Though we long for a utopia, history proves that human drive comes from self-interest. The most successful human systems are those that recognize and align with this. The Cardano network rewards participants and decentralizes power, resulting in a framework that is both sturdy and egalitarian. Cardano does this through the function of its digital currency, ADA. ADA has three important functions: Currency, Voting, and Staking. In this article you will learn about these functions. You will also learn how your participation can benefit you and your fellow man.
As a currency, ADA functions the way a country’s money does. You can use ADA to buy food and services where accepted. There are currently a handful of businesses around the world accepting ADA. You can also use exchanges to trade your ADA for local currency, as you might trade US dollars for Euros. As the use of ADA by individuals and institutions grows, its value will continue to increase.
The second function of ADA is voting. Cardano, like the internet, is a collection of network protocols. These network rules govern how Cardano works, and what you can and cannot do with it. And like any system, it requires regular maintenance, including changes and updates. Since Cardano doesn’t belong to one person, voting is a way to prioritize and manage changes. Anyone can submit a CIP (Community Improvement Proposal) on the blockchain. If a majority of ADA holders approve the proposal, the change is implemented. These changes can be as simple as updated transaction fees or rewards. They might also be more significant, like increasing the amount of ADA in circulation.
The third and most exciting function of ADA is staking. The Cardano network is just that: a network of connected computer nodes. Each node is maintained by a stake pool operator. When there is a transaction on the network, a random pool is selected to validate the transaction, format it into a block and save it to the blockchain. Next, every other computer on the network processes and confirms the change. In Cardano, this happens again and again, every 20 seconds. Sharing responsibilities removes the need to trust a central bank or government. No one can claim money they are not entitled to. No one can steal what isn’t theirs. Fraudulent transactions are rejected by the rest of the network.
Cardano achieves trustless shared security and responsibility by encouraging a robust network of participants. Why would a pool operator want to do the work of maintaining a pool in the network? Because there’s money in it, you self-interested human! About every five days, pools that perform their job for the blockchain, receive a certain amount of ADA as a reward.
But not everyone who wants to take part in the Cardano ecosystem can run and maintain a computer server. This is where staking comes in: you can delegate your ADA to a pool. Then, when that pool gets rewarded, you get paid too, proportional to the amount of your stake. This is like interest earned in a traditional bank savings account. While the bank holds your money, they are putting it to work by loaning it out to others, and collecting interest. So you earn a (teeny tiny!) cut of that return in the form of interest on your savings. With staking, you are letting your investment work for you. Unlike traditional banking, everyone decides the rules of the ecosystem, not a few. So, the returns are more inspiring and fair than what you would get at the bank. While the national average interest rate on a savings account in the U.S. is at .04%, staked Cardano earns about 5.5% annually in rewards.
If you invest in Cardano and choose not to stake, it’s a bit like hiding your savings under the mattress. In fact it is worse! The exchange where your ADA resides is actually staking it for you – and keeping 100% of the rewards. Nor should you stake on an exchange. In these cases, the exchange is still the big winner. They control the choice of available pools, and the fees they collect are higher.
Staking is no-risk and all reward. You can spend, trade, or use your ADA whenever you want to. While your ADA is staked, you are eligible to earn rewards. Also, your investment facilitates processing on the network. Through this clever arrangement, Cardano has created a system that maintains high security and fairness, by aligning human self-interest with network rules.