What does contingent staking mean for Cardano

If you’ve been anywhere close to Cardano Twitter the past few weeks, you would have stumbled across the heated discussion around contingent staking. Today we unpack contingent staking and what it could mean for the Cardano ecosystem going forward.

What is contingent staking?

Contingent staking is a mechanism that allows Stake Pool Operators (SPOs) to refuse delegated tokens, enabling them to maintain control of their businesses. It works through a multi-signature setup that requires the SPO to approve the delegator's proposed delegation transaction.

Contingent Staking is not an obligatory framework and is only used if a jurisdiction requires compliance with certain laws. This mechanism has become controversial because some see it as a way for governments to increase their surveillance and a step back in decentralization.

Charles Hoskinson, the IOG CEO, said introducing Contingent Staking would be a CIP (Cardano Improvement Proposal) that ADA holders will vote on. If most Cardano users disagree with the vision, they can refuse it.

The pros and cons of Collateral Staking.

While some members of the Cardano community have praised it as a way to enhance the quality of the network and reduce reward variance, others have raised concerns about the potential risks of contingent staking, such as centralization.

Cardano founder Charles Hoskinson has addressed these concerns and clarified that the marketplace of stake pool operators would still exist and allow people to continue to delegate to their preferences, including normal stake pools. Moreover, contingent staking does not replace normal staking or private pools. Instead, contingent staking aims to enhance the trust and security of the Cardano network and its participants, especially in light of the renewed regulatory scrutiny around staking activities in the crypto space.

Hoskinson has proposed the model to help the cryptocurrency market align with regulatory requirements. It uses a two-sided transaction certificate (signed by the delegate and the SPO), allowing SPOs to consent to the delegation before it happens. In the context of regulatory requirements, contingent staking can offer extra checks or security measures to promote compliance and deter illicit activities.

Flagship's thoughts

I fully appreciate why the idea of having KYC, a potential requirement of contingent staking, to stake has some in the community concerned. However, with so much uncertainty around crypto regulations, especially from the United States, it is hard for ecosystems to know precisely what they must comply with and how to build a solution that meets that need.

If Cardano staking offers both a contingent and non-contingent staking option, this could be the best solution. It allows those in certain jurisdictions to KYC and remain compliant, while those in other markets keep their anonymity. In a way, it currently setups the staking ecosystem like the exchange ecosystem, i.e., if you want the benefits of a centralized exchange, which almost always means you have to KYC, then you can follow that process. If, instead, you wanted the decentralized option; there are many DEXs where KYC is not an option.

If designed correctly and voted in by the community, this approach should improve Cardano’s appeal for mass adoption by the more traditional business sectors.