Cardano Staking (ADA): Risks and Returns

The Shelley hard fork roll-out during the summer of 2020 cemented Cardano’s full transition to a fully-decentralized blockchain network and allowed it to fully embrace its new proof-of-stake consensus. This meant two things for Cardano (ADA) holders at the time:

  1. Users could now independently support the blockchain by staking their Cardano (ADA) cryptocurrency.
  2. Users could begin earning rewards on their ADA investments by delegating their ADA to staking pools or hosting a staking pool themselves.

These capabilities allowed Cardano to start growing into a more robust and secure blockchain network while providing its user base with the incentives to support and grow this network. We cover the concepts that surround Cardano staking, how to stake Cardano and the risks and rewards of staking your ADA cryptocurrency.

Cardano Staking ADA: How does it work?

Cardano staking allows participants to support the Cardano blockchain by becoming validators on the network. Cardano holders can pledge their ADA cryptocurrency towards staking pools. 

These staking pools, in turn, serve to validate transactions and secure the Cardano blockchain. 

Also known as the “proof-of-stake (PoS) protocol,” staking improves both the liquidity and security of a blockchain, while vastly reducing the energy consumption and carbon emissions that accompany legacy proof-of-work protocols employed by blockchains like Bitcoin.

 

“proof-of-stake (PoS) protocol,” … improves both the liquidity and security of a blockchain, while vastly reducing the energy consumption and carbon emissions that accompany legacy proof-of-work protocols…

Cardano staking only works if there are enough participants, and the staking pools and the network of underlying nodes are the keys to Cardano remaining decentralized, and preventing unscrupulous users from hijacking the blockchain via 51% attacks and other hacks.

Cardano’s proof-of-stake consensus relies heavily on the network effect of large pools of users pledging their ADA cryptocurrency towards transaction validation, or “staking.” The larger the network of staking pools, the more secure the blockchain becomes. 

To encourage the growth and preservation of this network, Cardano rewards pools that stake their ADA cryptocurrency with “staking rewards,” which are periodically awarded out to validators who are selected to “produce blocks,” or process transactions. These periodic staking rewards can be likened to the periodic interest income paid on bonds.

How much can you earn from staking Cardano ADA?

According to Cardano.org’s calculator, users who choose to delegate their ADA cryptocurrency to a staking pool are estimated to earn an average of 4.6% APY, depending on the characteristics and size of their staking pool.

This rate scales proportionately to the amount of ADA you decide to stake, however, your return will vary depending on how long you choose to delegate for and which staking pool(s) you choose. These staking pool rewards are paid out periodically and assume users stake their cryptocurrency for a 365-day period. 

You can estimate how much ADA staking rewards you might earn by using Cardano’s staking calculator and entering the amount of ADA you want to stake.

How long do I have to wait before I start earning ADA rewards?

There is a waiting period of approximately 15 days, or “3 epochs,” from the time you delegate your ADA to when you start receiving rewards. This may take longer in some cases and occurs when you delegate your ADA for the first time.

Cardano relies on a stake delegation cycle that selects pools to produce blocks and calculates rewards in fixed periods of time, known as “epochs.” Each epoch takes approximately 5 calendar days.

The full delegation cycle takes approximately 4 epochs from when you start delegating your ADA and consists of the following actions:

Assuming the user does not withdraw their ADA cryptocurrency or otherwise stop delegating it to the staking pool, the calculation and delivery of staking rewards in epochs 3 and 4 should continue indefinitely, or at least until the pool shuts down for any reason. ADA rewards should continue to be paid out every other epoch thereon.

How to Stake Cardano ADA?

There are currently at least three ways to stake your Cardano ADA cryptocurrency:

  1. Delegate it through a staking pool
  2. Host a staking pool
  3. Stake it through an exchange

Cardano does not support individual staking. Users who wish to stake their ADA must delegate it through a Cardano Staking Pool.

The easiest and fastest way to stake your ADA is by delegating it through a staking pool in a Cardano wallet. However, users with technical expertise in development and the proper equipment may stand to make greater returns by hosting their own staking pool.

Alternatively, users can choose to have an exchange, like Kraken or Binance, stake their ADA on their behalf. Bear in mind, this introduces custodial risk via exposure to the underlying exchange.

How to stake Cardano through a staking pool

You can stake Cardano by delegating your ADA to a staking pool. Staking pools can be found and compared directly through your Daedalus or Yoroi Cardano wallet. All live Cardano staking pools can be viewed through the delegation center within the interface of both wallets.

As a discerning investor, make sure you review the top staking pools for saturation, margins and performance, among other things. 

Pools with large capitalizations may have their own websites and feature metrics to track performance and pool participation. In addition to reviewing metrics, it’s worth visiting each pool’s page and seeing what they offer. 

Additionally, some pools may be run by certain organizations, individuals, or groups in support of a cause or purpose. In an age where ESG investing is popular, these motivating aspects may be something you want to consider when delegating to a pool.

As always, past performance is not always indicative of future results. Users will want to evaluate each pool for the following traits:

Saturation

Saturation measures how much room the pool has to grow before rewards stop growing and additional participants receive diminishing returns. Better performing pools tend to skew towards higher saturation rates, however once diminishing returns are met, pool delegators may want to swap to less saturated pools to avoid dilution of their rewards.

Pool margin

This is the percent the stake pool takes from rewards before distributing the remainder among pool delegators. This ratio serves as the incentive for the pool operator and is similar to the performance fees charged by hedge funds.

Cost per epoch

This is akin to the expense ratio on a mutual fund and is meant to cover the costs of running and maintaining the pool. This is charged in addition to the pool margin and is only meant to cover operating costs.

Pledge

Indicates the amount of ADA that the pool owner has committed to his own stake pool. This serves as a way to align the interests of the pool and its owner, and higher amounts indicate greater alignment between the pool operator and his delegates.

Produced blocks

Similar to the performance history of a fund, this tracks how many blocks have been produced overall by the pool and can serve as an indicator as to the longevity and performance of the fund if paired with other metrics.

Once you’ve decided which pool you want to delegate to, both Yoroi and Daedalus will allow you to delegate your entire ADA stake towards it by default. If you want to delegate your ADA stake to multiple pools, you will need to create multiple wallets within the Daedalus or Yoroi environments and delegate them individually.

How to run a Cardano staking pool

Technically savvy Cardano investors, with sufficient time and resources, can choose to run their own Cardano staking pool to both support the blockchain and significantly boost their yield by multiples of what’s possible through simple delegation.

Running a staking pool requires some investment of time and money from the prospective pool operator. They will need to own or rent a server that is live and maintains a 24/7 internet connection. 

Cardano staking pool operators also require technical expertise, with experience in software development, server maintenance and operation. They will also need to be diligent, acquainted with the latest Cardano development updates, and willing and able to act in the best interests of the delegators that join their pool.

The technical aspects of how to open and operate a staking pool are beyond the focus of this guide, however, interested ADA pool operators can obtain more information on how to start a pool at Cardano’s website.

What are the risks of staking Cardano ADA?

There are three primary risks that users should consider when deciding on whether to stake ADA or any other cryptocurrency:

  • Liquidity risk
  • Cybersecurity risk
  • Custodial risk

Depending on how you decide to stake your ADA, we discuss whether these risks warrant major concern.

Liquidity risk

Liquidity risk is less of an issue for Cardano than it is for some other cryptocurrencies that rely on or are transitioning to a proof-of-stake protocol.

Staking your ADA cryptocurrency by delegating it through a staking pool does not actually decrease the liquidity of the investment. Your ADA can be bought or sold at any time, even when delegated to a staking pool.

This contrasts with cryptocurrencies like Ethereum, which currently features no way for you to sell your ETH 2.0 currency if you choose to stake your holdings.

Cybersecurity risk

Cybersecurity risk poses a moderate concern and depends on the security of the software wallet you choose to use as your cybersecurity habits.

When ADA is delegated through a Cardano wallet, like Yoroi or Daedalus, the cryptocurrency remains within your wallet at all times and the staking pool does not have access to your private key. This makes it a relatively safe way to stake your ADA.

There may be a heightened risk if you decide to hold your ADA cryptocurrency in an exchange, as in the past, exchanges have proven to be popular targets for hackers. Generally speaking, it’s a good idea to transfer large volumes of your cryptocurrencies to an offline, hardware, or local wallet for storage to limit your exposure. Balances kept on exchanges should be limited for transactional purposes.

Custodial risk

Custodial risk plays a factor if you choose to stake your ADA through an exchange, as the ADA held on the exchange is not technically held within a wallet that you hold. There is a risk that the exchange may undergo difficulties in volatile markets and restrict withdrawal of your ADA.

Additionally, users are required to trust exchanges with their keys based on the way they operate. Users should be discerning when picking which exchange they choose to invest with, as any cryptocurrency held on the exchange is at risk to any hacks that may target the exchange. 

Custodial risk can be a major problem if users are unable to access a large portion of their cryptocurrencies during periods of high volatility. There’s also a risk if the underlying exchange encounters any material financial difficulties or operates unethically in any way. If you decide to stake your ADA through an exchange, make sure it’s a reputable exchange that has a history of stable operations and high-security standards.

Compare the best Cardano wallets

If you’re interested in getting the best Cardano wallet that offers staking, check out our roundup.