Delegation and rewards
Before we begin
What is a delegation
The Cardano Proof of Stake Protocol is based on the so-called Stake Pools. These are special servers that approve transactions and forge blocks in return for rewards (Ada). Instead of calculating the hash function for races as in the case of Bitcoin, in Cardano we divide the time into Epoch (5 days), Epochs era has x slots. In each slot we draw one Ada, the owner of that particular Ada who participates in the drawing has the option to forge a block. Therefore, there is a dependency: The more Ada you have, the greater your chance of winning (as in lotto). When we do not have the financial resources to become a significant “player”, we can, together with others create Stake Pools which works similarly to a joint deposit. Together we can compete with the more wealthy participants of the protocol and the prizes are divided proportionally to the contribution (minus the commission from the owner of the Stakes Pool). The delegation doesn’t freeze our cryptocurrencies unlike a traditional deposit, we can withdraw or change the Pool at any time.
When and how rewards are awarded
The prizes are awarded when the pool to which Ada has been delegated is forged by a block. The diagram below shows when we will get the reward:
It follows from the above that in the case of the first delegation, we have to wait at least 15 days (3 full epochs) for receiving the reward for the delegation (if in Epoch 3, our stake pool makes a block).
When we change the delegation, the situation is as below:
We can conclude from the above that when changing the delegation, we do not lose the rewards that are waiting for us. All the actions described above take place simultaneously.
Saturation of the Stake Pools
A very important element of the protocol is the so-called Saturation. It solves the problem of the excessive expansion of the Pool which could lead to a decentralized network. As a consequence one Pool could forge for example 60% of all blocks which could tempt its delegates to modify the history. Therefore, the Ouroboros protocol introduces the concept of Saturation. If a Pool has a delegation of > 1% of all actively delegating funds across the network its block-forging rewards drop drastically, encouraging its delegates to change the pool to maximize profits. Remember about this when choosing Pools for delegation.
We can easily perform the Delegation operation from the Portfolio level. We will use Daedalus for this. After opening the application, we click on the network icon:
Now we can go to the Stake Pools tab. There we can search for available Stake Pools.
Each stake pool should have a ticker which means an abbreviation of 3 to 7 letters. In the case of Dragon pool, our ticker is DRAG. In addition, we can view basic information such as pledge (the amount of the pool owner’s own contribution), the number of forged blocks, the website and a short description. For the purposes of our example, we will try to delegate our Ada to the Stake pool: DRAG. To do this, click as below:
Then we have to go through a brief confirmation of the delegation.
First, we choose the account from which we want to delegate:
Then we confirm the choice of our Stake Pool once again:
In the last step, we confirm the choice.
Delegating is some kind of investment that should pay off. Therefore, it is important to choose wisely and at the right time to change the Pools to which we delegate. We will use the similarities to investing in the stock exchange. Basically, we have 3 approaches to investing:
1. Stable growth
When we don’t want to invest aggressively, we choose companies with an established reputation and the certainty that they will not collapse in the near future. We are sure of profits but we also know that they will not be large profits (we should be content with 3-5%).
Smaller and emerging companies can ensure high growth (up to 30-40%) but are burdened with high risk. We can gain a lot when the company becomes more recognizable or will have good financial results. On the other hand, it may collapse from day to day, causing our loss.
We use the 80/20 method. We invest 80% of our funds in stable companies, limiting the risk and the remaining 20% in less stable companies hoping for a large profit but also knowing that we can lose.
We can apply the above approach to selecting a Pool.
A pot with more Cardano delegates will bring a stable profit of 5%, will have many opportunities to create blocks but remember that the rewards we get are proportional to our contribution and in relation to other delegates. We also need to remember that large pots can saturate quite quickly and the rewards will decrease significantly.
When we choose a pool with a low Ada delegation, we have less chance of forging a block but the rewards will be greater. Additionally, the pool owner may be more likely to waive the commission to encourage posters.
We advise you to diversify your risk and delegate Ada to at least two pools (one stable, the other emerging) in the ratio of 80/20 for the benefit of the more established ones. Remember that the cryptocurrency exchange rate is less stable than that of fiat currencies so even keeping Ada in more stable Pools, we are not sure how much we will earn when converting into PLN.
As of today, multi-delegation is not available so we have to create more than one account in Daedalus and delegate each account separately.