This article attempts to give a clear and simple explanation of staking for people that are new to Cardano.
What is Staking?
Staking is like earning interest on your Ada, just like you would with a bank account. Except in this case instead of keeping your Ada at bank (or rather the Exchange) you move it to your own digital wallet. It is a fundamental part of how “Proof of Stake” (POS) cryptocurrencies work. There are other POS coins – but I really believe Cardano is the best implementation of it. For example a lot of other coins have a lockup period where you have to stake it for a fixed amount of time and cannot sell you coins should you need to in that time. With Cardano there’s no such restriction.
I heard I could earn interest on my crypto through BlockFi/Nexo etc..
There are companies out there as well as DeFi dapps (that’s for another article!) where you deposit your crypto (doesn’t have to be Ada), with them and they will pay you interest. The big difference between those and staking, is that with staking you do not have to hand over your crypto to anyone else and trust them to look after it. While a lot of these companies are reputable, there is still a risk attached to letting them have control of your crypto.
But with staking on Cardano, your Ada never leaves your personal wallet. You have full control of it at all times.
Ok but how does staking work?
Staking works by you choosing a stake pool operator (SPO) through which you want to earn your interest. This is known as “delegating” your Ada. There are 1000+ SPOs to choose from. The SPO does not have any control over your Ada – it stays in your crypto wallet (more on wallets later).
Every 5 days in the Cardano blockchain, some SPOs will get chosen to process transactions and they will get rewarded with more Ada for doing so. Then after 5 days a new set of SPOs are randomly selected.
The chances of an SPO being selected goes up the more people delegate to it, therefore SPOs are constantly trying to attract more delegations, up to a certain point when they become “saturated” and will not earn any more Ada (currently this is when an SPO has 64m Ada delegated to it).
Each SPO decides up front. what % of its rewards it wants to give back to people that delegated to it. This is known as “margin”. The lower a stake pools margin, the less Ada they keep and the more they are giving back to the people that delegated their Ada with them. So more delegation to a pool means a greater chance of the pool getting rewards in each epoch, and the lower the margin means the greater the slice of the rewards you could get.
But then also remember – the more people that are delegating to that pool, the more people you will be sharing the rewards with. A smaller pool with fewer delegators, should in the long run provide you with the same amount of rewards as bigger pools because while the probability of winning rewards in each 5 day epoch is lower, you are sharing the rewards you get with fewer people.
Who runs stake pools? Should I run my own stake pool?
Setting up a stake pool requires a lot of IT know-how and maintenance to ensure it remains online in case its gets chosen. Some people will go to the effort of setting one up, while most others will just take the easier route and just delegate with them.
SPOs can range from hobbyists that run a single pool, to professional organizations that run many. Having an ecosystem that includes small individual SPOs is seen as desirable as it helps prevent the network being run by only a handful of entities. But more on how to decide on a stake pool to delegate to later.
Ok you convinced me, how can I stake my Ada?
The steps below assumes you have purchased Cardano (Ada) on an exchange like Coinbase or Binance and will cover the following:
- Creating a new wallet to hold your Ada
- Moving your Ada off the exchange and to your wallet
- Selecting a stake pool and delegating to it
- There are two official Cardano wallets you should use for delegation. Daedalus (https://daedaluswallet.io/) or Yoroi (https://yoroi-wallet.com/#/). Note: It is important you double check that you are downloading from the official site or official app store application as there have been reports of fake copycat wallets out there.
- Both are good and reliable but I will say that Yoroi is better for beginners (and even pros) as it doesn’t take hours downloading the entire blockchain onto your laptop. Plus you can use Yoroi through a phone app too. For this tutorial let’s download and add the extension for your browser
3. Launch the Yoroi extension in your browser. On Chrome I had to click on the hammer icon in the top right then select Yoroi.
4. Now follow the on-screen options to create a wallet. The options I selected were: “Simple user”, and skip for “Allow Cardano payment URLs”, then create a Cardano wallet, following the on-screen instructions. Remember to store your seed phrase somewhere secure!
5. Withdraw your Ada to your new wallet by clicking on receive to see the address to send your Ada to, then go to your exchange and transfer your Ada to this address. It is advisable to do a test of a small amount of Ada first to make sure it works before Sending a larger amount
6. Finally, click on Delegation list, browse the stake pools or search for one if you know the ticker name already, then hit delegate.
Can I change stake pools?
Yes! You can change stake pool at any point that you want by going back to Daedalus and Yoroi and selecting a new stake pool and pay a very small transaction fee. Note that the change takes effect in the next 5 day epoch, and then you will start to see rewards on the epoch after that. However you will continue to receive rewards on your old pool until then so there is not “break” in rewards.
How should I choose a stake pool?
There are three mindsets you might have here.
- “I don’t care who I delegate to as long as the rewards are good”
- “I don’t care who I delegate to as long as the pool is small and the rewards are good”
- “I care who I delegate to. I want to do good.”
In all cases I would suggest you start by going to https://adapools.org/
Adapools can look a little daunting at first sight but scroll down till you get to the Pool list shown above. The first things to consider are the options just above the table.
“I don’t care who I delegate to as long as the rewards are good”
In this case, click ‘Hide saturated’ so that it turns green. Then pick any pool you see. They are ranked by ‘score’ so generally the ones higher up are deemed better based on a number of factors.
“I don’t care who I delegate to as long as the pool is small and the rewards are good”
If you care about helping the Cardano ecosystem then also select ‘small pools’ and ‘one group’ filter. This will filter out bigger stake pools or people that have multiple stake pools, and focus on the smaller individual operators such as yours truly. Then pick any pool you see.
“I care who I delegate to. I to do good.”
In addition to all of the above , try clicking on each pool to see what information they have about themselves. Ideally they’ll have a website or Twitter link where you can learn more about them. A lot of pools aim to help grow the Cardano ecosystem (such as this blog written by ROBOT pool) while others are involved in giving to a charity. You might also want to read their Tweets to get a better feel for how active the pool seems to be. (Note there are some unscrupulous practices that happen on rare occasions where an SPO will suddenly increase their fees or margin rate without telling you. In this case you might not get as much rewards (or any rewards) as you would have, but your original Ada is still safe in its wallet.)
I quite liked what one Reddit user wrote :
“You shouldn’t focus too much on ROA. Select a pool that fits your own vision for Cardano. On the long term you may gain more from an increasing price than you earn from rewards. We also need decentralization, stability and security. So you may also want to consider delegating to smaller pools or single pool operators. :)”pb95ma
And they also provide a link to this useful article.
Ultimately it’s up to you to decide whether you like what you read about a Stake Pool, and whether you feel they are helping to make the world a better place. With great delegation, comes great responsibility 🙂