Understanding Liquid Staking in Cardano

English Education
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Many members of the Cardano community often express confusion about unstaking their ADA (Cardano’s native cryptocurrency) when they need to carry out transactions. This is a valid concern, especially since Web3 concepts can be complex and unfamiliar to those new to the space. To help clear up this confusion, I’ve decided to explain how staking works in Cardano in simple terms, avoiding technical jargon.

Consensus Algorithms: PoW vs. PoS

In blockchain, there are two main types of consensus algorithms: Proof of Work (PoW) and Proof of Stake (PoS). These systems are like rules for how transactions are verified and added to the blockchain.

  • Proof of Work (PoW): PoW is used by networks like Bitcoin. Here, participants (miners) contribute to the system by solving complex mathematical problems using specialized hardware. The process is energy-intensive, but it ensures that transactions are secure and trustworthy. Since Cardano doesn’t use PoW, we won’t go deep into it.
  • Proof of Stake (PoS): Cardano operates on PoS. In this system, users dedicate (or “stake”) a portion of their ADA to the network. This stake contributes to the network’s security and operations. The term “stake” reflects the level of influence or trust a participant has in the system – the more you stake, the greater your contribution.

Types of Staking: Traditional vs. Liquid

There are two main types of staking in blockchain: traditional staking and liquid staking. Understanding the difference between these two is key to clearing up misconceptions about moving your ADA while staked.

Traditional Staking:

In traditional staking, when you stake your assets, they are locked. This means you cannot move or use your ADA until the staking period ends. Think of it like a fixed-term deposit in a bank: you earn interest, but you can’t withdraw your money until the agreed time is up.

Liquid Staking:

Liquid staking works differently. Here, your assets remain staked to support the network, but you maintain liquidity. This means you can still move your ADA, use it in transactions, or even cash it out whenever you want. It’s like putting your money in a savings account that earns interest while allowing you to withdraw or use the funds at any time.

In Cardano, staking is liquid by design. This is why you don’t need to worry about “unstaking” your ADA to make transactions. Your ADA remains in your wallet and under your control, even while staked. This flexibility is one of the unique and user-friendly features of Cardano’s PoS system.

Why Liquid Staking Matters

For Cardano users, liquid staking removes the stress of having to choose between contributing to the network and maintaining access to your funds. You can stake confidently, knowing your ADA remains accessible for transactions or other uses. This design not only encourages broader participation in staking but also enhances the user experience, making Cardano’s ecosystem more inclusive and flexible.

I hope I helped someone clear their doubts. Feel free to ask questions and I will try my best to answer in the simplest way possible.

Resources for further knowledge:

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Thank you, Good work! :slight_smile:

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Thanks for the clarification and helping us understand liquid staking especially with cardano.The resource were helpful

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Thank you too. I tried my best to make it as simple as possible just to make sure that the idea is at least gotten. There are other forms of consensus algorithms which were excluded and traditional staking should be called (Frozen staking) just a side note. I am happy I could help.

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An important concept for newcomers is to think why we have staking at all, and why do people get rewarded for staking?

What staking is not:

  • You are not getting paid interest on your Ada.
  • You are not loaning your Ada to anyone.
  • Your chosen stake pool is not doing anything with your Ada.
  • Your Ada is not locked.

What staking is:

Staking is optional. You don’t have to do it. Those who choose to participate in staking are helping to secure Cardano’s network, and they get rewarded for their active participation. Here is why:

The spending key and the staking key

In Cardano there are 2 different keys associated with your wallet:

  1. The spending key is used to sign spending transactions.
  2. The staking key is used to sign your support for a particular stake pool.

Signing with your staking key is voting for a stake pool

When you select a particular stake pool and sign with your staking key you are voting for that stake pool to make more blocks. Whatever amount of Ada you have in your wallet at any moment then contributes to the total amount of Ada that people have “staked”, or voted, for that pool.

Spending your Ada does not change how you voted your stake key

You can still spend your Ada whenever you want and this will obviously affect the balance in your wallet. When you spend Ada, you sign with your spending key. Unless you decide to vote for a different stake pool you don’t need to do anything with your stake key and your currently chosen pool will benefit from whatever is the balance in your wallet.

Why staking helps a pool make blocks

Every epoch (5 days) a calculation is done to total the amount in every wallet that voted their staking key for each pool. The more Ada that was voted for a particular pool, the more blocks that pool gets to make in the next epoch, and the more rewards it will earn. Each pool then shares their rewards with the people who voted their staking keys for it to make more blocks. The stakers get rewards paid to them in proportion to how much Ada they voted (“staked”) for that pool. The protocol automates the reward payment, so there is no need to rely upon the stake pool operator to make the payment.

Thus the rewards you earn from staking is a share of the rewards earned by that pool. Because, without your support, that pool wouldn’t have been permitted to make as many blocks.

Why staking is necessary

Understanding the above enables an appreciation for why the staking mechanism is important to Cardano. Consider the following scenario:

Say a stake pool started censoring transactions, or disconnected from the network and stopped producing blocks, or teamed up with some other malicious pools to produce a fork of the chain.

As a “staker”, you can notice the failure to faithfully implement the protocol and choose to vote your staking key for a different, hopefully better behaved, pool. This shift of your stake key vote will then mean that the “bad” pool will get to make less blocks in future and your newly chosen “good” pool will get to make more. IE: Stakers can keep Cardano secure by ensuring that “good” pools make more blocks than “bad” pools.

By choosing to participate in staking, you are electing to be an active participant, and by monitoring your chosen stake pool in relation to other pools, you are helping to secure the Cardano blockchain. It is not very hard to pay a bit of attention to what is happening in Cardano land and remain prepared to re-sign (re-vote) with your staking key if you become aware of a problem. This is the real reason the protocol pays rewards for “staking”.

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Thank you very much for your input @Terminada it is truly amazing. This is an angle I ignored because I was more focused on a concern I have been seeing regularly in the past week. I enjoyed your input.

@Terminada I created a French version of this topic. Is it ok to translate your reply and add it to the topic to give more context to our French speaking members?

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Sorry if I complicated the explanation somewhat as I was trying hard not to. However, I think it is really important that people understand these concepts because there is community debate about what should be done to address the problems associated with “sticky stake” or “inactive stake” or “dead stake”.

For example, consider the scenario where someone stakes 50M Ada to a particular pool and then loses his keys. That stake pool can then do whatever malicious activity it likes, and charge whatever fees it likes, and that Ada can never be re-staked because the keys are lost. Unfortunately this scenario undermines Cardano’s security a bit.

There is debate about whether the staking implementation should be modified so that signing a staking vote has a time duration of maximum 1 year, after which time the person would need to re-confirm his/her staking decision? A kind of “proof of life” or “proof of active participation”. An analogous problem occurs with delegating governance voting power to a DRep.

I wish I could speak French. @BigCac I would love it if you would be so kind to translate my reply in the French version of the topic.

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I see

I understand this and please do not apologize as you did not complicate the explanation. You added value to it. Also for topics that might need French in them we could always collaborate to deliver the best we can.

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@Terminada I’m wondering why staking is optional. My (personal) smart default for this would be that as soon as I get some ADA in my wallet, it would be staked. I love this idea of liquid staking, but it sounds like ADA does liquid unstaking, rather than liquid staking. For me, liquid staking would be a process which would support everything that was described by @BigCac, but it also automatically staked my ADA as soon as I got it into my wallet.

If you know or can explain, could you please clarify for me why ADA network doesn’t do this by default?

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@jasongrant Good observation, this will take us to the concept of custodial vs non-custodial wallets. For the sake of those who might not be familiar I will explain what both mean.

Custodial wallets
These are wallets that are centralized and the user relinquishes control of his/her assets to the central authority for example Binance. With this systems the central authority can freeze your assets at will or do whatever they please.

Non-custodial wallets

With such a wallet the user has complete control over their assets an example will be the Yoroi wallet, Eternl etc. These wallets all run on Cardano.

Answer to your question

Cardano’s staking model is designed to prioritize user autonomy and security. By making staking optional, it allows users to maintain full control over their ADA without assumptions about how they wish to use their funds. Automatically staking by default could create risks or unintended consequences for users unfamiliar with staking.

Liquid staking in Cardano ensures that your ADA remains fully accessible even while earning rewards, blending flexibility with staking benefits. This approach aligns with Cardano’s philosophy of decentralization and user empowerment.

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Irrespective of custodial or non-custodial, it sounds to me that with the liquid staking capability on Cardano, staking by default is a wise choice. It should be, IMHO, an option on wallets to set this as a preference. I buy ADA, it gets staked, I can spend it, transfer it or hold it, but staking keeps ‘bubbling on’ giving me rewards.

I tell you why I say this. I had Cardano for a while on a wallet and forgot to stake it for a long time. I missed out on a lot of rewards simply through forgetfulness. This would be a good UX principle I reckon. It certainly is my thinking, after doing UX Design for 20 years now.

PS: I wouldn’t recommend this for non-liquid staking networks though.

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I understand your POV. However, automatically staking it will imply cardano interfering with your wallet which goes against the autonomy, decentralization and ownership. Cardano is more like a manual shift vehicle. What about wallets having notifications to remind you to stake your token if you haven’t done it yet?

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These are interesting questions and really go to the heart of what staking is about.

The answer boils down to the fact that we need the user to choose a pool based upon their own value system. IE: What things they think are most important. Eg:

  • Maybe the pool donates to charity? Maybe the pool is building tools?
  • Maybe the pool operator thinks privacy is a human right and doesn’t post their picture or location? But, maybe you don’t like this and want to see what the operator looks like?
  • Maybe the pool operator thinks money held by North Korean, Iranian, and Russian citizens should be frozen? Maybe that pool has a list of wallet addresses deemed to belong to Russian citizens and filters transactions involving those addresses?
  • Maybe the pool operator writes content on Twitter/X that you agree or disagree with?
  • Maybe the pool has a lot of their own Ada pledged? (A lot of their own “skin in the game”?)
  • Maybe the pool is run from Ethiopia and your mother was born there so you think it is important to support that pool?
  • Maybe you think the world has gone too Woke / DEI / ESG and you are tired of all the virtue signalling. Maybe the main thing you care about is whether the pool faithfully implements the protocol and charges lower fees so you can get a better share of the rewards. Or, maybe you feel the opposite and want more DEI or more ESG investing.

Every individual user has a unique set of values dependent upon their personal upbringing and previous life experiences.

The good thing is that we an all get to choose a pool we individually prefer and we can change this choice whenever we like. And if we want we can start our own pool. Importantly, if it ever seems that our individual chosen pool isn’t living up to expectations regarding what we feel is most important, then we can re-stake to another pool.

The protocol can’t automate this choice for us because the protocol doesn’t have a subjective human value system, rather the protocol’s values are the collective consensus values of the entire Cardano community. You are not required to stake your Ada, but if you wish to do so then you need to submit a staking transaction to tell the protocol what pool you have placed your faith in for now.

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I agree and I certainly stake my Ada. But you are also right in that it is a choice.

Another thing people often forget to consider is the tax implications. In many countries the staking rewards are treated analogously to share dividends. They are taxed as income in the amount dependent on the price of Ada at the time they became spendable by you. Thus if you live in one of these countries then by staking you are generating a taxable income and need to report this on your tax return.

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This is super insightful and the very first time I learn about the fact that each pool ‘comes with’ certain support for various belief systems and ethical considerations. I don’t get an option to choose a pool when I’m using an exchange (such as Coinbase), so it seems like at least in certain situations a pool has been pre-chosen for me.

The smart default in the case you describe would be to get the user to choose a pool they want to support (through an informed choice), then select if they want to ‘auto-stake’. After those 2 settings were set up, the auto-staking to a preferred pool would take place every time I ‘loaded up’ in my wallet.

Problems?

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So far as you don’t “unstake/undelegate” your assets. Anytime your wallet is loaded up it stakes to the pool automatically. You just need to do it just once and you are good. So the issue here will be you receiving initial funds in your wallet without delegating them.

Also when you search for a staking pool, they always have the link to their website which will explain their causes and how they operate

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