The very first question
Do you have an ADA?
ADA is an important asset.
You can use it for many things when you have it.
Buy and sell on exchanges
Purchase goods and services
Create or transfer NFTs
Donations
Voting, allocating funds
Stake pool operations, staking
Staking, etc.
"I get rewards from staking, but why do I get paid just for delegating ADA?"
This article is written for those of you who have staked ADA and may have such questions. In Cardano's Proof of Stake (PoS) system, when you delegate to a stake pool, you get a reward every 5 days in return.
It is like depositing money in a bank and getting interest, but it differs in a way that it has a solid structure that can be mathematically expressed and a better interest rate of about 4-5% per year (as of 2022). When I first started staking, I myself was looking forward to seeing the rewards increase, but I also had such a question. I am glad if I can clear up any of your questions.
Below are a few details, touching on how it works.
What is the Staking?
Delegation is the process by which ada holders delegate the stake associated with their ada to a stake pool. It allows ada holders that do not have the skills or desire to run a node to participate in the network and be rewarded in proportion to the amount of stake delegated. - https://cardano.org/stake-pool-delegation/
The quote is from official websites and written the same in other sources. I will try to explain it by grabbing each word in the context of staking.
First, ADA and staking are written separately here. In many cases, they are spoken of as the same thing because they require an intricate explanation.
For the sake of clarity in later explanations, I hope you will read this as if your ADA has a lottery ticket called a stake attacked to it.
Ada held on the Cardano network represents a stake in the network, with the size of the stake proportional to the amount of ada held. - https://cardano.org/stake-pool-delegation/
The more ADA you hold, the more stakes (lots) you will have in proportion. Stakes can be delegated to the stake pool.
What is stake delegation?
I mentioned the word delegation, but what is stake delegation?
It is a mechanism inherent in Cardano's Proof of Stake (PoS) protocol, and it is the act of depositing a stake into a stake pool. Since you are only depositing your stake you have control of, you are free to transfer your stake to another pool. It is not a transfer or deposit of ADA itself, but an accompanying lottery. Therefore, there is no loss of ADA due to delegation, and you can use ADA for other purposes while delegating. By delegating, you will be rewarded according to the amount of delegation.
Why is reward paid?
This is the part that probably makes you wonder the most. It's my personal favorite part because it's so human.
"Why do I get paid (incentive) just for delegating? Isn't there something fishy about it?"
Incentives are used to ensure the longevity and health of the Cardano network and ecosystem. The incentive mechanism is underpinned by scientific research that combines mathematics, economic theory, and game theory. - https://cardano.org/stake-pool-delegation/
First, if there is no incentive, no one wants to continue struggling unless there is a very strong motivation, such as "I want to help, or because it is necessary for society." For example, in online games, players will challenge bosses or tackle missions despite the hardship. This can be seen as an action for self-interest, such as rare items or rewards. (Although game theory is very deep and not easy to explain, if you look into it.)
In the same way, operating a stake pool requires costs such as server rental fees, daily maintenance, etc. In return, Cardano provides an incentive to continue this operation because it receives an operating fee or incentive for block generation. Without the incentive, fewer people would continue the operation, and the network itself might disappear.
From the delegator's perspective, as explained below, the delegation of stakes allows them to be involved in this operation (block generation), and as a result, they are rewarded. How can you get involved?
How PoS (Proof of Stake) works
The proof-of-stake (PoS) system used by Cardano is similar to a lottery.
Anyone who has more coins (and therefore invests more) can generate more blocks in a PoS-based system. - https://forum.cardano.org/t/topic/15200
Buying a lot of lottery tickets also increases your chances of winning.
The allocation of block creation is randomly determined by a system called Ouroboros, based on the amount of delegations to the pool. Thus, as in a lottery, the more stakes (lots) delegated to the stake pool, the higher the probability of winning the lottery and becoming a slot leader with the right to generate blocks.
In a proof-of-work (PoW) scheme such as Bitcoin, multiple servers must perform a large number of calculations in order to generate a block. In the process of calculation, CPUs and fans are run, resulting in high power consumption. Among them, only the server that answers correctly first is rewarded with the right to generate blocks.
In this respect, PoS is more energy efficient because it is determined by something like a lottery.
Delegators
It allows ada holders that do not have the skills or desire to run a node to participate in the network and be rewarded in proportion to the amount of stake delegated. - https://cardano.org/stake-pool-delegation/
It is said that "having an ADA means having the right and obligation to participate in the protocol and create blocks." However, in order to participate in Cardano, you do not have to set up a server and operate a stake pool.
Instead, by delegating stakes to a stake pool, the pool will have a higher probability of winning the lottery of block creation. From that perspective, by "delegating," the delegator is participating in, contributing to, and fulfilling an obligation to the network. In return, the delegator is rewarded according to the amount of stake.
Stake Pool
The stake pool must be online in order to participate in the raffle draw, which takes place every epoch (1 epoch = 5 days). It must also be online at the moment of block generation, which is why the operator maintains the stake pool.
Successful block generation can contribute to connecting and maintaining the blockchain. Operators can earn fees and incentives for server maintenance.
In summary...
Reason for being paid >>> If there is no incentive, there may be no participants.
Pool Operator >>> Incentive is obtained by maintaining the servers.
Delegator >>> Incentive is obtained by increasing the right to generate blocks through delegation.
Is staking free?
A deposit of 2 ADA is required when first registering a stake address (registering the stake key/registration certificate and the delegation certificate to the blockchain).
Once registered, the only fee needed is for re-delegation and de-registeration. When I checked previously, the fees were 0.166293 ADA and 0.172761 ADA, so I think they it would be close amount.
The system is open to almost anyone in terms of fee.
Where do the rewards come from?
Another question that is hard to see is, "Where does the reward come from?"
These rewards are auto-generated by the protocol itself, and are not managed by the stake pool operators (SPOs). - https://docs.cardano.org/core-concepts/pledging-rewards
As the quote states, the stake pool operator has no control over rewards.
The operator does not distribute the ADA on hand, nor can they make adjustments, such as "more for this person and less for that person".
The system distributes rewards fairly and automatically according to stake volume (the amount of delegation to the pool) from the following two places:
Transaction fees generated by remittances and other transactions
Monetary expansion (unissued ADA called reserve)
Reserve
The part about the remittance fee being used to pay for the rewards is understandable. The other part of the reserve is explained here.
Flow of rewards with example volumes captured from CoinMarketCap as of Auguat 2021
Max Supply >>> Maximum amount that will not be issued any more: 45,000,000,000
Circulation >>> ADA in the market: 32,112,302,902
Total Supply >>> ADA circulating in the market + Treasury: 33,005,080,086
Treasury >>> Total Supply - Circulation: 892,777,184
Reserve >>> ADA not yet issued = Max Supply - Total Supply: 11,994,919,914
In a nutshell, like bitcoin, the maximum supply of ADA is fixed at 45,000,000,000, and the reserve is ADA that is not in the market. For each epoch, a fixed percentage of ADA is taken from the reserve and collected in pods.
A fixed percentage of the ADA is then allocated to rewards and treasury. The final payment is the pool's rewards, which is then distributed to the delegates.
During this process, the total amount of the reserve will decrease, and so will also decrease slightly as the amount of rewards taken out.
For future rewards, it will be necessary for the network to have more participants and more transactions.
Other frequently used terms
Luck..
This term is mainly used in ADApools to describe pool grades. For stake pools, there is a block generation allocation lottery for each epoch.
The probability (expected value) of winning depends on the size of the stake (delegation), and the system "expects" to generate a small number if the stake is small and a large number if the stake is large.
Luck is the number of blocks actually generated/expected. 1 (100%) is the optimal situation. If it is lower than 1 (100%), the system was unlucky, if it is higher than 1 (100%), the system was lucky.
For example, during Epoch 287 (8/29~9/3), the pool's performance was 11 (number generated) / 10.1 (number expected by the system based on stake volume). Calculating this, the lottery was good luck, as it was 109%.
Also, the rewards are up or down depending on this percentage.
Summary
Delegation is the process by which an Ada holder delegates the stakes associated with his or her Ada to a stake pool. This increases the probability of block generation without having to operate a node (server), participate in the network, and fulfill the rights and obligations of creating blocks.
By generating blocks, you will get a reward allocated from the reserve for each epoch, depending on the amount of stakes you delegate.
"I get rewards from staking, but why do I get paid just for delegating ADA?"
We hope that the above questions about staking have been answered. Thank you for reading all the way to the end!
If you think it was useful, please help us and consider delegating to the SUGAR stake pool.
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