can impose. It is commonly set at a percentage ranging from 0% to 5%. In order to entice new members, many new and beginning pools set their margin at 0%.
A small stake delegate will not notice a substantial difference in profits from a pool with a 1-2% fee. A delegate with a multi-million dollar interest, however, will notice a significant difference.
Risks of Staking
When deciding on how much ADA to stake, prudent investors may consider the potential risks. However, when it comes to staking ADA, whether directly or through a third party, it bears no more risk than simply holding it in a wallet. The only actual risk appears to be the loss of the wallet's private key, which is something that all cryptocurrencies face, whether staking is involved or not.
There is one caveat. The price of ADA, like that of most other cryptocurrencies, is unpredictable. If Cardano's price falls or the cryptocurrency market suffers a severe selloff, as it occurred in 2018, the potential losses from crypto investments might soon outweigh the staking revenue.
Cardano Staking Pools and Decentralization
Cardano plans to ensure that the staking pools do not amass an excessive amount of power. For example, as Cardano's staking pools expand in size, the payouts will decrease. In addition, this will encourage users to switch between pools frequently, preventing one pool from dominating the others.
Second, there will be limited administrative control over Cardano's stake pools. There are no voting rights in stake pools, and only Genesis keyholders will initially vote.
An Easy Guide to Staking ADA on Yoroi to a Stake Pool
Now let's get to the exciting part, how to stake your ADA!
First, you will need to install and set up a Yoroi wallet. The Yoroi wallet makes it easy to store and delegate ADA without installing a Cardano node on your computer or waiting for the complete blockchain to download.
Once the wallet is installed, you can begin earning staking rewards with your Cardano funds by following these easy steps:
Once the wallet has been set up, you will first need to move money to it from an exchange such as Binance or another wallet.
Select the Delegation option to delegate your ADA to a stake pool. You must provide a pool ID to choose a stake pool.
A third-party service like PoolTool can help you identify a suitable pool and its ID. Remember to pick a pool that isn't too saturated.
Click the "Next" button after entering the pool's ID.
Select "Delegate" once you have entered the password.
You've now assigned your ADA and can start collecting rewards at the end of this epoch and the following!
Sending ADA to an Existing Wallet
Just a note on sending ADA to an existing wallet - suppose you are sending additional ADA to a wallet that is already delegated to a pool. In that case, it will add that ADA to the already existing amount of ADA that is in the wallet and will be included in the next delegation cycle just as you did when you first added ADA to the wallet and started delegating.
Conclusion
Cardano is developing one of the most innovative staking structures ever and one of the most decentralized. The incentives are excellent, and Cardano's concentration on stake pools should make it easy for users to join. In addition, staking through Cardano can help users earn passive income. Staking crypto, especially ADA, has never been so straightforward, even for beginners.
Join us in the next module where we will review the history of Cardano.