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Understanding How ADA Delegation Rewards are Calculated

Founded by Charles Hoskinson, Cardano is a blockchain platform seeking a decentralized application (DApp) development platform. The Cardano platform runs on the Ouroboros consensus protocol. In addition, it leverages the Delegated Proof-of-Stake (DPoS) consensus mechanism meaning that users can delegate their ADA to other pools to be staked and earn rewards. 

The two primary ways ADA coin holders can invest and earn rewards on the Cardano blockchain include; running their own stake and delegating their ADA to a staking pool. The Ouroboros protocol determines the amount of monetary reward based on the amount of stake delegated to a given stake pool. The more significant the stake delegated to a given stake pool, the more likely it is to form the next block and consequently the more the rewards. The rewards are shared among everyone who delegates their stake to that stake pool. Here’s an insight into how the Ouroboros protocol calculates the ADA delegation rewards. 

Delegation Explained

Contrary to the common perception, delegation and staking are two different concepts. Staking means holding your coins in a pool while delegating them involves putting them in a network. In addition, delegation leverages Proof of Stake (DPoS) – An evolution of PoS whereby network users vote and elect delegates, also referred to as block producers or witnesses, to validate the next block.   

On the Cardano platform, ADA holders can run the network by either staking ADA to run live nodes. However, not all ADA holders have the capacity to run a stake pool and participate in the network’s consensus mechanism. In such situations, ADA holders allocate some or all of their ADA holdings to one or more stake pools, who then stake the coins on their behalf. 

In simple terms, delegation is delegating your right to stake ADA to one or more stake pools because you don’t have the capacity to stake. Therefore, delegating ADA comes with rewards, calculated based on several factors, such as the amount of delegated ADA tokens, the staking fees charged by your preferred stake pool, and network parameters. The rewards are obtained from two major sources: transaction fees and monetary reserve.

How Does Delegation Work on Cardano

Delegation on Cardano is pretty simple. You can easily delegate your ADA to a stake pool once you have it. Delegating your ADA to a staking pool gets you a reward of 5% ADA per annum. The reward is paid out every 5 days. Usually, a pool with over 15 million ADA produces a block after every Epoch, i.e., 5 days after a stake pool becomes active and produces blocks in the active state. 

When you first delegate your ADA holdings to a pool, your ADA remains in an active state until the Epoch ends. After the Epoch ends, a snapshot is taken then your stake turns active. It’s only in the active state that the stake pool produces a block, earning you blocks. The rewards from the stake pool are obtained from the transaction feed and minted tokens in the blocks. Below is the order of every Epoch. 

Epoch 1: Delegation is in a live state 

Epoch 2: Delegation turns active, and the pool starts minting blocks earning rewards

Epoch 3: Rewards are calculated 

Epoch 4: Rewards are distributed 

Epoch 5: The cycle starts again from Epoch 2

Considering that each Epoch takes approximately 5 days, the entire process takes around 20-25 days based on the day you started your delegation. So, for example, if you started delegating your ADA to a staking pool right after an Epoch change over and snapshot, it would take some time for the Epoch to go into a live state. 

Another thing to note about Delegation on Cardano is that the network doesn’t impose a lock-in period meaning that you can freely move your ADA in and out of your wallet. Therefore, you are eligible for rewards as long as your ADA is in a pool before the epoch snapshot period. However, locking in your ADA for some period up to 3 months gives you extra rewards for that particular lock-in period. 

How to Delegate Cardano ADA?

Delegating ADA is pretty straightforward and secure. Below are the steps in delegating ADA:

  1. Download and install your preferred Cardano wallet. Ensure the wallet supports delegation, i.e., Daedalus Wallet & Yoroi Wallet 
  2. Transfer ADA to the wallet 
  3. Select the pool you want to delegate to using the delegation tab on the wallet’s app 
  4. Pay the required delegation fee and then wait for 20-25 days to receive the rewards, i.e., Epoch.

How Much of a Reward Do You Get Delegating ADA to a Stake Pool?

The amount of rewards you receive from delegating ADA to a staking pool varies from pool to pool based on the pool’s saturation and performance. The lower the pool saturation, the lower the rewards and less regular it will be. On the other hand, the higher the saturation level, the higher the rate of minting blocks and the more consistent the rewards are.

How are the Rewards Calculated?

The Ouroboros protocol is responsible for calculating the rewards, which are then later automatically distributed amongst all ADA holders who have delegated their coins to a stake pool. To calculate the rewards, the protocol leverages a formula that considers the available rewards amount, monetary expansion, transaction fees, and more. As a result, the rewards are proportional to the pool stake up to the point of saturation. The formula is as below:

Where: 

  • R – the total amount of existing rewards for this Epoch
  • a0 – pledge influence factor (can be between 0 and infinity)
  • z0 – relative pool saturation size, i.e., 0.5% for several desired pool k=200
  • σ – stake delegated to the pool (including stake pledged by the owners and stake delegated by others)
  • σ’ = min(σ, z0) – as σ, but capped at z0
  • s – stake pledged by the owners
  • s’ = min(s, z0) – as s, but capped at z0

In the formulae, the rewards increase with σ but stop increasing once the pool turns out saturated, i.e., σ reaches z0. After the rewards have been calculated and adjusted based on the performance, they are distributed to the pool member, operators, and ADA holders who delegated part or all of their holding to the pool. 

There are several steps involved in the distribution of the rewards. First, the cost of running a pool is subtracted from the total rewards and offered to the pool operator. Next, the margin is also deducted and offered to the pool operator. Finally, the remaining reward is split based on the proportion of delegated stake to all people who delegated the stake to the pool, including the pool owners. 

To find how many rewards you’ll get after every Epoch, i.e., five days, you don’t need to always use the formulae as staking calculators are used to estimate your rewards.

Closing Words

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Running live nodes and staking are two vital concepts to support the Cardano network. However, not all ADA holders have the capacity to stake ADA or run live nodes. As such, Cardano supports delegation where ADA holders can delegate all or some of their coins to one or more stake pools, who stake on their behalf and earn rewards in ADA. The rewards are calculated by the Ouroboros protocol considering several factors such as network parameters, chosen stake pool, amount of delegated ADA, and more. Once the rewards are determined, they are automatically distributed to pool members, operators, and ADA holders who delegated part or all of their holding to the pool. You can use an online calculator by Cardano to determine how much reward you can earn by delegating your coins to a stake pool. 

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