In my previous article, I talked about some Cardano basics and how users can get rewards by participating in staking.
The good news is you can get involved by joining a stake pool even if your are not so tech savvy. Of course, the return will be higher if you build your own stake pool. This is for people with the right tech skills and willing to spend time and money on it.
In the following paragraphs, I will share my experience of the easy approach — ADA delegation. I will introduce the factors affecting the returns and the strategies of choosing a good pool.
2 Ways of Earning Passive Income
The more advanced approach is to build your own stake pool. The concept is similar to operating your own node for bitcoin and participate in mining. But the big difference is that Cardano stake pools don’t compete for computation power and electricity. It requires quite a lot of technical know-how though. I will cover this approach in the articles to come.
The easier way is to join existing stake pools. It saves your time by scarifying some rewards. At the time of writing, there are >1,500 stake pools worldwide, making the Cardano blockchain completely de-centralized. Some of them are open to public and invite ADA holders to join. For detail steps, please refer to my previous article: Cardano Staking — My First Experience.
Factors Affecting Stake Pool Returns
All stake pools are listed on ADApools.org.
It’s listed on the Yoroi wallet as well (but with less information)
When it comes to choosing the right pool, the following are the most important factors to consider:
- Stake (Pool Size)
- total no. of ADA delegated to the stake pool. The more ADA the stake pool has, the higher chance of being selected as block creator. But that’s true up to a certain no. of ADA only (saturation point — 63.6M ADA at the time of writing). When over this limit, it will have diminishing return. This is intended to encourage ADA holders to delegate to smaller pools and thus prevent one from becoming too big (promote de-centralization)
- the fixed fee and the share that the stake pool takes from the rewards per epoch before distributing them among its delegators. For the above example highlighted in blue, the pool will deduce 340 ADA and 1% of the rewards before distributing to the delegators.
- the amount of ADA the stake pool owner commits to delegate to his own pool. This is used for reference. Delegators would expect the owner will perform well if he delegates more of his own ADA to his pool.
4. ROA 1M/Lifetime
- This is the annualized “Return of ADA” for the last 30 days and lifetime. This gives a short and long term track record of the stake pool.
e.g. 5.84% / 5.63% means APY for the last 30 days is 5.84% while APY calculated from day 1 since setup is 5.63%.
5. Server Reliability and Performance
- It is not shown explicitly shown on the ADA pool but it’s a important factor for making the decision. Imagine when your pool is selected as the next block creator but somehow the server goes down. It will lose its chance of getting the rewards. Some stake pools’ server monitors are publicly accessible on the internet, showing their server uptime and resource utilization.
There are lot of other parameters that will affect the rewards as well. But they are less important and more technically involved. I would suggest digging deeper into ADApools.org if interested.
Many stake pools have their own promotional websites (e.g. nedscave, kysenpool, blackstarpool…) where the owners may mention how the rewards will be used (e.g. maintaining their hardware, donating to the poor, funding tech projects….). It’s worth visiting before you make the final decision.
My strategy at this stage was:
- ruled out those with poor factors, ~10 stake pool remained
- checked the websites of these ~10 stakes pools
- sorted out those with most uptime (highest stability), ~5 remained
- picked the 2 with meaningful objectives (donating part of their rewards to the needed)
- divided all my ADA into half and delegated to these 2 pools
Someone would expect they can get rewards immediately and on daily basis (just like crypto lending services provided by some DeFi websites). Unfortunately, this is not going to happen. In fact, you have to wait for a while before you can get your 1st reward. Cardano divides the staking process into different epochs and slots (cycles in concept). It’s clearly explained by the diagram below:
In short, you have to wait 15 days for the best case scenario while the worst is 20 days.
Also, note that your ADA are not locked up. You are free to withdraw or join another stake pool anytime (but can’t get any reward in this epoch, it won’t be paid pro-rata). This is a great advantage over ethereum 2.0 staking which the system will hold up users’ eth (in term of months!) before they can get rewards.
I personally purchased 10 ADA and went through the whole staking process. My purpose was to observe how the transactions are made. Let’s take a look below:
A important point to note is that 2 ADA will be taken by the system as deposit. But since it is a deposit, you’ll get it back if you ever un-delegate the wallet.
Cardano is born with the aim of solving the pain points faced by current blockchain platforms. The adoption of POS (Proof of Stake) as consensus algorithm is a big step towards solving the problems of sustainability (e.g. energy waste, centralization…). I believe Cardano will change the whole blockchain landscape in the short run.
The beauty of Cardano staking is that all ADA owners even with very little technical background can join. So, why not join a stake pool and earn passive income (4–6% APY, much higher than any bank deposit) now!