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:
- The spending key is used to sign spending transactions.
- 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”.