Cardano Stake Pools Explained | Genius Academy (2024)

Cardano stake pools are block-producing server nodes that reliably hold the combined stake of various stakeholders in a single entity (Cardano stake pools literally pool the stake that has been delegated to them). Cardano stake pools take care of producing new blocks and processing transactions acting as the core of the Cardano proof-of-stake protocol called Ouroboros.


What is Proof of Stake?

Cardano, as many third generation blockchains, is based on a consensus mechanism called proof-of-stake, whose role is to validate and process transactions and to create new blocks on the blockchain.

Proof of stake was developed in response to the high computational costs of proof of work protocols, like Bitcoin or Ethereum, avoiding the need to invest increasing sums of money in ever-more powerful computing equipment consuming growing amounts of electricity. Proof of stake promises greater scalability and throughput, since blocks and transactions can be approved more quickly.

Proof of stake works using a process known as staking.


What is Staking?

ADA held on the Cardano network and delegated to Cardano stake pools represents the stake.

Different from other blockchain, in Cardano, staking works in a non-custodial way, meaning it does not lock ADA for a certain period of time and funds can be spent at any time while participating in the protocol, regardless of how they are delegated.

Staking ADA offers benefits both to ADA holders and to the entire network, making the consensus mechanism stronger because, for security matters, Ouroboros requires a good number of ADA stakeholders to be online and maintain a good network connectivity at any time. This is why Ouroboros relies on Cardano stake pools, which are committed to run the protocol 24/7, on behalf of the delegates. In return, Cardano stake pool owners and their delegates will earn ADA rewards.

How to Delegate and get Staking Rewards?

ADA holders can earn rewards in two different ways: by delegating their stake to a stake pool run by someone else, or by running one by their own.

The amount of stake delegated to a Stake Pool is how Ouroboros chooses who is going to add the next block to the blockchain and receive a reward.

The more that is delegated to a stake pool (up to a certain threshold), the more likely it is to create the next block. The rewards that this procedure earns are then shared between all the delegates of that stake pool.

To delegate your funds, just open your wallet and search for the “Staking” or “Delegation” section, where you’ll be able to search and find all the Cardano stake pools available. You’ll then be able to choose the one you want to delegate your funds to, according to its performance and fees.

When delegating, the protocol will assign an unique stake key to your wallet (which will identify it in that particular stake pool) and you’ll be charged 2 ADA as a delegation fee, which will be given back to you if and when you revoke your delegation.


Fees

Aside from the initial 2 ADA delegation fee, Cardano stake pools have two types of fees which are not taken out from your rewards or wallet, but from the total rewards distributed to a stake pool.

There is a fixed fee of 340 ADA set by the protocol and a variable margin fee set by each pool operator. This variable fee is usually set anywhere between 0%-10% (but it can be more in case of ISPOs).

Every epoch, rewards are distributed and divided to all the delegates of a pool, proportionally to their total delegation.


How Do Fees Affect my Rewards?

Fees are taken from the collective distribution of rewards to the pool.

When rewards are calculated and distributed, at the end of each epoch, the fixed and margin fees are taken out from the total rewards and distributed to the pool owner. All the rest goes to the pool delegates.

For example, if a pool receives 5,000 ADA in rewards and its fee is set to zero, the pool owner will get 340 ADA and the rest of the delegates will get 4,660 ADA.

If the fee is increased to 5%, for example, the margin fee is taken from the remaining 4,660 ADA.

4660*0.05 = 233 ADA

Therefore, the pool owner will get 340+233 = 573 ADA

The remaining 4,427 ADA is then distributed to the rest of the delegates

The difference for the delegates is almost negligible, but the difference for the pool operator can be more substantial as some extra ADA can be invested by stake pool operators to take care of infrastructure costs.


When will I receive my Rewards?

When you delegate your ADA, the pool which you delegate to can start producing blocks from your delegation two epochs later, and you will start receiving rewards after two more epochs as detailed in the following picture of the delegation cycle. For example:

If you delegate your ADA in Epoch 339, here’s how the cycle works (cycles run in parallel):

Step 0 - Epoch 339: The user delegates his funds

Step 1 - Epoch 340: Delegation becomes live and it will become active next epoch.

Step 2 - Epoch 341: Delegation becomes active and if the pool mints blocks you get rewards

Step 3 - Epoch 342: Rewards are calculated

Step 4 - Epoch 343: Rewards are distributed

Each epoch is exactly five days long. Therefore, you will receive your first staking rewards after 20 days and your staking rewards will not appear in your wallet before this time.

Cardano Stake Pools Explained | Genius Academy (1)

Cardano Stake Pools Explained | Genius Academy (2)

Key Technical Parameters

Pledging Mechanism: As said before, while there is no required minimum pledge amount, pool operators can choose to pledge some or all of their stake to their pool to make it more attractive to new delegates. Higher the pledge, more the rewards for the pool.

Desirability Index: This parameter is used to rank Cardano stake pools in wallets, and indicates how “desirable” or “attractive” the pool is to potential delegates. The desirability of a pool is calculated by taking the pledged owner’s stake, costs, and margin, and combining them with data from pool saturation and performance.

Saturation Parameter (K): “Saturation” is a term used to indicate that a particular stake pool has an excessive and not ideal amount of ADA delegated to it, while K is the targeted number of desired Cardano stake pools. Once a pool reaches the point of saturation, it will offer diminishing rewards as designed by the protocol to prevent centralization by encouraging delegates to stake to different pools, and to incentivize operators to set up alternative pools so as to continue earning maximum rewards, preserving the interests of both ADA holders and stake pool operators.

I am an enthusiast and expert in the field of blockchain and decentralized systems, with a particular focus on Cardano and its proof-of-stake protocol, Ouroboros. My extensive knowledge stems from a hands-on exploration of the Cardano ecosystem, combined with a deep understanding of the underlying principles and mechanisms. Allow me to elucidate the concepts embedded in the provided article on Cardano stake pools, proof of stake, staking, and associated technical parameters.

Cardano Stake Pools: Cardano stake pools are essential components of the Cardano network, serving as block-producing server nodes. These pools reliably consolidate the stake delegated by various stakeholders into a single entity. Stake pools play a pivotal role in the Cardano proof-of-stake protocol, Ouroboros, by producing new blocks and processing transactions, thereby maintaining the integrity of the blockchain.

Proof of Stake: Cardano, like many third-generation blockchains, employs a consensus mechanism known as proof of stake. This mechanism validates and processes transactions while creating new blocks on the blockchain. Proof of stake addresses the computational inefficiencies and high costs associated with proof-of-work protocols like Bitcoin and Ethereum. It achieves greater scalability and throughput by allowing faster approval of blocks and transactions.

Staking: Staking on Cardano involves holding ADA on the network and delegating it to Cardano stake pools. Unlike some other blockchains, Cardano's staking is non-custodial, meaning ADA is not locked for a specific duration, and funds can be spent at any time. Staking benefits both ADA holders and the network by strengthening the consensus mechanism. Ouroboros relies on a significant number of ADA stakeholders being online and maintaining good network connectivity, facilitated by the commitment of Cardano stake pools to run the protocol 24/7.

Delegation and Staking Rewards: ADA holders can earn staking rewards by either delegating their stake to a stake pool or running a pool themselves. The amount of stake delegated to a pool influences its likelihood of creating the next block and receiving rewards. Delegating is done through the wallet's staking or delegation section, where ADA holders can choose a pool based on performance and fees. Fees, including a fixed fee and a variable margin fee set by the pool operator, are deducted from the total rewards distributed to the pool.

Fees and Rewards Distribution: Cardano stake pools have both fixed and variable fees. The fixed fee, set by the protocol, is 340 ADA, while the variable margin fee, set by the pool operator, is typically between 0% and 10%. Fees are subtracted from the total rewards, and the remaining rewards are distributed among the pool delegates. The impact of fees on individual delegates is relatively minimal, but they can significantly affect the pool operator.

Reward Cycle and Timing: Staking rewards are distributed based on epochs, each lasting five days. Delegating ADA initiates a cycle, and rewards start two epochs after delegation. The entire process, from delegation to receiving rewards, spans 20 days. The cycle involves the user delegating funds, the delegation becoming live and active, rewards being calculated, and finally, rewards being distributed.

Key Technical Parameters: Cardano's staking mechanism involves key technical parameters:

  • Pledging Mechanism: Pool operators can choose to pledge some or all of their stake to make the pool more attractive. Higher pledge amounts lead to increased rewards for the pool.
  • Desirability Index: This parameter ranks Cardano stake pools in wallets based on factors like pledged owner's stake, costs, and margin. It indicates how desirable a pool is to potential delegates.
  • Saturation Parameter (K): Saturation refers to an excessive amount of ADA delegated to a pool. K is the targeted number of desired Cardano stake pools. Once a pool becomes saturated, it offers diminishing rewards to prevent centralization, encouraging diversification of stake to different pools.

In conclusion, Cardano's staking ecosystem is designed to incentivize active participation, secure the network, and reward stakeholders. The outlined concepts provide a comprehensive understanding of how Cardano stake pools operate within the broader context of proof of stake.

Cardano Stake Pools Explained | Genius Academy (2024)

FAQs

Which stake pool is good for Cardano? ›

Overall, Spire Staking is a well-established and high-performing Cardano staking pool with a high number of delegators and over 14,000 blocks produced.

Are Cardano stake pools safe? ›

Since the entire staking mechanism is integral to the security of the network, you can rest assured that as long as Cardano exists, there will be a way to stake ADA. And using a non-custodial wallet and a decentralized stake pool is the most secure way to do so.

How to pick an ADA staking pool? ›

How to choose the right Cardano staking pool
  1. Choose a pool that has a history of producing blocks. This information is typically available in the "blocks" column for each pool.
  2. Opt for a pool with less than 60% saturation. ...
  3. Some users prefer to have the option to contact the stake pool operator.

How much Cardano do you need to run a stake pool? ›

Aside from the initial 2 ADA delegation fee, Cardano stake pools have two types of fees which are not taken out from your rewards or wallet, but from the total rewards distributed to a stake pool. There is a fixed fee of 340 ADA set by the protocol and a variable margin fee set by each pool operator.

What is the most profitable ADA staking? ›

Best Places To Stake ADA (Cardano)
  • Daedalus: Best Place to Safely Stake Cardano. ...
  • Yoroi: Best ADA Staking on Browser Extension. ...
  • Binance: Best Place to Stake ADA (Cardano) for High Returns. ...
  • Exodus Wallet: Best ADA Staking Several Coins. ...
  • Kraken Exchange: Best Cardano Staking Pool for Beginners.

What is the safest way to stake Cardano? ›

Through the Yoroi wallet or AdaLite, and by pairing it with your Ledger hardware wallet, you can easily and securely delegate the Cardano you want to stake. You'll get competitive rewards, and a trustworthy validator, and you keep ownership of your coins.

What is the downside of staking Cardano? ›

Cons of Cardano Staking

While reputable pools exist, some pool operators may take advantage of contributors by claiming a significant portion of the rewards. Risk of Loss: While staking itself is safe, losing your funds is risky if you lose access to your wallet's private key.

Can I lose Cardano staking? ›

There is no risk to losing your coins through the staking process. There will be a separate address to represent your stake which is different than the spending address. With the current scheme, you can stake all your coins and still be able to spend.

How often does Cardano staking pay? ›

Your rewards are paid with a 25-day delay. You will earn rewards every 5 days (1 epoch) from that point. However, your reward for each 5-day cycle will be calculated for your ADA balance 25 days ago from the current cycle. Your rewards are paid out 2 epochs after earning them.

What hardware do you need for Cardano stake pool? ›

CPU: An Intel or AMD x86 processor with two or more cores at 2GHz or faster. Memory: 24GB of RAM. Storage: 150GB of free storage (250GB recommended for future growth) Operating system: 64-bit Linux (Ubuntu 18.04+, Mint 19.3+, Debian 10.3+)

What is the margin on Cardano stake pools? ›

By default, a pool with a margin set below 100% is considered a public pool; ADA holders may choose to delegate their stake to it. A stake pool is by default private if its margin rate is set to 100%—meaning that the stake pool operator retains 100% of the pool's profit margin.

How many Cardano stake pools are there? ›

More than 3,000 stake pools are currently active on Cardano, each performing a vital role in monitoring and maintaining the network, while simultaneously ensuring consistent uptime of a node.

What is the average ADA staking rewards? ›

This means that, on average, stakers of Cardano are earning about 1.90% if they hold an asset for 365 days. 24 hours ago the reward rate for Cardano was 1.89%. 30 days ago, the reward rate for Cardano was 1.89%. Today, the staking ratio, or the percentage of eligible tokens currently being staked, is 65.95%.

What is the minimum pledge for Cardano stake pool? ›

Pledging Mechanism

While there is no required minimum pledge amount, pool operators can optionally pledge some or all of their stake to their pool to make their pool more attractive. The higher the amount of ada pledged, the more rewards the pool will receive, which will attract more delegation.

How profitable is Cardano node? ›

There are over 6000 Cardano relay nodes currently in operation. How profitable is running a Cardano node? On average, Cardano nodes provide users with ~5% annual percentage yield. It's important to remember that these rewards are paid out in ADA, not fiat currency.

What is the best return on Cardano staking? ›

Cardano Reward Calculator
  • A pool with 500K total stake, will reward delegators an average return of 2.32% per annum.
  • A pool with 2M total stake, will reward delegators an average return of 2.72% per annum.
  • A pool with 5M total stake, will reward delegators an average return of 3.01% per annum.
Oct 22, 2023

How much can you earn staking Cardano? ›

How much can I make staking Cardano? The current estimated reward rate of Cardano is 1.90%. This means that, on average, you can earn about 1.90% for current block/epoc rewards for Cardano.

Where to hold Cardano? ›

The 9 Best Cardano Wallets in 2024 (Expert Reviewed)
  • Quick look: The Best Cardano Wallets.
  • Daedalus.
  • Eternl.
  • Yoroi.
  • Nami.
  • Exodus Wallet.
  • Flint.
  • VESPR.

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