Stake and Secure: A Beginner's Guide to Cardano Staking and Understanding the Rewards and Risks
Updated: Jan 23
Cardano staking is a way for holders of the Cardano cryptocurrency to earn rewards for helping to secure the network. But, as with any investment, there are potential risks and uncertainties. In this article, we'll explore some of the key questions around Cardano staking, including whether rewards will decrease, if staking compounds, if it will last forever, and if you can lose your staked Cardano.
Decrease of Rewards
Just like a savings account at a bank, the rate of return on your staked Cardano can fluctuate over time. However, unlike a bank, the rate of return for Cardano staking is determined by the overall health and usage of the Cardano network as well as the reserve available to be used as rewards. The reserve decreases over time as rewards are distributed to stakers, similar to the halving mechanism in Bitcoin. The rate of return may decrease as the reserve decreases.
Compounding is when the interest earned on an investment is also invested, so it can earn interest itself. This can create a snowball effect and result in larger returns over time. In the case of Cardano staking, the rewards earned can be automatically re-staked, which means they can earn more rewards. This is similar to a farmer planting a seed, which grows into a plant, and then produces more seeds for planting again.
Long-term and Sustainable
The Cardano network and its staking mechanism are designed to be long-term and sustainable, like a tree that will continue to grow as long as it's nurtured and taken care of. The Cardano team is constantly working on improvements and upgrades to the network, which can help ensure the long-term viability of staking.
While it's true that the reserve for rewards decreases over time as rewards are distributed to stakers, it's important to note that this decrease in the reserve does not necessarily result in a decrease in the overall rate of return for stakers. This is because the Cardano network also generates revenue from transaction fees. As the network becomes more active and more transactions are processed, the amount of revenue generated from fees increases. This additional revenue can offset the decrease in the reward reserve, resulting in stable or even higher staking rewards for holders.
Think of it like a lemonade stand, if more people come to buy the lemonade, the owner can make more money from selling lemonade and also from the tips. The same goes for Cardano network, the more people use it, the more fees it generates, and the more rewards it can distribute to the stakers.
It's also worth noting that, as the Cardano ecosystem continues to grow and mature, there may be additional revenue streams that further offset any potential decrease in the reward reserve. With the network getting more used and more active, the fee revenue will be higher and it can replace the reward from the reserve, result in higher staking rewards.
Cardano has implemented a technology called Hardfork Combinator, which allows for large-scale upgrades to be made to the network without requiring a pause in staking. This means that staking can continue uninterrupted even during major network upgrades. This allows for continuous staking and earning rewards.
Risks of Losing Staked Cardano
It is possible to lose your staked Cardano if your private keys are compromised. However, as a delegator, if you stake from a non-custodial wallet, the risk of the operator's node going offline and not making blocks is limited to not receiving rewards, while your ADA remains safe in your wallet. It's important to keep your private keys safe and to choose a reputable staking operator to minimize these risks.
In summary, Cardano staking is a way to earn rewards for helping to secure the network. However, as with any investment, it's important to understand the potential risks and take steps to protect your staked Cardano. Keep in mind that the rate of return may decrease as the reserve decreases over time, and compounding your rewards can lead to larger returns.
The Cardano network and its staking mechanism are designed to be long-term and sustainable. With the help of Hardfork Combinator technology, staking can be done continuously without interruption even during major network upgrades. Remember to keep your private keys safe and to choose a reputable staking operator to minimize the risk of not getting your staking reward on Cardano.