What is Staking?
If you’ve been paying attention to the crypto and financial markets, then you know that investing in crypto is a smart move. Between nonfungible tokens (NFTs), stablecoins, and Bitcoin, experts are weighing which currency is the best move for long-term investments to identify where investors should lay their claim.
What isn’t popularly discussed is the real potential of crypto staking and the power that Cardano has in setting the standards for crypto investments.
If you’ve heard of ADA, Cardano, or staking, and you want to get more involved, then you are on the right track.
Here’s what you need to know about staking and how to make your first stake:
What is Crypto Staking?
Staking is a process of placing an eligible crypto on a Proof of Stake (PoS) blockchain to earn a reward. This is a less intensive alternative to mining that uses PoS platforms as a consensus algorithm. Other versions such as Delegated Proof of Stake and Leased Proof of Stake can be used as well.
To make a deposit onto a PoS blockchain, you must hit a minimum requirement. Essentially, the staker is putting eligible assets into a designated wallet so that the algorithm can perform network functions like validating transactions. It then rewards the stake owner. Stakers are essentially rewarded with more crypto for putting crypto into the network functions for the network to reproduce nodes.
Holding the coins in the staked wallet is essential to the staking process. As long as you keep your tokens on the given exchange, the protocol can work for you. Some protocols allow you to add or withdraw, but you most likely have to wait a certain amount of time or maintain the minimum.
Cardano is an example of one of these blockchains. For Cardano, you (the delegator) must deposit ADA crypto at the designated minimum (although companies like BonafideADA have no minimum). Once you hit that minimum balance, a node will deposit that amount onto the network, similar to how a security deposit works.
This is your first stake.
Your stake size corresponds directly with the chance of your stake (which is now a node) to be chosen and forged in the next block. Similar to how a miner is rewarded in Proof of Work (PoW) chains, if your PoS node is selected and it creates a block, then you are rewarded.
Not all cryptocurrencies are eligible for staking. Here are just a few you can stake with:
- Cardano (ADA)
- Algorand (ALGO)
- Cosmos (ATOM)
- Ethereum (ETH)
- Tezos (XTZ)
Proof of Stake (PoS) vs. Proof of Work (PoW)
In staking, a user holds or locks their funds in a designated crypto wallet to maintain the PoS blockchain. This is very similar to crypto mining and Proof of Work (PoW) blockchains because the stake helps a network achieve consensus while rewarding those with participating funds.
PoS platforms are scalable with high transaction feeds. Just like in mining, stakes are incentives to start a new block or add a transaction.
However, in staking, validating transactions depends on how many coins you have in your wallet.
Another core difference between PoS and PoW is the processes in place. PoS operates based on a smart contract algorithm (branching off of Ethereum), whereas PoW requires members to work on behalf of the network. Usually, this is in the form of solving an arbitrary mathematical puzzle to prevent users from messing with the system.
Validating Your First Stake
There is a lot that goes into choosing your platform and making your first stake:
Why Consider Staking With Cardano (ADA)
While there are a number of PoS blockchain platforms, we consider Cardano to be one of the strongest. Cardano has a native coin, ADA, which was minted by the stake pool operators running their network.
It is also the network created by Ethereum co-founder Charles Hoskinson and is known to be the third generation of blockchain technology.
Cardano provides delegators with much more security than previous generations. It was designed using Ouroboros; simply put, the Ouroboros PoS algorithm divides time into epochs that are made up of fixed-time slots (currently, an epoch lasts five days, and a slot lasts one second, although these can change). There is nothing simple about Ouroboros, and it is vital to the function of Cardano’s staking protocol.
When one epoch ends, another starts. Each slot has a leader that is chosen by the “lottery,” and each slot leader does the following:
- Validates transactions
- Creates transaction blocks
- Adds newly-created blocks to the Cardano blockchain
In this system, the higher the stake, the better the chances of winning the lottery.
Since Cardano is a third-generation crypto blockchain, it has taken the lessons learned from Bitcoin and Ethereum to expand and evolve. Hoskinson has led the charge to make Cardano better able to automatically withstand a large number of transactions while maintaining a high level of security, increasing its longevity and ability to scale.
Cardano is also extremely robust while offsetting the cost of mining with nodes that “mine” themselves based on smart contract technology.
Prepping Your ADA Stake
Once you’ve chosen your platform, like all crypto transactions, you must go through platform eligibility checks, like identity verification and holding the eligible cryptocurrency for the platform.
The biggest hurdle is usually getting that minimum balance for the specific asset. If you go with Bonafide ADA, you actually don’t need a minimum threshold!
If you go with another company, though, then you will have to make moves and get ADA transferred into the designated wallet. Once you hit that minimum threshold or go with Bonafide ADA, you can validate your first stake.
The platform will recommend a hash (or pool) to stake with, but you can also find a stake pool that you can contribute to. (Note: Changing pools might alter the minimum threshold). These protocols are fairly similar no matter which protocol and asset you go with.
Delegating Your First Stake
If you’ve hit the minimum threshold and are eligible with the platform, you can place your first stake. Remember that the platform might take a small fee for placing your stake, or they may wait to take a commission on the reward.
Depending on the protocol (or the blockchain that you go with), you might be limited once you hit your stake. You might not be able to move the funds, and you might experience a lockup period where you can’t withdraw. However, once any of these lockup restrictions have passed, you should be able to withdraw a reward-earning asset just like any other cryptocurrency.
Sometimes withdrawals and trades may be delayed if the platform is in the process of staking funds. Here you are just waiting for the funds to be unlocked. The ability to withdraw might also be dependant on your banking history, account history, and transaction history.
Know that once you stake your ADA, it is completely safe, even if you are sharing the pool with others. Your funds remain in your control as stake pools never have access to the pool’s rewards or funds.
You also can never lose funds by staking them. Pools might take fees from the total rewards before it is distributed to their delegators, but never from the original staked funds.
Earning Return on Stake (ROS)
The staking process works on a reward system:
- Adding eligible assets to a PoS blockchain increases the node numbers and improves the chances of earning interest.
- If you place your ADA asset on the PoS blockchain and it inflates, the protocol rewards those nodes more.
- The protocol determines the rate at which new tokens are added and then distributes these tokens to holders.
- The return on stake (ROS) is then calculated based on the pool size. Each protocol will define the intended pool return based on a saturated pool. For example, the Cardano (ADA) protocol has a ROS of 5 to 6%. And this is based on the number of lifetime blocks and the number of pledges on the blockchain.
- Exactly how you earn a reward will depend on the stake pool and protocol you go with. For example, eligible crypto earning holding a minimum balance can earn rewards on Binance and Coinbase, and many other platforms.
- But, no matter where you stake, you, the validator, should always retain full ownership of the asset.
Some assets require penalties and lockups, which essentially means you can’t withdraw your funds immediately. But those will depend on the actual asset. To counteract these, a PoS company will have a secure infrastructure in place to prevent slashing at the protocol level (and they usually back the validator even if slashing occurs, especially since staking companies will be getting a commission from rewards).
Once your stake starts earning rewards, you’ll see that the more you hold in the stake, the more the platform can stake on your behalf. This increases the number of rewards you will receive! Stake rewards are calculated based on the number of assets in your wallet, and it may also be affected by the frequency of blocks that are produced on that network.
Things to Consider Before You Delegate!
Calculating rewards will be different for each platform. A fixed percent is usually determined based on the network’s protocol and is influenced by validator performance (how frequently stakes are made), the number of stakes on the network, inflation rates, and savings rates. So a fixed reward can still fluctuate.
Rewards aren’t guaranteed, but you also won’t lose your original staked amount.
Stakers might be given estimated rewards or projections, but these are estimates. If you’re given an Annual Percentage Yield, this will be the total amount of staking rewards projected over an annual (365-day) period and based on the then-current rewards rate. So this might also change.
If you stake in the US or are a US citizen, then your earnings will be subjected to US tax reporting requirements. Any US customer who earns over $600 in staking rewards should file 1099-MISC income earnings. If you are looking to make substantial rewards, consider staking outside of a US stake pool like with Bonafide ADA.
And, of course, check the platform’s user agreement so that you understand the protocol’s ROS and the calculated percentage the company might take off your rewards.
Your research into staking will inevitably lead you down many rabbit holes. As is true with much of the crypto community, there are so many coins, platforms, and blockchain networks to choose from.
Staking is no different.
Finding the right stake pool takes some research, as you want a stake pool platform that will offer rewards and not risk the integrity of your assets.
The bottom line is that every cryptocurrency investment is a potential risk, and you want to eliminate as many risks as you can. Going with a strong PoS blockchain like Cardano is one step in the right direction.
Disclaimer: This information should not be interpreted as an endorsement of cryptocurrency or any specific provider, service or offering. It is not a recommendation to trade.