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Staking your ADA on Cardano

Introduction to Staking on Cardano

Staking cryptocurrency is a way of using your tokens to help run the associated Proof of Stake (PoS) blockchain. For doing this, you earn rewards, in the shape of more tokens (usually of the same type that you initially staked). It’s an easy way to passively earn more crypto.

What is Cryptocurrency Staking?

In simple terms, staking your coins is a way of earning rewards (a passive income) while simultaneously helping run the blockchain.

Proof of Stake (PoS) vs. Proof of Work (PoW)

In order to better understand staking, you should start by understanding how a Proof of Stake blockchain differs from a Proof of Work.

I’ll only paint a brief picture of the different blockchains here because we have a whole article on it which you can find here.

In order for Proof of Work blockchains (e.g. Bitcoin and Etheruem) to work, new blocks must be “mined”, which requires a huge amount of hardware and energy. The only people who benefit from this are those with the most computational power.

With Proof of Stake blockchains (e.g. Cardano), holders of the network native token (e.g. ADA) can help run the network by staking. 

Put simply, staking your coins earns you rewards and efficiently helps run the network. Less equipment and less energy are required on a PoS blockchain, resulting in a more decentralised and more environmentally-friendly network.


Is Staking on Cardano Different?

Unlike other PoS blockchains, Cardano allows you to stake your ADA without locking them up for a predetermined length of time.

There is a lower barrier to entry too, but we will talk about this a bit later.

 

How Does Cardano Staking Work?

Cardano approaches staking in a slightly different way to other networks. Unlike others, Cardano does not allow solo staking, Holders can either run a staking pool (a group of holders pooling their tokens) or they can delegate their coins to someone else’s stake pool.

This method of staking ensures there are enough node operators for the blockchain to run quickly, securely and efficiently.

NB: at ALL times your ADA coins will remain in your crypto wallet and NOT be locked up, you are free to stake, unstake or use your ADA in any way you like.

In order to maintain decentralisation, the Cardano staking system keeps it fair by building diminishing returns as an individual pool gets bigger, thus keeping things fair and not allowing any stake pool to gain too much power. 

Because folders are allowed to stake, unstake and re-stake as often as they like, they may leave a stake pool if it gets too big, thus maximising their precious rewards!

Another unique feature of staking on Cardano is the frequency at which the rewards are paid out to holders. The Ouroboros protocol that Cardano works on divides time into “Epochs”, consisting of five days. Rewards are paid out at the end of each epoch.

How Much ADA do you Need to Stake on Cardano? 

Whilst there is no theoretical minimum amount of ADA that you are required to have to stake, there are a couple of small costs (transfer and transaction fees) when you stake that would, with a small holding, take an unrealistic amount of time to recover.

Fees to stake ADA include:

  • 1 ADA. Transfer fee to move your ADA from a centralised exchange to your crypto wallet.

  • 2 ADA. Registration for wallet delegation (refunded if you deregister your wallet).

  • 0.2 ADA (approx) transaction fee.

Total of 3.2ADA.

Example 1:

If you were to stake 10ADA, after your transaction costs (see above) have been taken off, it would take approximately 8 years to make back what it cost you to delegate. This is because from 6.8ADA you would earn only around 0.28ADA per year.

So we can see that while you can delegate any amount to a stake pool, it doesn’t make financial sense if you only have a handful of ADA.

However, once your pot grows, the rewards ramp up significantly, as you will see below.

Example 2: If you were staking 100ADA, you’d earn your costs back in about 8.6 months (0.37ADA per month).

Example 3: It would take less than a month to earn your costs back if you staked 1000ADA (3.85ADA).

Oh go on then, let's see what you would earn from 10,000ADA!

Example 4: 10,000ADA, minus the 3.2ADA transaction costs would net you around 38ADA per month (463ADA per year).

Yummy!

NB: The above-quoted numbers are approximate values. You can use the staking calculator on the Cardano website for a more accurate prediction.

Is it Worth Staking your Cardano Tokens (ADA)?

If you are planning on holding your ADA for the long term, by now, it should be obvious that it is worth staking your ADA, it is a simple, safe and easy way to earn a passive income on your investment.

Staking ADA offers a yield that is typically higher than most traditional finance investments but as always, do your own research (DYOR)!

It is also advisable to check your local tax laws.

Can you Lose ADA by Staking?

As we have explained in this article, the PoS consensus mechanism is as secure as you can get; you are in complete control of your investment at all times and can withdraw your coins at any time.

The only “risks” you have when you stake your ADA have nothing to do with the staking mechanism. They are down to the general volatility of the crypto market and your own ability to protect your wallet’s private key.

Crypto Volatility

The price of all cryptocurrencies is extremely volatile and ADA is no different. Whilst the amount of ADA you own will always increase when staking, the underlying asset value may go down faster than income earned, resulting in a net loss.

Don’t Lose your Crypto Wallet Private Keys!

This doesn’t just pertain to staking, they are called “private keys” for a reason. Your wallet's private keys are your last line of defence when it comes to the security of your crypto portfolio.

Losing the keys to your wallet puts all your crypto holdings at risk of being lost forever. Only you have access to them, so keep them safe!!

Final Thoughts 

By now you should completely understand the staking mechanism Cardano uses with its native token (ADA). It is safe, simple and easy to do and can provide a long term passive income for you and those you are providing for.

I hope you have enjoyed this article, don’t forget to check out all our other articles in the Cardax Academy.

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