EP009 - How to Stake Cardano (ADA) for Rewards & How Rewards Work
May 26, 2021
Wondering how to stake Cardano? In this episode, we take a step back and do a deep dive into the basic concepts of staking on the Cardano blockchain and understanding how rewards work.
After running a Cardano Meetup the other week, it is clear that the idea and concepts around staking are still foreign to a lot of newcomers to cryptocurrencies and the basic groundwork needs to be laid out before other concepts and ideas can be worked on. With a room filled with 15 Cardano enthusiasts, we aimed to chat about security and NFTs but it was clear that one of the main concepts around Cardano staking and Proof of Stake needed to be discussed.
What is Proof of Stake
Proof of Stake (PoS) is the way that Cardano and some other blockchains validate the blocks that form the chains. Users or delegates, pool their ADA, the cryptocurrency of Cardano, together and delegate it to a pool. The more ADA that is delegated, the more trust that pool has and the more blocks it will produce.
Proof of Work (PoW) on the other hand works by using computing power to mine or validate the blocks. The more power you have the more blocks you can produce.
PoS requires the pooling of ADA together to validate while PoW requires mass computing power to mine.
If you want to learn more about PoW vs PoS then please listen to episode 2 of the podcast where I cover it in detail.
How Does Staking Work on Cardano
Staking is a relatively easy process on Cardano. Once you have moved your ADA to a wallet, you can delegate, or point your wallet balance, to a stake pool that you want to be the validator of blocks on the network. Depending on the amount of ADA that has been assigned to the pool, it may or may not produce a block.
Usually, a pool with over 1.5 million ADA will produce a block every epoch (5 days).
Your ADA never leaves your wallet. You simply point your wallet to a pool. That's how delegating works. If someone asks you to send your ADA balance to a wallet address, then it's a scam. Your ADA should never leave your wallet.
Why Would You Stake Cardano (ADA)? What Are the Benefits?
You get ADA for staking. For holding on to your ADA and delegating it to a pool, you get rewarded ~5% ADA per annum. This is paid out proportionately every 5 days. This means that your ADA actually compounds in value every 5 days.
Compared to the interest rates of many banks around, this is much more appealing. One of my local banks currently offers 0.05 per annum in a regular savings account, and 0.35% on a 12 month, long term savings account that is locked in place. Both of these interest rate values are well below the rate of inflation which means your money is worthless even with the appreciating interest.
The other benefit is the fluctuating value of ADA which on current trends appreciates and increase in value against fiat currencies over the long term.
How Much of a Reward Do You Get Staking Cardano (ADA) to a Stake Pool
The amount that you get paid from a pool when delegating will vary from pool to pool depending on the current performance and saturation of the pool.
The lower the saturation, the less regular the pool rewards will be and in turn, will fluctuate in the value of the reward. On pools with higher saturation levels, you will see more blocks being consistently minted from the pools giving you a more consistent reward.
How to Stake Cardano ADA?
The staking process is easy and secure. You just have to manage your wallet security yourself.
1) Create a wallet using one of the popular wallet apps, ensuring it is from the correct and real developers. 2) Transfer ADA to the wallet. 3) Choose which pool you want to delegate to via the delegation tab on the app. 4) Pay the delegation fee and wait for the rewards which usually come in after 20-25 days.
Your ADA never leaves your wallet. You simply point and assign your ADA to a pool that you wish to produce rewards for you and is to perform the validation process for the blockchain.
Rewards are paid out every 5 days once your delegation to a pool becomes active and that pool produces blocks in the active state.
When you first delegate to a pool, your ADA is in a live state until the epoch ends. When the epoch ends and a snapshot is taken, your stake then becomes active. In this active state, if the pool produces a block, you will get rewards from the pool in the form of minted tokens and transaction fees in the block. At the end of that epoch, the rewards from the epoch are calculated. At the end of the epoch, the rewards are then distributed.
To recap: Epoch 1: Delegation is in a live state Epoch 2: Delegation becomes active and if the pool mints blocks you get rewards Epoch 3: Rewards are calculated Epoch 4: Rewards are distributed Epoch 5: Cycle begins again from Epoch step 2
Since each epoch is 5 days, this process takes approximately 20-25 days depending on when you started your delegation. You may have started delegating right after an epoch change over and snapshot, which means you have a few more days before the epoch goes into a live state.
What is the Lock-In Period?
There is no lock-in period with staking to a Cardano stake pool. You can move your ADA freely in and out of your wallet, to trade or to spend. As long as your ADA is in a pool before the epoch snapshot period then your ADA will be recorded for rewards.
Some other exchanges where you don't have control over your ADA may require you to lock in your ADA for a particular period of time to get a certain percentage. For example, if you lock your ADA in for a 3 month period, you get extra rewards for that lock-in period. The exchange usually uses that extra ADA that they have available to them to do extra external investments or allow it to be lent for leverage trades. That's how they make an extra few ADA off your ADA. It's a trade-off.
The downside to being locked in is that you can sell when the market is peaking or secure your position when it starts to turn downwards into a bear market. Staking to a stake pool ensures you have that extra flexibility.
What is an Epoch
The Cardano timeframe is divided up into 5 day periods. This is called an Epoch, not an epic. At the end or beginning of each epoch, the Cardano network does a snapshot of where your ADA is staked for the next 5 days. If blocks are produced on that pool, then you will get the rewards.
As long as you are staked at the snapshot point, you're good to go with that pool. You can move your ADA in and out to trade or buy NFTs as needed.
How To Choose a Stake Pool?
Choosing a stake pool is dependent on how much stake you have. If you have a smallholding of ADA, you should choose a pool that is saturated enough to produce blocks. A delegation that is at least 1.5M - 2M ADA in total to a pool should be enough to produce at least 1 block per epoch.
Other things you may want to look at is the mission of the pool.
Some pools have a mission and purpose such as donating to charity or supporting the Cardano community. Our pool for example produces the podcast, YouTube content, written blog posts and tutorials and in-person Meetup community events.
Supporting our pool supports our efforts to continue that purpose. Other pools may support music artists, eco-related charities, mental health or other related issues medical research-based charities. Some are purely there to make a profit and get you a return on your ADA. There are many to chose from and choosing one that aligns with your views is a great way to go.
If you have a large holding of ADA and need to get a decent return on your ADA, ensure that you are on a pool with low saturation. For example, if you have 5M ADA to delegate, ensure that you are on a pool well below the maximum saturation point of 55M ADA. Your delegation of 5M ADA is more than enough to help a very small pool produce blocks consistently and potentially get a higher return as smaller pools can have slightly higher but inconsistent returns.
If you're using sites such as ADAPools.org, you can look at stats on the pool such as Monthly Return on ADA (ROA Monthly) and Lifetime Return on ADA (ROA Lifetime). Both of these measurements will tell you if the pool has missed blocks and is underperforming. If a pool has a low ROA that is below 4%, then there may have been issues on the pool that has caused it to miss blocks. Hopefully, the pool operator has learnt from their mistakes.
The amount of relays a pool has can help reduce the failure of the pool. A minimum of two is good. This allows for maintenance as one relay can be taken offline for upgrades while the other continues to connect the block producer to the rest of the network. Check to see if the stake pool has two or more relays. They may even have hidden relays.
Connect with your pool operator. If you can get into contact with your pool operator, that is most likely the best thing you can do. It will allow you to understand what is going on with the pool, help answer your questions and get your rewards that you should be getting when staking with them. You can connect with us via Discord. We have a little community where all the other pool operators can chat with the delegates to learn more about their goals.
If you have a certain amount of ADA and you really want to support a small stake pool but still want or need rewards, then you can split your ADA stack into two wallets. One wallet you can delegate to a stake pool that is making you a return, the other will be to a stake pool that you believe strongly in.
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