How Do Rewards Get Distributed?

In the Ouroboros protocol, the more stake delegated to a stake pool (up to a certain point), the better its chances of being selected to produce more blocks, effectively increasing the rewards it earns and shares with its stakers. First, let’s break down some terminology. - Pledge Amount: The pledge is the amount of the pool operators’ own ADA they have delegated into the pool. - Delegation: Delegation is the process by which ADA holders ( known as delegators) delegate the stake associated with their ADA to a stake pool, aka staking. - Fixed Cost: This fee covers the pool’s operating expenses. 99% of pools charge the minimum fixed cost of 340 ADA, which is deducted first from all of the pool rewards. Don’t be worried if you only stake a small amount; this fee is shared by all stakers on a pro-rata basis. - Margin: This is the percentage of rewards that the stake pool operator takes after the fixed cost has been deducted but before pro-rata rewards have been handed out to delegators. - ROA: The amount of ADA returned or expected to be returned over a one-year period divided by your current stake, which is the equivalent of the annualized interest rate. - The Reserve: This is ADA that has not yet been included in circulation. Cardano will have a total supply of ~45 billion tokens, of which ~34 billion are already circulating, leaving ~11 billion in reserve. - Expansion Rate: This is the amount of ADA used for rewards. This rate is currently ∼0.3% of the Reserve per epoch. - Treasury’s Cut: This is currently 20%. This amount is subtracted from the total possible rewards, which are calculated using the expansion rate. - Staking Rate: This is a reflection of the ratio of ADA actively staked to the total amount of ADA in circulation. This is also used to determine how much ADA should be distributed to participants. - Epoch: According to Cardano’s glossary, this is a defined group of slots that constitute a period of time. The number of inflationary rewards is distributed to all stake pools. This is calculated by taking the total possible reward, less the treasury’s cut, and factoring in the staking rate.

Pledging Mechanism

On the Cardano blockchain, pledges act as an important mechanism to fight Sybil attacks which occur when an adversarial actor (someone who wants to create chaos in the blockchain, a malicious actor) operates many nodes in order to manipulate the blockchain. Under the current configurations, a pledge has little impact on your staking returns, but if additional protection is ever needed on the Cardano blockchain, it will boost the staking rewards on pools with higher pledges, ultimately encouraging a healthier validator ecosystem. When choosing a pool, delegators should take into account how much the operator has pledged. High pledges demonstrate that a stake pool operator is committed to long-term success and will possibly increase delegator rewards in the future. However, there is no minimum amount when it comes to pledging.

Distributing Rewards

An epoch is a defined group of slots over an amount of time every five days. As each epoch unfolds, rewards are distributed to all stakers who have delegated to stake pools. The protocol itself generates these rewards, and these rewards are not managed by stake pool operators (SPOs).

Margin Mechanics

Most competitive stake pools charge a margin of 1-10%. We suggest you stick with these kinds of pools.