One unique feature of some cryptocurrency blockchains is a process called staking. Staking is similar to cryptocurrency mining in that it aids in transaction validation. For Cardano investors, staking is an easy way to earn passive income and support the stability of the Cardano network.
Cryptocurrencies like Bitcoin operate on a proof-of-work, or PoW, model to verify transactions. The PoW model involves powerful computers solving complex mathematical equations to verify transactions. These miners compete against one another to be the first to solve problems, consuming a tremendous amount of electricity in the process.
Proof of stake, or PoS, is a popular alternative form of verification used by Cardano. In PoS verification, an algorithm selects which node will add the next block to the blockchain based in part on how many coins the node has staked, or locked away. Nodes often comprise groups of people who have pooled their stakes together.
By delegating Cardano’s cryptocurrency Ada to a stake pool, investors increase that pool’s chances of producing blocks. When blocks are produced, the pools earn rewards that are then paid out to all the pool contributors.
From a practical standpoint, the average Cardano investor only needs to understand that the Ada used for staking never leaves the investor’s wallet, and investors earn rewards in a way that is similar to interest in a savings account. Investors can move their Ada freely after it has been staked or even unstake it completely if they choose.
Cryptocurrency exchanges such as Binance, Bitfinex, Coinbase, KuCoin, Kraken and Poloniex all allow for one-click PoS staking.
Keep these things in mind if you’re interested in Cardano staking:
- The pros of staking.
- The risks of staking.
- The caveat.
Pros of Staking
Shidan Gouran, founder of Canadian merchant bank Gulf Pearl, says there aren’t any true drawbacks to staking for investors who are already holding Ada for the long term.
“If you possess stakeable cryptocurrency, I do recommend staking it. You will be earning a passive income for doing not much more than clicking on a button, and the yields are typically higher than traditional investments,” Gouran says.
Gouran says investors worried about how much Cardano to stake shouldn’t be concerned considering there is no downside to participation.
“They should be staking all of it. Depending on how you stake Cardano, you can earn anywhere from over 1.9% to over 7%, with 1.9% requiring very little investment and a simple click of a button,” Gouran says.
Cryptocurrency mining can be an extremely complicated, costly and time-consuming process. However, Eloisa Marchesoni, co-founder of Blackchain Consulting, says staking is an alternative way for crypto investors to participate in the verification process without the hassle and risk associated with a mining rig.
“Staking is an alternative consensus mechanism – a way to verify and secure transactions – that allows users to generally secure crypto networks with minimal energy consumption and setup,” Marchesoni says.
She says each staking wallet is like a different bank account that earns interest and supports the network.
Risks of Staking
Cardano investors may be concerned about risks when considering how much Cardano to stake, but staking Ada either directly or via a third party involves no more risk than simply holding it in a wallet. Gouran says the only true risk is losing the wallet’s private key, which is a risk with all cryptocurrencies regardless of whether or not staking is involved.
Wouter Witvoet, CEO of Canadian financial services company DeFi Technologies, says staking should be a “no-brainer” for any long-term Cardano investor. Witvoet says the Cardano staking system is so simple that investors shouldn’t think twice about how much Cardano to stake.
“Cardano addresses have separate keys for spending and staking, meaning that if you decide to stake your Ada tokens, they will never leave your wallet. You can stake as much as you have since you can unstake your Ada at any time,” Witvoet says.
Marchesoni says she recommends that investors divide their stakes among different pools to diversify and should avoid pools charging excessive fees.
Even when staking in a pool, she says the pool operators have no way of stealing your Ada.
“However, they can take most or all of the rewards from the pool by suddenly changing the margin to 99% or 100%. The only risk really is that the pool owner is unscrupulous and tries to take advantage of delegates in that way, but that is very rare,” Marchesoni says.
Cryptocurrency staking is an easy way to earn a guaranteed yield in a world in which passive income is hard to come by. But much like an income-generating dividend stock, the value of the underlying asset is an important consideration.
Like most other cryptocurrencies, the price of Ada is extremely volatile and unpredictable. For investors already holding Ada for the long term, staking is a simple way to increase returns. If the price of Cardano takes a dive or the cryptocurrency market has a major selloff as it did in 2018, the potential losses from crypto investments can quickly exceed income earned from staking.