How does ADA staking work and what are the rewards?

How does ADA staking work and what are the rewards?

Welcome back Upstreamers. This article is all about ADA staking and we’re going to cover the following topics:

• How does Cardano staking work?
• Rewards for staking pool operators.
• Rewards for delegators.
• How to choose a Cardano staking pool.

First of all, this isn’t an in-depth look at the technicalities of the staking mechanism, as you may know, I’m not that clever. Instead, you should see this as more of a beginners’ guide to staking.

If you don’t fancy reading the whole thing, Dave explains it all in this video????

How does Cardano staking work?

To understand staking rewards you need to have a basic understanding of how the Cardano network runs. So here goes… The Cardano network is made up of over 3000 staking pools which people, we call them delegators, can stake their ADA to. Each staking pool operator is responsible for running a node (a small computer) which is connected to the Cardano network. Every 20 seconds one of these nodes will get selected to confirm transactions on the Cardano blockchain.

All the transactions made and confirmed on the network during this 20 second period are packaged together into a block. Oh hey, blockchain, that makes sense now! Staking pools that have more ADA staked are usually “more trusted” by the network and have a higher chance of getting selected to verify transactions and produce blocks. 

Rewards for staking pool operators

Each transaction has a small processing fee attached to it which is awarded to the staking pool operator and the delegators. The staking pool operator deducts their fixed cost of (minimum 340 ADA) as well as their set margin percentage to help cover their running costs, charity donations and any profit they decide to keep for themselves.

Rewards for delegators

After the staking pool operator’s rewards are deducted the rest of the rewards, which is usually the vast majority, are passed directly onto the people who have delegated their ADA to the pool. Your rewards will be paid directly into the wallet that you’re staking from.

The bigger the proportion of the ADA in the pool that is yours, the bigger the share of the rewards you will get. Let’s say the pool has a total delegation of 1 million ADA and 100,000 of that is yours. In this scenario you would receive 10% of the pool’s total rewards. 

How to choose a staking pool

There are over 3000 staking pools to choose from and in order to earn rewards, you’ll need to choose a staking pool that is likely to produce blocks regularly. To help make this decision it helps to know how a pool is chosen to produce a block. So here goes… 

Think of how a raffle works. Then think of each ADA token in a staking pool as a raffle ticket. The more ADA there is in a staking pool, the more raffle tickets it will have.  Simply put, the more ADA in a pool, the more chance of producing a block, or winning the raffle.

So all this might lead you to thinking that delegating to a pool with more ADA in it would give you more rewards, as that pool is more likely to produce more blocks. But it’s not quite as simple as that. Remember that you get a proportion of the rewards relative to how much ADA you have in the pool? Well, that means if you delegate to a pool with a smaller amount of total delegated ADA, they may produce less blocks over time but you will get a higher proportion of the rewards. If you choose to delegate your ADA to a pool with more total ADA, they are likely to  produce more blocks but you will get a smaller proportion of rewards.

This all sounds very complicated but to make things easier, if you stake to a pool that is actively producing blocks then you should average 3 – 4.5% APY in ADA rewards across the year.

Choose a staking pool that aligns with your personal values

In our view, it’s a good idea to support the decentralised vision of Cardano and choose smaller pools who don’t produce many blocks. This helps to reduce the reliance on the big pools and steers more of the rewards away from the big players with lots of money, to the smaller network operators and wider Cardano community.

There are all sorts of pools set up to support many different charitable causes and promote certain lifestyles. For example, at Upstream we use a percentage of our rewards to make charity donations every month. So far we’ve been supporting Grow, which is a British charity set up to educate young children on living sustainably and to grow their own food. More on that here if you’re interested.

If you are feeling really generous, you could support pools that haven’t produced any blocks yet. If your ADA bag is large enough, you could even be the catalyst to that pool producing their first block. This would be an amazing gesture, and you’d receive most of the rewards. Bonus!

Maybe the best idea is to have a few accounts using an Eternl Wallet and spread your ADA across a few different pools? You can see how to do that here. 

If you’d like some more help deciding which pool to delegate to you can watch this video that explains what all the numbers next to each pool are and how they can help you to select a productive, decentralised staking pool.

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