I don’t want to spend a lot of time on this post, but I think it is important to have a conversation about staking rewards and what they actually mean. I’ve been seeing a lot of posts on Reddit and Telegram with people speculating about the percent return from staking. There seems to be a misconceived notion that a higher return somehow means that people are getting richer… This is false.
People seem to think that if staking rewards are set to 10% annum, that this will result in the value of their ADA holdings going up 10% relative to the USD. This couldn’t be more wrong. The newly minted ADA being introduced to the circulating supply after each epoch is a result of inflation. Inflation does not mean that the total value of ADA is increasing. It means that the total value is simply being split into more/smaller pieces. It is essentially a tax on every ADA holder that is proportional to the amount of stake they have in the network.
Staking rewards will basically be split into two pieces…
Pool Operator – The pool operator piece will likely be a fairly static cost and is an incentive for pools to be available 24/7 and to be honest actors. This will be calculated by adding together the cost of the infrastructure to run the pool and the desired amount of money that the pool owner wants to charge for their time and effort to maintain the service.
Stake Delegator – The stake delegator piece is the amount of the block reward that remains after the pool operator has been paid. This portion is designed to incentivize ADA holders to stake their holdings honestly or to delegate their holdings to an honest pool operator.
With this, let’s take the example of 10% staking rewards and look at a quick example.
Let’s assume that I own 600M ADA of the currently 30B that are in circulation, and I want to stake them to a pool that takes 1% of the 10% stake rewards.
Before staking rewards begin, this would mean that I have 600M ADA which is 2% of the total circulating supply.
After one year, my block rewards would look something like this:
Total block rewards: 60M ADA
Block rewards paid to stake holder: 54M ADA
Block rewards paid to pool operator: 6M ADA
End of year total ADA in circulation assuming 10% inflation: 33B ADA
End of year total ADA that I own: 654M ADA
At the end of the year, I now only own 1.98% of the total circulating supply. So while my total number of coins has increased, I actually own a smaller percentage of the total ADA.
(Please note that I am only looking at relative amount of ownership in the total network. I do understand that the ADA coin will likely see capital appreciation after decentralization, because it is seen as adding value to the system. I am simply making the argument that a higher inflation rate does not somehow mean that you are “making more money”. A higher inflation rate would simply mean that those who choose not to stake would essentially be punished more harshly. That is all.)