What is Staking?
Cryptocurrencies that use ‘Proof of Stake’ (PoS) protocols and offer rewards for ‘Staking’ have gained more spotlight lately. This is likely due to the increased media attention surrounding crypto, and because Elon Musk and Tesla reversed their decision to accept Bitcoin as payment for Tesla cars. This reversal was largely due to environmental concerns over how Bitcoin is mined. Cardano, the third largest cryptocurrency in the world, uses ‘Proof of Stake’ (POS) as an alternative to ‘ Proof of Work’ (POW) and incentivizes its users to secure the network by earning ADA, its native coin, by ‘Staking’ them. But is ‘Staking’ on Cardano worth it?
Staking is a great way to earn passive income. You can view it as earning interest on your crypto coins. With some cryptocurrencies, staking means you agree to lock up your tokens for a certain period of time, during which they are unspendable. However, this is not the case with Cardano as you can remove your coins from a stakepool at any time to use them as you wish! When you buy ADA, you become a ‘stakeholder’ of the Cardano network and the amount of your coins you hold represents your stake. Cardano’s ‘Proof of Stake’ consensus mechanism incentivizes participation in securing the network.
In terms of tokenomics, Cardano ADA has a maximum coin supply of 45 billion, where approximately 32 billion ADA are currently in circulation. The remaining 13 billion are reserved for staking rewards for the coming decades. Therefore, If you are fortunate enough to have 32million ADA, you would represent 0.1% ‘stake’ of the network.
Remember, as Cardano and other cryptos are decentralized networks, there are no central banks or central systems to process payments or transactions and keep the system operating for the public. By staking your ADA, you are supporting the network and actually participating in processing transactions, similarly to Bitcoin mining, but by allocating your network ‘stake’ to a pool to validate blocks of transactions on your behalf. Stakepool operators are independent administrators of the network and process blocks of transactions which are created on a daily basis to keep the network running. These blocks are then added to the blockchain as a record and are immutable.
In return for your participation in staking by delegating to a pool, you earn ADA tokens as a reward. Hence passive income! Unless you are day-trading cryptocurrencies which we don’t recommend for beginners as it is very risky, most investors purchase coins with the intention of holding them or ‘hodling’ as some say in crypto circles. They see it as a long term investment in the hope of price appreciation. With ‘Proof of Stake’ blockchains, you can earn interest on your coins as you wait, by ‘staking’ them to a stakepool. Your coins are never at risk as you never transfer them to any pool or entity. Through the official Cardano wallets such as Daedalus and Yoroi, you can select a pool through the ‘delegation center’, and your ‘stake’ in the network is delegated to that pool. A reliable stakepool will validate blocks of transactions on your behalf and other pool members and the pool is then rewarded by the protocol. The pool operators agreed fees are first deducted to cover running costs and earn profit, and the rest of the ADA rewards is auto-distributed to the pool delegators, based proportionally to the amount of ADA they have staked to the pool. All fees and reward distributions are handled by the protocol and not the pool operator, so there is no risk of not being rewarded with what you are due!
In practice, all ADA holders who stake can expect around 5%- 5.5% interest on their coins annually, paid in ADA every 5 days, assuming your pool is online 24/7 and doesn’t miss any assigned blocks. So there’s really no risk or reason to not stake if you are holding Cardano ADA in the medium or long term!. Let’s dive a little deeper….
What is Proof of Stake?
Proof-of-stake protocol uses a lottery to determine who can validate blocks to receive rewards. The more ADA or stake you have, therefore you could say the more ‘lottery tickets’ or probability you have to be assigned a block of transactions to validate and earn rewards. Blocks are validated by nodes. When you are lucky enough to be assigned a block, you are called the ‘slot leader’ and your node needs to be online at the time of assignment.
This is in comparison to Bitcoin and other ‘Proof of Work’ protocols which involve the use of computational power to mine blocks, where miners compete to solve computational problems and the winner is selected to validate the block and mine the bitcoin as a reward.
‘Staking ADA’ (PoS) is an alternative concept to ‘Mining Bitcoin’ (PoW) to secure the network or is an alternative ‘consensus mechanism’. The advantage is that you do not need to buy expensive mining hardware and avoid expensive electricity bills. Cardano PoS is reportedly 21million times more energy efficient than Bitcoin Mining! It’s also more resource friendly as multiple miners arent competing for the one block at a given time. In PoS, a pool operator knows in advance if its node is randomly elected.
POS is based on incentivization and participation of network users where all are rewarded, rather than a competitive ‘winner takes all model’ of Bitcoin. Huge capital is required to start mining bitcoin nowadays which excludes many from doing so, thus encouraging centralization. 50% of all Bitcoin mining is carried out by largest 10% of Mining companies, and many are based in China.
Why Consider Staking with Cardano?
While there are a number of PoS blockchain platforms, Cardano has the most valued staked of any blockchain, with a value of $23billion of dollars staked to the network, compared to $13billion and $11 billion dollars staked on Ethereum and Solano respectively.
It also has achieved full decentralization as all block production is in the hands of the 2600 community stakepool operators, as IOHK, Cardano’s parent tech company retired all their genesis pools in March 2021. The community pools now run and maintain the 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 uses its own POS protocol, ‘Ouroborous’ which is one of the most efficient consensus protocols in this space, and the first to be proven secure in a rigorous cryptographic way. Ouroboros is modular and functions by creating diving time into ‘Epochs’, which last 5 days, holding slot lotteries to decide who creates blocks. Ouroboros was designed with future-proofing, scalability, and tractability in its DNA.
Since Cardano is a third-generation crypto blockchain, it has taken the lessons learned from Bitcoin and Ethereum to expand and evolve its system capabilities. It allows for significantly lower transaction fees while simultaneously can scale to billions of people and its code has been formally verified to ensure the highest levels of security.
How Does Staking ADA Work?
The are two ways to participate and secure the network to earn ADA:
Setup and run a Stakepool Node:
If you have the technical skills, time and marketing skills, you could set up a node and required server infrastructure to validate transactions on the blockchain for Cardano. This is advanced participation and effort and pool operators earn fees for doing so. Marketing online is the biggest challenge to build a pool and attract ADA delegators. There over 2600 active Stakepools in operation currently.
Delegate your Stake to a Pool
As explained above. This is the most common choice. ADA holders who aren’t interested in Option 1 can delegate to a pool instead. When the pool produces a block, the protocol will deduct agreed fees for the pool operator and distribute the rest of the rewards to the remaining pool members so the process is automated and safe. ADA delegators just select a pool to do the work for them, sit back and enjoy the passive income!
Slot Lottery and Block Validation
The right to produce a block (the slot) is based on a lottery or ‘Slot Lottery’ Every single ADA coin acts as a ‘ticket’ in the lottery. The more ADA staked in a pool, the more probability it has to win or be elected as ‘Slot leader’. Once elected as ‘Slot leader’, the pool’s node has to be operating at the moment it is assigned the block to validate. This is why a pool’s technical infrastructure needs to be functioning and online 24/7. If a pool misses an assigned block, the pool and its delegators receive no rewards. In practice, most if not all pools are running 24/7 and very rarely miss a block. There is an anomaly in the system called a ‘Slot battle’ where two pools are elected but only one can produce a block. However, this is a rare occurrence.
Epochs and Snapshots
Cardano network splits time into periods called epochs. One epoch lasts approximately 5 days. It means that if an epoch starts on a Monday evening then it ends Friday evening.
At the beginning of each epoch, a snapshot is taken of the ecosystem which records the distribution of ADA coins on the network and across all pools. The slot lottery and reward distribution is based on these snapshot records at the start of that Epoch.
Reward distribution is dynamic and is designed to change over time as the network grows. Currently its 5.5% interest annually paid out in every Epoch and your staking rewards are deposited to your wallet. This interest earned can compound very nicely over time!
A quick example of 10,000 ADA @ current price of €1.19 (€11,956) staked for 1 years compounds to 550 ADA (€658). If you held your ADA for several years this will compound nicely! Now this example assumes ADA stays at its current price. We know crypto markets are volatile and prices rarely remain constant. As always, do your own research when investing in cryptocurrencies. Click here to see why we believe ADA is a good investment in 2021.
Tip: We are super bullish!
Note: Staking rewards are subject to each individual countries tax laws.
How to Begin Staking
In theory, staking is easy to do but can be daunting at the start. For more detailed information regarding the staking process, how fees are applied and ultimately how to choose a stakepool, click here. Also, see our Staking FAQ sheet. If you want to get staking in a pool, then you need to buy ADA and find a reputable stake pool, like BonafideADA. In order to do this, you’ll need to sign up for a crypto exchange, like Binance, Coinbase or Bitpanda.
Our ‘How to Stake’ Section provides step by step guides and videos to begin staking. The key steps include:
- Download and Install official Cardano wallets, such as Daedalus for desktop or Yoroi for your mobile device.
- Sign up for a crypto exchange like Binance, Bitpanda or Coinbase. You can deposit euros via bank transfer for free or deposit money through a debit card for a small fee.
- Transfer your ADA to your Yoroi light wallet or Daedalaus full node wallet.
- Then, you can delegate your stake easily within the wallet.
Staking earns passive income with zero risk and helps decentralize the network. As Cardano works towards its mission of global adoption and providing financial inclusion to those in the developing world, stake your Ada with Bonafide ADA to earn rewards with a secure bonafide staking service. Keep an eye out on our website and social channels for news updates and pool promotions. Any further questions on staking, feel free to contact us