Cardano was established in 2015 by Charles Hoskinson, a co-founder of Ethereum and an American computer programmer. He aimed to create a blockchain that was based on rigorous academic principles.
The Cardano blockchain is designed for decentralized application deployment. Its proof-of-stake consensus mechanism and internal structure provide fast processing speeds and high capacity compared to its competitors, such as Ethereum. It is also the first blockchain that a community of scientists and academics has thoroughly reviewed.
The native cryptocurrency of Cardano is known as ADA, which is often used interchangeably with the name Cardano. ADA performs various functions on the Cardano blockchain. Still, its primary purpose is to validate and secure the blockchain through the proof-of-stake consensus mechanism through a process known as staking.
Staking cryptocurrency can be an easy way to increase one’s cryptocurrency holdings over time, but it is important to be aware of potential risks. This guide will explain how Cardano staking works, the different options available, and the potential risks involved.
What is Cardano Staking?
Staking involves holding onto digital currency in a blockchain that uses proof-of-stake (PoS). PoS validates transactions by verifying blocks, and users are incentivized with additional coins to help maintain network security.
Cardano utilizes a specific type of PoS called delegated proof-of-stake, referred to as Ouroboros, and involves two parties: stake pool operators (SPOs) and delegators. SPOs are similar to nodes that validate transactions and operate the system, with the probability of being selected to validate transactions based on the amount of ADA they hold in their pool.
Staking as an SPO can be challenging and requires technical expertise, so it is better suited for experienced cryptocurrency enthusiasts. However, ADA can still be staked through delegation, a simpler process.
Delegators, conversely, can stake their ADA without having to operate a pool or possess technical knowledge. They simply choose an SPO to delegate their tokens to and receive a portion of the rewards earned by the SPO for staking and validating transactions. This provides an opportunity for individuals to earn rewards without having to manage the complexities of running a stake pool.
Instead of performing the validation of transactions, delegators can participate in staking by putting their ADA tokens into a selected stake pool operated by an SPO. Doing so increases the chances of their chosen SPO being selected to validate transactions. If it is selected, rewards are then divided between the SPO and the supporting delegators.
Delegators can stake their tokens directly through a cryptocurrency wallet or indirectly through a cryptocurrency exchange. Rewards for Cardano stakers are distributed every five days, a period referred to as an “epoch” in the Cardano staking world.
In addition to staking ADA within the Cardano blockchain, ADA can be lent out through decentralized finance (DeFi) and centralized finance (CeFi) service providers. Although not considered staking, lending out ADA to other traders through a lending and borrowing platform can offer higher annual returns. However, it comes with higher risk and complexity than staking through a wallet or exchange.
How to Stake Cardano
As previously stated, there are three primary ways to stake Cardano: using a wallet or exchange and lending through a DeFi or CeFi platform. The simplest option for beginners is to stake Cardano directly through a cryptocurrency wallet.
Users must first own ADA tokens stored in a cryptocurrency wallet to begin staking ADA tokens. They can choose from popular multi-currency digital wallets like Exodus or a hardware wallet like Ledger for added security.
Once the ADA tokens are securely stored in a wallet, the next step is to connect the wallet to a staking service or platform. This will allow users to delegate their tokens to an SPO, which will then validate transactions and earn rewards on behalf of the delegators. The rewards will be split between the SPO and the delegators based on the terms agreed upon by the SPO.
How to Stake Cardano On-Chain Using Wallet
Cardano recommends using two specific online software wallets for staking ADA tokens. The first one is Daedalus, a desktop wallet that works on Windows, macOS, and Linux and was developed by IOHK, Cardano’s development arm.
The other is Yoroi, a simpler browser-based wallet compatible with Google Chrome, Microsoft Edge, and Firefox and can also be used on Android or iOS. Daedalus is a full-node wallet meant for experienced users who want to create a node and operate a staking pool in the network. Yoroi, on the other hand, is a beginner-friendly staking wallet. To ensure the authenticity of the wallets, it is advised to download them directly from the Daedalus or Yoroi website.
It’s important to mention that there are many fake cryptocurrency wallets, so downloading directly from the official website is the best way to ensure you get the correct wallet. Daedalus is a more advanced wallet that requires downloading a copy of the entire Cardano blockchain and updating it through validation. At the same time, Yoroi is a lightweight wallet designed for those who want to stake ADA tokens as a delegator.
Both wallets serve different purposes, and it is up to the user to choose the one that suits their needs best.
How to Stake Cardano (ADA) Using Yoroi
- To delegate your ADA through Yoroi, download the Yoroi browser extension and agree to the terms of use.
- You will be presented with two set-up options: Simple and Advanced. If you are new to the process, select Simple. This will allow you to create Payment URLs for easier transactions.
- Next, connect a hardware wallet with ADA tokens or purchase some from a cryptocurrency exchange such as Binance, Coinbase, Huobi, or Kraken. Transfer the tokens to your Yoroi wallet.
- Afterwards, delegate your ADA to a staking pool. Each pool will have different fees for its node operation, so it’s important to research different options. Bear in mind that these fees can change without notice. Some investors delegate their ADA to multiple pools to mitigate risk.
You will start receiving rewards when you delegate your ADA to a staking pool. However, when you first deposit your coins, there is a 20-day waiting period for network approval to prevent spamming. After the 20-day wait, stakers receive rewards every five days, with the first reward received 25 days after staking. The rewards continue every five days.
There is a network fee when claiming rewards, which is between 0.1 and 0.2 ADA but may change frequently. Some stakers choose to wait and claim all their rewards at once to minimize the impact of fees on their gains.
Conclusion
One of the main benefits for Cardano stakers compared to other blockchains is the absence of a locking period for their ADA tokens. By staking ADA directly from a cryptocurrency wallet, the tokens never leave the user’s control.
There’s no limit on the amount of ADA tokens that can be staked, and they can be withdrawn at any moment, making the process flexible and appealing to many in the community.
While staking ADA directly through a wallet may be straightforward, users are fully responsible for their funds. If a password to the wallet is lost, the ADA will be inaccessible. This is a common issue with cryptocurrency ownership, not just with staking.
Another potential issue to be mindful of when staking ADA directly is the presence of unethical validators. While they can’t steal the ADA tokens, they can gather all the staking rewards from a pool by suddenly changing the margin requirements. This is a rare occurrence, and the Cardano community actively works to identify and eliminate unreliable operators.
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