What is Cardano ADA?
Cardano is a third-generation proof-of-stake blockchain that aims to change the crypto space for good. It offers advanced smart contracts and other decentralized protocols and shares a lot of resemblance with the crypto giant Ethereum.
However, Cardano is the only blockchain out there that relies on peer-reviewed scientific research as building blocks for updates to its platform.
The native token of the Cardano blockchain is known as ADA and can be used to pay the network fee for the blockchain. Users can also stake their ADA to validate transactions on the Cardano blockchain and earn rewards in return.
How to Stake Cardano (ADA)?
Staking your Cardano is a great way of earning some passive income on your holdings. ADA holders can stake their coins in two different ways:
- By delegating their ADA to a stake pool run by an individual, exchange, or company
- By creating their own stake pool
Creating your own stake pool requires some resources and time investment and is not a suitable option for everyone. Also, the bigger the stake pool is, the better its chances are to be chosen for adding the next block to the blockchain. That is why staking with a big stake pool is preferred by most token holders.
There are plenty of ADA stake pools out there, and you can choose the one that is reliable and has a large number of participants. The bigger the stake pool is the more profits you will make.
Introduction to Staking Crypto
Most people who are new to the crypto space view staking only as a way to earn extra crypto, but it is much more than that.
Staking refers to depositing the cryptocurrency you own into a collective pool or a wallet for a certain period of time to earn rewards. Once you stake, your crypto gets locked into the wallet or pool until the staking period is completed.
Staking is a way of adding new blocks to the blockchain to validate new transactions. It is an alternative to mining that uses fewer resources and does not require excessive power to validate transactions.
“In simple words, Staking is an act of locking your cryptocurrencies to earn rewards.”
In most cases, users can stake their cryptocurrency directly through their wallets. The alternative is to signup on exchanges like Binance and stake directly on the exchange in a few simple steps.
Most exchanges only need you to hold the coins in the exchange wallet, so you do not have to get into the hassle of moving your coins into a pool.
Staking originated from Proof-of-Stake (PoS) consensus mechanism, and in order to understand staking, you will first have to understand the PoS and how it operates blockchain. Let’s take a look at what PoS is and how it works:
What is Proof-of-Stake (PoS)?
When it comes to validating blockchain transactions, it can be done through two different mechanisms i.e.
- Proof-of-Work (PoW)
- Proof-of-Stake (PoS)
PoW is the older consensus mechanism that is used by many blockchains, including Bitcoin itself. It turns transactions into blocks, and those blocks are added to the blockchain when a miner solves complex mathematical problems that require computational power.
Proof-of-Work is highly effective in running a secure and decentralized blockchain consensus. The only problem is that it takes too much computing power to solve mathematical problems presented by this consensus mechanism.
The complex equations are entirely random and only exist to keep the network secure. This gives rise to an important question of whether the cost of electricity required to validate a transaction is worth the hassle or is just a waste of resources.
Cryptocurrency experts realized this obvious drawback and came up with another consensus mechanism known as Proof-of-Stake (PoS). Unlike PoW, PoS does not rely on solving complex mathematical equations and also does not require high computational power.
The idea behind PoS is that the users who own the cryptocurrency can lock their coins into a pool or wallet, and the protocol will randomly pick them to validate a transaction in the future.
The validator is chosen randomly, but the probability of being chosen increases with the number of coins you have staked in the pool.
Participants are chosen not on their ability to solve mathematical challenges but on the number of coins they own.
Crypto experts also argue that a Proof-of-Stake blockchain offers better scalability and can speed up the process. It is one of the reasons why the second-largest cryptocurrency in the world, Ethereum, is currently in the middle of switching from PoW to PoS
How Does Staking Crypto Work?
As discusses above, PoS uses staking to add and validate new blocks to the blockchain instead of having to solve complex computational problems.
This helps the participant generate blocks without having to rely on complex mining hardware like ASICS.
In PoS, the validators do not need to invest in mining rigs; they just need to invest in the cryptocurrency itself.
So instead of computational power, the participants are chosen based on the number of coins they have staked. The investment can also act as collateral and keeps the validators honest.
If participants fail to maintain network security, they can end up losing their investment.
Proof-of-Stake blockchain usually awards the validators in a currency of their own. Some blockchains have a second token that they use to pay the staking rewards.
Staking Rewards and How They Are Calculated
How your staking rewards are calculated depends entirely on the blockchain network you are using. Every blockchain uses a different method to calculate rewards for its validators.
Some blockchains adjust the rewards on a block-by-block basis and take several factors into account, including:
- Number of coins staked by the validator
- Staking duration
- Number of times the validator has staked their tokens
- Total number of coins staked on the pool
- Inflation rate
Other blockchain networks reward the participants in a fixed percentage for keeping things simple. They are awarded to participants as compensation for inflation.
This model is preferred by many people because it allows the validators to calculate the exact rewards they will receive prior to staking their tokens.
Having a fixed percentage for staking rewards not only encourages the current holders to stake their tokens but also attracts new investors.
The idea of earning interest on your cryptocurrency holdings sounds great to most HODLERS (long-term crypto holders).
What is a Staking Pool?
Staking pool refers to several coin holders coming together and using their resources collectively to increase the chances of receiving rewards.
All the participants combine their resources, which increases the chances of validating more blocks. Once a block is validated, the rewards can be shared proportionally among all the participants.
However, establishing a staking pool is not as easy as it may sound. It requires a lot of time and expertise, and not everyone can create a stake pool of their own.
Stake pools are most effective for blockchain networks that are technically advanced or have a high fee for staking.
Typically, the assets stay locked for a fixed timeframe, and the withdrawal time is set by the protocol.
Stake pools also have a minimum requirement for entry, and you need to own a certain number of tokens to participate in the pool. Joining a staking pool is a better option for traders who are new to the crypto space.
How to Stake Your Own Crypto?
Crypto holders can stake their coins in several different ways. It is crucial that you do your research and chooses a method that best suits your needs.
Some of the most important factors that you need to consider while staking your crypto includes:
- Privacy and Security
- Staking fees
- Amount of time and effort you are willing to devote
- Better alternatives for higher gains
- Safety of your assets
Depending on your goals, you can choose a reliable exchange like Binance (Not active in the US) or Kraken that offers secure staking, or you can join a stake pool of your own choice that you trust.
Frequently Asked Questions:
Is Staking Crypto Worth it?
Yes! Staking crypto is a great way of earning passive income on your investments. If you are planning to hold a cryptocurrency long-term, then staking it for rewards can help you yield more profits.
How Does Staking Crypto Help Make Money?
Staking uses the Proof-of-Stake consensus mechanism, which allows participants to validate transactions and earn a reward for them. Every time the system chooses you to validate a transaction, you are given a small fee for adding a new block to the blockchain.
Where Can I Stake?
You can stake your crypto on a trusted exchange like Binance or Kraken, or you can simply join a stake pool created by the community of that cryptocurrency.
What is the Future of Crypto Staking?
Experts in the crypto community are projecting a bright future for crypto staking. Some also believe that it will replace savings account for a lot of people as it offers a higher annual yield.
What Coins Can You Stake?
There are plenty of cryptocurrencies out there that use the Proof-of-Stake consensus mechanism. Some of the top coins you can stake includes:
- Cardano (ADA)
- VeChain (VET)
- Tezos (XTZ)
- Cosmos (ATOM)
- Chainlink (LINK)