One of the greatest things for holders of Cardano is the opportunity to stake your ADA to earn passive income as a reward for your contribution to the ecosystem.
But there are a lot of questions people have about staking, how stake pools work and what happens to your ADA when you stake.
What Is Staking?
Staking is a process where you delegate or commit your Cardano (or other crypto) to the ecosystem to verify transactions and earn rewards for locking your coins up.
There are a lot of different cryptocurrencies that have this built in, but Cardano’s system is slightly different to most others.
With Cardano you never technically ‘lock up’ your crypto, you hold it in your wallet and the wallet is delegated to a stake pool.
This is done within some official wallets that we will get into further down the page.
Once your wallet is delegated the funds in that wallet are added to the pool. Pools verify transactions and commit them to the blockchain, which provides pools with rewards that are split up among all of the delegators.
Proof Of Stake
As opposed to proof of work, which is the basic mining protocol for Bitcoin and Ethereum along with other currencies. The Proof Of Stake is more of an equal opportunity participation method of transaction verification.
Ouroborus, Cardano’s Proof Of Stake Algorithm is the most cited and researched method of creating this equal opportunity of block creation or minting as opposed to mining which is basically a competition for computational power.
This means any participation in Proof Of Work is likely to be able to earn some rewards for the Pool, although there are different parameters within the protocol that affect this outcome.
Stake Pools
Stake Pools are the places that people delegate or stake their Cardano ADA to, they are set up mostly by community members and maintained by them to support the network and help maintain decentralization.
You can select the stake pool you wish to delegate to on any of the three wallets that support it, Daedalus, Yoroi and AdaLite.
Each stake pool will have different fees and sizes, from pledge to saturation and active stake; each of these things are worth considering when picking a stake pool and they will all affect the rewards you earn in some way.
Stake Pool Costs And Fees
There are 2 different Costs associated with each stake pool, they are the Fixed Fee and Variable Fee or Margin.
The Fixed fee is just the pool cost set by IOHK when they launched the mainnet which is set to prevent the race to the bottom of pool fees, and make sure that Stake Pool Operators can earn some rewards to help pay for the pool.
The Variable Fee is the margin set by the Stake Pool Operator and can be any percentage of the rewards that the SPO would like.
What to set the Variable fee at is a subject of heated discussion among SPOs and often the cause of conflict on Twitter.
STOIC Pool’s variable fee is 0%
The way this affects rewards is that any Epoch STOIC produces blocks, we will take the Fixed fee (340ADA) from the rewards, then everything left over is split amongst delegators, nothing else is taken for the SPO.
Other pools have a variable fee, so they will take a percentage of the pool rewards, after the fixed fee is deducted.
Why Stake Cardano
If you stake your Cardano to a pool, you are able to earn passive income in the form of rewards from the pool.
Depending on the size of the pool and how large the fees are, this could vary greatly, but either way it is essentially free money.
Banks are giving very low interest rates these days, stake pools are providing good rewards to delegators, for essentially just holding their ADA.
The best way to think of staking is like earning dividends for holding stocks. The difference is that the stake pools pay every 5 days!
How To Stake
You can stake your Cardano through any of the official wallets. Each of them will let you search for Stake Pools, or browse through their ranking table (each ranking table works slightly differently).
I recommend searching for specific pools or at least sorting them to avoid the higher delegation pools, because they will quickly become saturated if not already, and that will lead to diminishing returns for you as a delegator.
Once you pick your pool simply select delegate and your ADA will be added to the pool for the next Epoch.
When you stake your ADA, you will not lose it and it will not leave your wallet, as mentioned above, it will stay exactly where you have it but will start earning rewards and continue to do so until you move it to a different wallet or exchange.
Cardano Wallets
There are 3 main Cardano wallets that will allow you to hold and delegate our Cardano to earn passive income.
One of the most important things to do with your Cardano is to take it off the exchange!
When your cryptocurrency is on an exchange, it is technically not yours, so if it is hacked or the exchange gets locked up for any reason (this has happened a few times before), your Cardano is potentially lost and there is no legal requirement for reimbursement or protection of those coins.
Not your keys, not your crypto.
This makes staking to an exchange risky, even if it seems to provide good rewards.
Staking Rewards
Staking rewards are provided to delegators approximately 2 Epochs behind the delegation, so if you stake your Cardano in Epoch 230, you will get those rewards at the end of Epoch 232.
It is important to note that active stake is based on a single snapshot taken at the turn of the epoch, and not accumulated throughout.
That means if you delegate in the middle of Epoch 230, it won’t be active until 231, and thus won’t get rewards until the end of 233.