Staking and blockchain for beginners
This guide is for the absolute Cryptocurrency beginners out there. It is meant to give a broader understanding of a very complex concept and should serve to give a more visual explanation for those out there not into mathematical calculations. If you are already a little more experienced and interested in the nifty science behind blockchain and especially staking mechanism, please check out our “Advanced section”.
Introduction
Blockchain and Cryptocurrencies
Cryptocurrency has become a well-known term in the last few years, it seems to pop up everywhere when we scroll through our newsfeed or zap through programs on the TV. But what actually is it? Let me tell you, Bitcoin is not the only one out there! Cryptocurrencies are digital currencies; each unit is a digital coin that can be bought and sold on cryptocurrency exchanges. That makes it very attractive to traders and like all new things, some old school institutions might feel threatened by it. But cryptocurrencies are just a by-product of a much more exciting new technology: blockchains!
A blockchain is the backbone of all cryptocurrencies, some have their very own blockchain, other cryptocurrencies run on top of the blockchains of other projects. For instance: Bitcoin runs on its own blockchain; the Bitcoin blockchain. Ether, Shiba Inu and many others all run on the same blockchain, Ethereum. Cryptocurrencies are digital money, also called tokens. They can be used as payment for activities and services on the blockchain or traded into other currencies.
A blockchain is basically just a database, which stores its data in linked together chunks, called blocks. This makes it a very well organized database, with each set of data having a timestamp and unmovable link to the data that is previously entered and all future data added to the blockchain. Data that is stored on the blockchain can never be changed.
What makes blockchains different and more secure from other databases is the fact that it is decentralized, meaning it is not depending on a single server and location but on several. The components that enable this are called “nodes”. Nodes are computers with a full copy of the entire blockchain transaction history stored on them. Each node that participates on a blockchain is connected to all other nodes. They are in constant exchange with each other, always updating each other and recording and checking (verifying) all ongoing transactions on the blockchain. This principle is called decentralization and it is what makes a blockchain a lot less vulnerable to any safety concerns. Each node decides if a new block is added to its copy of the blockchain or not. If many nodes say ”A” should be added, and one node says “B” should be added, the nodes choose the many of course!. This way, if one node is corrupted (think about power outages or a hacker attack), all other nodes will deny new blocks coming from the corrupted source and only trust the many neighbours who are correct.
To summarize:
A blockchain is an unchangeable database that stores data in chunks called blocks.
Nodes are the components that verify, add or deny blocks.
Cryptocurrencies are digital money that can be used to pay for blockchain services
Why is that cool?
Exchange
Trade and deal making has changed significantly since globalization. We no longer only deal with people we know personally, we even deal with people not living in the same country or having the same laws and other regulations and values. The partners we deal with are often anonymous entities. Blockchain enables us to verify contracts and processes in a decentralized way, meaning the deal can’t be changed once agreed upon and will be enforced by several independent entities that have no gain in changing the outcome. Blockchain also acts as a neutral and trustworthy contractor in between parties. When 2 entities want to make a deal, but trust has not been established yet, a blockchain can, for example, “hold” sensitive data in a secure place with both parties being able to access, but not change what has been transferred and stored there.
A very simplified way of thinking about this is to imagine 2 people who are making a sales deal. Bob wants to sell Alice a pineapple. Alice agrees to pay Bob 1$ for the pineapple. Bob lives in Honolulu, Alice lives in Denmark. So Bob has to mail the pinapple, and Alice has to pay the dollar. Both need to make sure that the other partie commits to what they agreed on. This is where Blockchain comes in. Blockchain is a digital way for Alice and Bob to arrange this deal without any banks or other parties that still makes sure that there is indeed a pineapple and there is indeed a $1 that will be paid. Once both goods have exchanged hands, the deal is verified.
Banking the Unbanked
“Banking the Unbanked” has become a Cardano slogan and reflects all the efforts that the Cardano Foundation is currently making in countries that have either limited access to banks or are struggling with corruption. With blockchain a lot of DeFi projects came to life. DeFi is short for decentralized finance. It enables anybody with access to the internet to use financial services, cutting out the middleman, thereby avoiding additional and unnecessary costs as well as other barriers often laid down by traditional institutions.
As a simplified example:
Bob wants to buy bread from Carol. Bob has a pineapple but does not have a bank account. Carol does not want a pineapple, but wants 1$ in her bank account. Alice wants to buy a pineapple. Alice agrees to pay Bob 1$ for the pineapple. Alice can transfer the equivalent of 1 $ in cryptocurency (=app. 0.5 ADA), to Bob in exchange for the pineapple. Bob now gives the 0.5 ADA to Carol to buy bread. Carol changes the 0.5 ADA for 1$ at her bank. She now has 1$ at he bank account.
Property Rights and Proof of Ownership
It’s hard to imagine, but a major factor of the western world thriving and setting sail towards modern globalization was the principle of property rights. The fact that the land that you bought or inherited and built on is indeed by law yours and cannot be taken away by a corrupt official at any point is unfortunately not a sentiment that is enforced in all places of the world. Too often official papers get “lost” or “changed” behind closed doors. Imagine the huge difference a central register on blockchain can make.
Imagine Bob from our first example. Bob owns the pineapple plantation his previously sold pineaple came from. Dave, the nephew of the governour, wants to build a small grocery store on Bob’s pineapple plantation. Dave will pay Bob a good amount of money every month for the lease of the ground. After the grocery store is built, Bob does not receive any money. Bob sues Dave for the rent. In court it becomes clear that according to the official records, he no longer owns his plantation. Rumour has it the governer changed the official government records. In most Western countries it’s hard to imagine that this could happen, but in many countries with unstable governments it’s a sad truth.
The advantage of a blockchain is that it can not be corrupted. If Bob’s property rights would be on the blockchain, and the lease agreement he has with Dave would be registered there too, none of this could happen. Bob could prove he owns the plantation, and that Dave owes him money for the lease.
Security
Because the blockchain keeps a gazillion copies it’s very hard to corrupt it, even if someone hacks a computer, or bribes an official. As mentioned before: all the other nodes in the blockchain will just ignore the corrupt information and listen to the gazilion-1 nodes that represent the correct transaction. In addition a lot of blockchains, including the Cardano blockchain, are open source wich means everyone can check the code they are based on, to make sure it’s not corrupt.
Speed & (Cost)efficiency
Bureaucracy comes with a lot of middlemen. And paperwork, often in threefold. That needs to be sent through snail mail, just to end up in the big companies internal mailing system, where it will be forgotten on at least 1 of the 3 desks that it needs to pass. Factor in that all the people involved in this process have their good right to go on vacation once in a while too, and have to get paid their more then minimal wage. With the blockchain technology called Smart Contracts, all of these tedious steps can be skipped. This has the potential to make bureaucracy a lot more time & cost efficient and most of all, less frustrating. A smart contract can contain all the same checks and balances, but will be processed in a few seconds, for a fraction of the costs.
Let’s talk money
The internet is full of stories of people claiming to have gotten rich with cryptocurrency. This is not untrue. Just like on the stock market, cryptocurrencies can be traded and a good pick and the right selling time can indeed be very profitable.
If you buy a bitcoin for 50.000$ and then sell it for 60.000$ you make a shitload of money!
However, this goes both ways! If you happen to buy a bitcoin for 60.000$ and it drops to 50.000$ you lost a shitload of money!
Just like in any economic trading process, with cryptocurrency and all the projects surrounding it, not all are bound to succeed and many people have lost a lot of money.
There is another way to make money in crypto currency as well, that does not involve trading. This is by contributing to making the blockchain work. Contributing to the blockchain is called: building a block! If you build a block it means you validated transactions and contributed to the blockchain.
Proof of Work and Proof of Stake
Building blocks is currently done in two ways:
By updating the blockchain using proof of Work ("Mining")
By updating the blockchain using proof of Stake ("Staking")
Both Proof of Work and Proof of Stake are basicly ways to pick the next block producer. In case of Proof of Work it is which Miner is allowed to produce the next block, in Proof of Stake it's the next Stake Pool. Picking the next block producer is a very important process in every blockchain, since you want to be very sure that no one can claim too many blocks, since they would control the block chain.
Bitcoin, for example, uses proof of Work. If you build blocks for the Bitcoin blockchain, the chain will reward you with a reward in fresh Bitcoin. Because bitcoins are worth money, mining is a way of making money from the blockchain, that doesnt involve trading.
Cardano, on the other hand, uses proof of stake. If you build blocks for the Cardano blockchain, the chain will reward you with ADA. Building of blocks is done in a slightly more complex way. It involves multiple parties that work together. This process is referred to as “staking” and you get fresh ADA for it from the Cardano blockchain. Because ADA are worth money, staking is a way of making money from the blockchain, that doesn't involve trading.
What does "Mining" do?
All miners in a Proof of Work blockchain get a puzzle to solve. If they are the first to solve the puzzle, they get to build the next block in the blockchain, and take the reward. The only way to solve the puzzle is by trying many calculations, and checking if one of them is correct. This means a miner is more likely to be successful in building the next block if they try more calculation, which means more computing power, and a lot more energy consumption. Since the amount of blocks that are built is fixed (in bitcoin at 1 every 10 minutes), the blockchain automatically adjusts the difficulty of the calculations when more computing power is added. It becomes an arms race between miners to try to solve the puzzle first. Automatically the energy consumption keeps going up.
What does “Staking” do?
The other way of verifying the activities and transactions that occur on the blockchain is called “Proof of stake”. All Stake Pools in a blockchain get a chance to produce the next block. Which Stake Pool gets to produce the next block is determined by an algorithm which takes into account how much cryptocurrency is "staked" to each Stake Pool. This principle does not require all the calculations that Proof of Work requires for selecting the next block producer, and because of that requires a lot less energy to run. In a "Proof of Stake" blockchain anybody who owns the cryptocurrency can stake it to a Stake Pool and receive a reward for each block the Stake Pool creates. In a simplified way, you can view this as “backing up” the work of a Stake Pool in creating a block. As a thank you for the back up, all delegators will receive part of the ADA earned by the work the node(Stake Pool) did.
Let's complicate matters a bit more: There is a difference in the process between the “Proof of Stake” blockchains out there. “Staking” means that you sign over the administrative rights for your cryptocurrency to a Pool Operator. Worst case scenario this means you could loose your currency if the pool operator messes up. And then there is “delegating”, where you will always be the ONLY person in control of your Cryptos. Cardano's proof of stake is based on delegating rather then staking. In addition, with cardano you can withdraw your ADA at any time.
If you are more interested in the details of rewards and distribution for delegating with us, please check out our “advanced section” of the website. Here you can also find the full calculation for our big pool CAPEX.
Difference between Mining and Staking
In the last few years there has been a lot of news about the energy consumption of cryptocurrencies. Critics took a closer look at “Proof of Work” blockchains and the high energy-costs associated with it. It has been said that Bitcoin mining consumes the same power as the country of Argentina. However, proof of stake blockchains like Cardano use energy comparable to a single normal household.
We did not check these claims, but it is clear that when it comes to energy consumption - Proof of Stake consumes a lot less than Proof of Work. Anybody who is really interested should do their own fact checking on this subject. For us, less energy usage is better. This is an important part of why we back up Proof of Stake Cardano Network. Cardano is one of the “Proof of Stake” blockchains out there, instead of mining for blocks, ADA holders can “stake” their ADA in one of the 2500 available “Stake Pools”.
Delegating ADA on the Cardano Blockchain
By delegating your ADA in for example our CAPEX or CAPEY Stake Pool, you as the ADA holder will help the Pool generate blocks on the Cardano blockchain. For each block that the Pool produces, actions are verified on the blockchain and the Pool gets a reward. The reward is paid out every 5 days and will be transferred directly to your wallet in ADA. This 5 days period is called an “Epoch” in the Cardano community.
The reward is distributed among all people who delegated their ADA in the Pool and the Pool operator gets a fee that is previously agreed on and taken from the reward before it is distributed. You can see the fee that a Pool Operator charges on the pool info in your wallet.
It is important to understand that by delegating your ADA to a Pool you will never “pay“ anything from the ADA you already own or lose any of it. Only if you get a reward from the pool you "delegate" to, because it produced blocks, the pool operater wil deduct a small percentage from that gains.
The goal of this website is not to trade cryptocurrency or give financial advice. But we do operate a well maintained node on the Cardano blockchain (CAPEX), this is our Stake Pool. If you like our explanation, feel free to delegate.
There are 3 points that we find very attractive about staking ADA on the Cardano blockchain:
You can withdraw your ADA at any time
The Pool Operator has no access to your ADA
Anybody can delegate, there is no minimum input
What do I need to do after my ADA is delegated?
Once your ADA is delegated in a Pool, there is nothing else required of the delegator. You do not need to keep your wallet open or computer running to get your part of the reward. To delegate you just click "delegate" in your chosen wallet. A detailed guide on how to delegate on two of the biggest cardano wallets can be found HERE.
Once you click “delegate” dont panic if nothing happens directly. It will take 15-20 days until you will receive your first reward. Your reward will be automatically appearing in your wallet if we produced a block. CAPEX has produced (many) blocks every Epoch since Augsust 2020.
Why do some Pools produce more Blocks than others?
As mentioned before, the reward for delegating depends on how many blocks a pool produces.
How many blocks are produced in an epoch is a very complex calculation. To simplify, we will only name the main factors:
What you put in: Total ADA delegated to a pool – The more ADA in total, the higher the chance to produce a block
What we put in: Pool operation and maintenance = The operator (not the delegator) needs to keep his pool online and maintain it with every update. Offline time and poor maintenance can result in missed block production
Luck: no, this is not a joke! Part of the assignment of block production for each Pool is randomized!