In the ever-evolving world of cryptocurrency, terms like blockchain, decentralization, and proof-of-stake can leave many newcomers feeling overwhelmed and confused. With so much information available, it’s easy to get lost in the buzzwords and technical jargon. However, among the myriad of options, Cardano stands out as a promising platform that combines innovation with user-friendly features.
One of the most exciting aspects of Cardano is the opportunity to stake ADA, its native cryptocurrency. Staking allows you to earn rewards while actively supporting the network’s security and functionality. In this article, we’ll break down everything you need to know about staking ADA, addressing common questions and simplifying the process for beginners. Whether you’re looking to earn passive income or just want to understand how staking works, we’ve got you covered!
What is Staking?
Staking is the process of locking up your cryptocurrency tokens in a blockchain network to help it run smoothly and securely, while earning rewards in return. When you stake your tokens, you’re essentially supporting the network, especially if it uses a proof-of-stake (PoS) system. In return, the network rewards you, usually by giving you more tokens.
There are two types of staking: active and passive. Active staking involves taking part in the network by validating transactions and helping to create new blocks, which can lead to higher rewards. Passive staking, on the other hand, is simpler—you lock up your tokens, help secure the network, and earn rewards, but the payout is typically lower compared to active participation.
How Does Staking on Cardano Network Work?
Staking on the Cardano network works a bit differently from other blockchains. Instead of locking up your ADA tokens, you are staking your Cardano address, meaning your entire wallet balance is automatically staked. This happens without you having to re-stake when you receive more ADA, and you can freely use your ADA at any time.
Rather than running your own node, most users delegate their ADA to a stake pool. Stake pools are groups of ADA holders who combine their tokens to increase their chances of earning rewards. The pool operator manages the technical side, like running the node and keeping it active on the network. In return, they take a small fee from the rewards before distributing the rest to everyone who delegated their ADA to the pool.
Cardano divides time into “epochs,” which last five days. In each epoch, specific slots are randomly chosen to create the next block on the blockchain. If your pool is selected and successfully adds a block, you and others in the pool earn rewards, which are distributed at the end of the epoch. You can withdraw or re-stake your rewards to increase your future earnings.
Rewards for Staking ADA
Rewards for staking ADA are automatically distributed at the end of each epoch (a five-day period) to everyone who has delegated their ADA to a stake pool. These rewards are generated by the Cardano protocol, not by the stake pool operators. They come from two main sources:
- Transaction fees: When transactions are processed during an epoch, the fees from those transactions are collected and used as part of the reward pool.
- Monetary expansion: This involves drawing from the difference between ADA in circulation and the maximum possible supply (called the reserve). A fixed percentage of the reserve is used for rewards and also allocated to the Cardano treasury.
The system is designed to reward stakeholders fairly based on their participation in the network, and the rewards automatically appear in your wallet at the end of each epoch.
Delegating vs. Running a Stake Pool
ADA holders can earn rewards either by delegating their ADA to a stake pool managed by someone else or by running their own stake pool.
When you delegate, you contribute your ADA to a pool, increasing the pool’s chances of being selected to add the next block to the blockchain. The more ADA a pool has delegated to it (up to a certain limit), the more likely it is to be chosen to create a block. The rewards earned from this process are then shared among everyone who has delegated to that pool.
Running your own stake pool gives you full control, but it requires more technical know-how and resources. Delegating, on the other hand, is simpler—you just choose a pool to support, and you’ll earn a portion of the rewards when that pool is successful.
Choosing a Stake Pool
When choosing a stake pool for staking ADA, there are a few key factors to consider to maximize your rewards and ensure a good experience:
- Pool performance: Look for a pool that has a history of producing blocks. This shows that the pool is actively contributing to the network and earning rewards, which will be shared with delegators.
- Saturation level: Select a pool with less than 60% saturation. Pools that go over this limit stop distributing rewards to encourage decentralization. It’s a good idea to check the pool’s saturation regularly. Currently, pools with less than 64 million ADA staked are eligible for rewards, with many experts recommending pools that have around 30 million ADA or less staked.
- Stake pool operator accessibility: Some users prefer being able to contact the pool operator directly. Many operators provide contact info and social links, which can help you build trust, evaluate their competency, and see if their goals align with yours.
How to stake ADA (Using Trust wallet)
To stake ADA using the Trust wallet, follow these simple steps:
- From your wallet’s home screen, click on the “Earn” button.
- Choose ADA as the asset you want to stake.
- Select “Stake.”
- Decide how much ADA you want to stake and pick a validator (or stake pool) from the dropdown list.
- After selecting your validator, click “Continue.”
- Confirm your stake by following the final instructions, and you’re done!
Risks of Staking Cardano
Staking Cardano can be rewarding, but it’s important to be aware of the potential risks involved. Here are the main points to consider:
- When you delegate your ADA to a staking pool, you trust the operators to act honestly. However, some operators may engage in dishonest practices, such as stealing rewards or compromising the network’s integrity. Choosing a trustworthy pool is essential to protect your assets.
- If you lose your wallet’s private key, you could permanently lose access to your staked ADA. Keeping your private key secure and ensuring you have backups is crucial for safeguarding your investment.
- Staking often involves a period during which your ADA is locked, making it inaccessible for selling or trading. If you need immediate access to your funds, staking may not be the best option.
- Your earnings depend on how well the staking pool performs. If the pool isn’t effectively producing blocks or is poorly managed, you might receive lower rewards.
- The value of ADA can fluctuate significantly. This means that while you may earn rewards, the actual value of your staked ADA can change, impacting your overall returns.
Conclusion
Staking ADA is a great way to earn rewards while helping the Cardano network run smoothly. By learning how staking works, picking a good pool, and knowing the risks involved, you can make the most of your earnings. Whether you choose to delegate your ADA to a pool or run your own, staking can provide a nice source of passive income. Just remember to do your research and choose wisely to have a positive experience with Cardano staking.
