Cardano was created in 2015 by Ethereum co-creator Charles Hoskinson, an American computer programmer who wanted to create a blockchain that was based on high-level academic principles.
The Cardano blockchain was developed for decentralized application (dApp) deployment. Its proof-of-stake consensus mechanism and internal architecture enable quick processing times and high throughput in comparison to direct competitors, such as Ethereum. It is also the first blockchain to be truly peer-reviewed by a community of scientists and academics.
Cardano's native token is called ADA. Although distinguishable, the 2 terms are often used interchangeably. ADA fulfils multiple purposes on the Cardano blockchain, however, its primary use is to validate and secure the blockchain through the proof-of-stake consensus mechanism. It achieves this through the process of staking.
Staking cryptocurrency can be a relatively simple method to grow cryptocurrency holdings over time. However, there are pitfalls that every investor needs to be aware of. In this guide, we'll cover how Cardano staking works, the multiple options available and the risks involved.
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.
What is Cardano (ADA) staking?
Staking refers to the process of locking up cryptocurrency coins in an associated proof-of-stake (PoS) blockchain. The PoS mechanism secures and verifies transactions in each block. In return for helping to secure and validate the network, users are rewarded with additional coins.
Cardano implements a form of PoS called delegated proof-of-stake, which builds on the original protocol. Cardano refers to this consensus protocol as Ouroboros. The protocol involves 2 key parties: stake pool operators (SPOs) and delegators.
SPOs are equivalent to nodes on the network that validate transactions and help run the system. The likelihood of SPOs being chosen to validate transactions depends on the amount of ADA staked within their pool. Staking ADA tokens as an SPO can be a complex process. It requires a big commitment, significant technical knowledge and familiarity with the Cardano blockchain. It is therefore a method best left to advanced cryptocurrency users. Luckily, ADA can still be staked through the simpler process of delegation.
Instead of validating transactions, delegators can stake ADA tokens within a chosen SPO staking pool. By delegating ADA tokens, it boosts the likelihood of the chosen SPO being selected to validate transactions. If a node is chosen, rewards are then distributed between the SPO and the supporting delegators. Delegator staking can be completed directly through a cryptocurrency wallet or indirectly through a cryptocurrency exchange. Rewards are given out to Cardano stakers every 5 days. This period is called an "epoch" in Cardano staking jargon.
Alongside staking ADA within the Cardano blockchain, ADA can also be lent through decentralized finance (DeFi) and centralized finance (CeFi) service providers. While not technically classified as staking, loaning out ADA to other traders through a lending and borrowing service can offer higher annual percentage rewards, with the trade-off being that it poses a higher risk and more complexity than staking through a wallet or exchange.
How to stake Cardano (ADA)
As mentioned previously, there are 3 main methods of staking Cardano. These include staking through a wallet or exchange and lending through a DeFi or CeFi platform. The easiest method for beginners is to stake Cardano directly through a cryptocurrency wallet.
To get started with staking ADA tokens, the first thing users will need is to hold ADA tokens within a cryptocurrency wallet. Investors can use popular multi-currency digital wallets, like Exodus, or utilize a hardware wallet, like Ledger, to add an extra layer of security.
Staking Cardano (ADA) on-chain using a wallet
For the process of staking ADA tokens, Cardano has 2 specific software (online) wallets it suggests using. The first is Daedalus, a desktop wallet for Windows, macOS and Linux, created by the Cardano development arm IOHK. The second is Yoroi, a more simplistic browser-extension wallet that can run on Google Chrome, Microsoft Edge and Firefox. Yoroi can also be used on Android and iOS devices.
Daedalus is a full node wallet, which is intended for those wishing to create a node and become a staking pool operator in the network. The wallet downloads a copy of the entire Cardano blockchain, which is then updated through validation. The wallet is aimed at advanced users and will not be the focus here.
Yoroi is a lightweight staking wallet designed for beginners. It is intended for those that wish to stake ADA tokens as a delegator.
Note. There are lots of fake cryptocurrency wallets so it's worth going directly to the Daedalus or Yoroi website to download these wallets to ensure you're getting the correct one.
How to stake Cardano (ADA) through Yoroi:
- You'll get 2 set-up options: Simple or Advanced. If you're a beginner, pick the Simple option. You can create Payment URLs to make it easier to pay people.
- Now you're ready to start staking. Connect a hardware wallet that contains ADA tokens or buy some ADA from a cryptocurrency exchange like Binance, Coinbase, Huobi or Kraken. Transfer the ADA tokens into the Yoroi wallet.
- The next step is to delegate your ADA to a staking pool. Each staking pool charges delegators fees for the process of node operation. These fees will vary between staking pools, so it is worth browsing options. Pools can alter fees at any time without warning, which is important to be aware of before you start. Investors often choose to divide up their ADA holdings by staking in different pools to spread the risk.
Once you have delegated ADA to a staking pool you will begin accruing rewards. When first depositing coins, a user will need to wait 20 days to be approved by the Cardano network. This authentication delay prevents spammers from overloading the network.
After this 20-day wait, stakers will begin earning rewards every 5 days. A user's first ADA staking reward will come 25 days after beginning to stake. The next reward will come after 30 days, and so forth.
Note: There is a network fee that stakers must pay when they claim rewards. Currently, this is between 0.1 and 0.2 ADA but it can change quite frequently. Many stakers wait to claim their rewards all at once so their gains are not eaten up by fees.
Staking Cardano (ADA) through an exchange
As cryptocurrency exchanges have grown in popularity, they have begun to offer extra features outside of simply buying and selling cryptocurrencies. One of these features includes offering users the opportunity to stake cryptocurrency tokens directly through the exchange.
In the case of Cardano, the exchange acts as the staking pool operator and takes care of all technical aspects of staking ADA within the network. ADA rewards are then accrued within the exchange.
While Cardano is available to buy and sell on most major exchanges, not all support Cardano staking. The 4 major exchanges that currently support the option include Binance, Bittrex, KuCoin and Kraken.
In comparison to staking through a cryptocurrency wallet, users are not able to choose and distribute ADA tokens across multiple staking pools.
Platforms that offer staking
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Earn interest lending ADA
There is currently only one major CeFi lending service, Nexo, that allows users to earn interest on ADA holdings.
Lending cryptocurrencies to decentralized finance (DeFi) applications is often referred to as DeFi staking. DeFi applications, such as decentralized exchanges (DEXs) or lending protocols, often depend on user-supplied liquidity to function properly. In return for supplying liquidity, users are rewarded with a share of the transaction fees.
Interest offered for lending to DeFi platforms is usually directly correlated to the demand for the cryptocurrency. This can sometimes mean rewards are better than staking ADA within the Cardano blockchain. If demand for ADA increases and supply is low, interest rates will rise. If demand for ADA decreases and supply is high, interest rates will fall.
How much can I earn with Cardano staking?
Staking rewards vary widely depending on the method and platform that stakers choose and will ultimately depend on the market value of ADA. If the market value of ADA increases, staking rewards will increase proportionally. However, if the market value of ADA decreases, the deposited ADA plus interest may be worth less than when starting the staking process.
Is staking Cardano safe?
A key advantage for Cardano stakers when compared with other blockchains is the lack of a lock-up period for ADA tokens. When staking ADA directly with a cryptocurrency wallet, the tokens never leave the wallet. A user can stake as many ADA tokens as they have available and withdraw them from staking pools at any time. This is a flexible feature that has won Cardano a lot of fans in the community.
While staking ADA directly through a wallet can be a simple process, users remain fully accountable. If a user loses the password to their wallet, they will lose access to their ADA funds. However, this is common to all cryptocurrency ownership and not just a feature of staking.
Unscrupulous validators are another risk to be aware of when staking ADA directly. While they cannot steal ADA tokens from a user's wallet, they can collect all staking rewards available to a staking pool. They achieve this by making sudden changes to margin requirements. Luckily, this is quite rare and the Cardano community is good at rooting out untrustworthy operators if they act this way.
Pros and cons of staking Cardano
- Passive income. Users can earn passive income on their ADA holdings.
- Non-custodial. As coins never leave a wallet during the staking process, there are fewer security risks in comparison to other blockchains.
- Dedicated wallets. Cardano offers dedicated wallets called Daedalus or Yoroi which simplifies the process of staking ADA tokens.
- Instant access. There is no lock-up period for staking ADA tokens. Tokens can be withdrawn from the network at any time.
- Accountability. Users are accountable for all aspects of the staking process. This includes keeping passwords and seed phrases safe. Without such information, ADA holdings could be lost.
- Risk of hack. Staking via an exchange or DeFi app can offer slightly higher rewards, but the methods are not as secure as staking through a wallet. If a platform gets hacked, or there is any vulnerability that hackers exploit, Cardano holders could lose access to cryptocurrency funds.
Cardano is one of the most popular cryptocurrency projects in the industry and has built up a large community following. Staking ADA within the network as a delegator is a relatively simple process that can be completed by new cryptocurrency investors. There are Cardano-specific wallets for beginners to choose from, and the network is also supported by all the major hardware wallets like Ledger and Trezor.
As with any cryptocurrency, staking rewards can vary and there are certain risks that any investor needs to be aware of. However, developers have tried to simplify the process as much as possible to entice new investors to take part.
Staking, in general, can be a good way to earn interest on your cryptocurrency holdings, but do take note that if the price of ADA falls while coins are staked, you could get back less than you put in. Staking ADA is therefore recommended for those that are going to be long-term investors in the project.
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Disclaimer: Cryptocurrencies are speculative, complex and involve significant risks – they are highly
volatile and sensitive to secondary activity. Performance is unpredictable and past performance is no guarantee of
future performance. Consider your own circumstances, and obtain your own advice, before relying on this information.
You should also verify the nature of any product or service (including its legal status and relevant regulatory
requirements) and consult the relevant Regulators' websites before making any decision. Finder, or the author, may
have holdings in the cryptocurrencies discussed.