Cryptocurrency enthusiasts are persistently looking for opportunities to generate passive income from their crypto assets. And staking Cardano (ADA) has been one of these alternatives offering a chance to earn rewards whilst contributing to the security and stability of the Cardano network.
In this article, we will delve into the specifics of staking pools, the crucial role of stake pool operators (SPOs), the associated risks and how you can easily delegate your ADA to a staking pool.
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What are Staking Pools?
For smaller investors solo staking can be quite difficult due to the potentially high minimum staking requirements imposed by some Proof-of-Stake (PoS) blockchains. This is where staking pools come along.
Staking pools are a collaborative effort by crypto holders to increase their chances on earning staking rewards. Staking requires holding specific cryptocurrencies and play a part in the validation process on a PoS blockchain like Cardano.
These stakeholders are permitted to invest practically any amount in order to be a part of a social risk instead of risking all their assets and reduces the inconvenience of running a node on your own. Each of these pools defines the minimum asset you can invest in and each of these cryptocurrencies has its own pools.
Users must lock up their coins in a staking wallet for a predefined period — the more coins you stake means the greater the likelihood of being selected to validate a block and earn higher rewards.
What are Stake Pool Operators (SPOs)?
Stake pool operators are individuals or organizations responsible for the setup, maintenance and operation of the pool.
By creating and managing staking pools, operators authorizes investors to collectively meet the minimum staking requirements and improve their chances on earning higher rewards.
Operators typically charge a small fee for their services but the benefits in terms of increased rewards for pool participants outweigh this cost.
Risks of Delegating Crypto in Staking Pools
- Pool Operator Risk: Pool participants must place their trust to the SPO to manage their funds and execute block validations. If the operator acts negligently or maliciously participants could face the risk of losing their crypto holdings.
- Slashing Risk: Penalties are imposed on validators who engage in malicious or erroneous behavior on the PoS blockchain — these include double signing, voting for conflicting blocks or prolonged periods of network inactivity. Even if SPO performs diligently the risk of slashing remains if the pool chosen to validate the block is deemed invalid.
- Pool Fees: SPOs typically charge fees for their services. While the fees are often reasonable they may reduce the overall rewards that participants earn. Before entering, weigh on the fees against the increased chances of earning rewards when deciding to stake.
How To Delegate Your ADA To A Staking Pool?
Participating in a staking pool is pretty straightforward.
Users would need to deposit their ADA holdings into the pool’s wallet. And from there, the pool operator leverages the pooled resources to validate blocks on the blockchain.
Rewards are then distributed (by epoch) proportionally to participants based on their staked amount.
Here are the following steps to get started:
1. Create a Cardano wallet and transfer your ADA
If you do not have a Cardano wallet, you can create one using a variety of different wallets, such as Daedalus, Yoroi or Exodus. In this case, we will be using Nami.
Pro tip: it is usually a good idea to do a test transaction first before sending your whole bag just to make sure you have the right address and everything is working properly.
2. Choose a Staking Pool and delegate your ADA
Once your ADA is in your wallet, you can now delegate it to a staking pool. You can find a list of staking pools here.
When choosing a staking pool, consider the pool’s fees, rewards, and previous performances.
Let’s choose “ADA Suisse Stake Pool” to delegate our ADA holdings — click “Delegate.”
3. Link your wallet and select how much ADA you wish to stake.
Specify the amount of ADA tokens you wish to stake and follow on-screen instructions to confirm the transaction.
4. Start earning rewards!
Once you have delegated your ADA, you will start earning rewards! Rewards are paid out every epoch which is about five days.
Staking Cardano has never been easier than it is now whilst contributing to the network’s security and decentralization.
Do note to still exercise caution, choose a reputable stake pool operator and carefully assess the associated risks before delegating your ADA.