Founded by Charles Hoskinson, who had previously co-founded Ethereum (ETH) with Vitalik Buterin in late 2013, Cardano (ADA) is a smart contract platform that focuses on scalability and security. Although still in early development, Cardano aims to deliver more advanced features than any protocol previously developed, and has garnered significant interest and support among cryptocurrency investors. At the time of writing, it is the sixth-largest digital currency in terms of market capitalisation.
One of Cardano’s most anticipated features is the ability to stake your tokens and earn a passive return on investment, and it is this benefit that we will discuss in this article.
What is Cryptocurrency Staking?
To put it simply, you can think of staking as “cryptocurrency mining” without the need for any hardware, or in more traditional terms, as depositing money in a bonus interest savings account. However, staking acts as a support to the operation and security of the blockchain network to which the token belongs, while also offering a return on investment.
There are usually multiple methods available for staking your tokens with the most common being a digital currency wallet. Many exchanges have begun to offer staking functionality to their users as well. In most cases, the process for earning your rewards is as easy as just holding your coins on the exchange.
The main technical mechanism that powers staking is something called Proof of Stake (PoS). This is an evolution of Proof of Work (PoW), a key component that allows blockchains to function as they do. PoS was introduced as a solution for reducing the computational power required to validate blocks. while maintaining the core value of cryptocurrency — decentralisation.
By allowing ordinary participants to lock their stake and the protocol to use these holdings to randomly validate blocks as opposed to miners using high energy cost hardware to compete for them, a higher level of scalability can be achieved, while keeping the blockchain decentralised. Instead of relying on the hash rate produced by individual miners to determine who validates a block, PoS determines it by the number of tokens a participant is staking.
How does Cardano’s Staking Work?
Fundamentally, Cardano works like any other cryptocurrency staking system. By holding and staking its tokens, you will assist the network with validating blocks on the protocol and receive a return on your investment. However, Cardano does not allow solo staking. Instead, you can either opt to run a staking pool that other participants can join, or delegate your holdings to someone else’s pool. The reason for this is to ensure that there are enough node operators within the network.
Cardano also allows support stakes to maintain separate keys for spending and staking. If you have opted to delegate your tokens rather than run a staking pool, you can do so without your holdings ever leaving your wallet. In addition, Cardano does not enforce any time periods for tokens to be locked up, so you are free to unstake and restake them whenever you wish.
Decentralisation is maintained through safeguards which prevent individual staking pools from gaining too much power. This is done by diminishing returns relative to pool size which should incentivise users to move between pools regularly in order to maximise their rewards. There will even be a comparison tool available to help people find the most profitable pools in order to make this process even easier. Staking pools also do not have the ability to vote on changes to the protocol, further reducing the chance of centralisation occurring.
What does the Shelley Update mean for Staking?
“Shelley” is the codename for one of five major development phases of the Cardano protocol, and which is planned to be fully implemented by the end of July 2020. The main objective of this upgrade is to make the Cardano protocol completely autonomous by decentralising its internal operational activities.
More importantly, the update will introduce the staking pools and allow Cardano holders to run or participate in them for rewards. The IOHK Foundation has also announced it will be providing initial monetary incentives to encourage people to kickstart staking and get the required infrastructure for getting nodes up and running in a smooth and seamless manner.
The introduction of Shelley also brings a major update to Cardano’s native consensus algorithm. Called the Ouroboros Praos, this family of protocols has been devised using peer-reviewed research that has been conducted by IOHK in partnership with the Blockchain Technology Laboratory at the University of Edinburgh. The Ouroboros Praos builds upon and enhances the security and scalability foundation laid out by the previous Ouroboros Classic protocol and is a significant step towards Cardano’s overall goals.