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Cardano 101: Self-custodial Staking and Why it is Important

Cardano 101: Self-custodial Staking and Why it is Important

Cryptocurrency custody is a common discussion topic among those in crypto and blockchain communities.

For instance, there is a self-custodial crypto wallet in which the user retains full control over their cryptocurrencies and their private key at all times. 

There is also a non-custodial or third-party custodial wallet in which a third party retains control and manages the cryptocurrencies on the user’s behalf. This requires that the user places their trust in the third party to manage the cryptocurrencies in good faith. A cryptocurrency exchange wallet is a good example of this type of non-custodial wallet.

This interest in self-custody has extended to not only crypto wallets but all aspects of decentralized blockchain technology. 

Compared to other proof-of-stake blockchains, Cardano possesses unique technical design features that enable simple self-custody of Cardano ada and Cardano native tokens even while staking to earn rewards. 

Cardano ada holders can always retain full control over their stake and withdraw their stake at any time if they use a self-custodial wallet.

How does Cardano staking work?

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The Cardano blockchain uses a unique staking mechanism based on Game Theory rather than slashing. 

The complete outline of how it works can be found in the Ouroboros whitepaper, but it’s been proven to work and tested on various conditions. Ouroboros is the name of the proof-of-stake protocol that secures Cardano’s decentralized blockchain.

The implications of Cardano’s design choice are: 

  • First, staking in Cardano is liquid and does not lock a user’s ada (native cryptocurrency of Cardano) for any vesting period.

  • Second, delegating one’s ada does not transfer ownership of them to the stake pool operator.

The custody of the ada cryptocurrency delegated to a Cardano stake pool is always under the control of the private key of the owner. For this reason, delegation for Cardano ada staking purposes poses no loss of ownership risk to the owner of the ada. 

Cardano ada holders can easily download and use self-custodial wallets such as Yoroi to stake ada directly from their wallet on both mobile and desktop browser versions while retaining full control over their ada.

More: How to stake Cardano ada using Yoroi Wallet

This low-risk approach has created a funding mechanism unique to the Cardano blockchain, the Initial Stake Pool Offering (ISPO). 

In an ISPO, ada holders delegate to a Cardano staking pool from a specific project building on Cardano, the project keeps a varying percentage of the staking rewards to fund its project development, and the delegators receive the project’s token. 

The delegators know that their ada can never be taken, and they accept the risk of losing their ada rewards in exchange for the project’s tokens. 

This can help fund in part new Cardano projects, plus it attracts a lot of new users to projects that engage in an ISPO. 

Cardano ada staking using crypto hardware wallets

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Another feature of self-custodial staking is hardware wallet delegation. 

All major wallet manufacturers in the blockchain industry support hardware wallet delegation for Cardano ada.

This means users can hold ada in their hardware device, and still get the benefits and rewards from delegation and staking.

This increases security as the private key of a hardware wallet is offline and the user further protects the cryptocurrencies in their wallet. The Cardano blockchain network still calculates the rewards based on the amount of ada delegated from the wallet. 

More: How to connect Yoroi to Ledger Wallet

Once the rewards have accumulated, the owner can withdraw them and send them directly to the hardware wallet. The added layer of security ensures the ada is protected from potential attackers, and the user doesn’t need to sacrifice the staking rewards of the Cardano blockchain network. 

This careful approach to Proof-of-Stake has resulted in a much more robust and secure consensus mechanism for the Cardano blockchain. At the same time, the design choices have also made it a better user experience for ada users looking to accumulate rewards while securing the Cardano blockchain network. 

Download Yoroi Wallet now to self-custody and stake Cardano ada

Yoroi is an open-source and the first crypto light wallet for Cardano ada holders. It allows Cardano ada holders to store, send, receive, and stake Cardano ada for rewards and to secure Cardano’s decentralized blockchain.

Available for mobile and desktop browsers, Yoroi is designed to be your gateway to Cardano’s Web3 ecosystem of DApps including Cardano DeFi, Cardano NFTs, and the USDA stablecoin.

About Yoroi Wallet