What is the difference between participation and delegation?
Delegation and participation are two separate concepts. All ADA holders have the right to participate in the Cardano consensus by operating active nodes to support the network. However, not all ADA holders have the capacity or desire to actively participate in the consensus mechanism.
The usual ADA holder who does not operate a stake pool participates in the delegation of its participation. Therefore, you are not really “participating” in the real sense of the word, but rather delegating your right to participate.
Choosing a stake pool to maximize your rewards
The first point that a delegator must absolutely know is that delegating to a stake pool with a low variable commission does not necessarily mean that you will earn more rewards than delegating to a stake pool with a higher variable commission.
The difference in annual return when you delegate to a stake pool with 1% variable commission and another one with 5% variable commission is approximately 1/4% of the expected annual return. The difference in payment is too low considering the benefits of choosing a consolidated stake pool. If a stake pool does not produce blocks, there will be no reward. Here’s the tip: The most important factor to consider when choosing a stake pool is the operator’s ability to keep the nodes in the stake pool safe and operational at all times. The second relevant factor is the saturation of the pool.
Choosing a stake pool consists of deciding between a combination of the following concepts:
- Reliability: Stake pools need to maintain 24/7 uptime to validate new blocks if chosen as a slot leader. Pools with a higher uptime have the highest reliability.
- Pool costs: Naturally, although much lower than PoW systems, stake pool operators have some costs associated with running a pool. These costs are declared in ADA for each epoch.
- Profit margin: In addition to the costs associated with the stake pool, which cover the expenses of the pool operators and do not necessarily represent a profit, they can also charge a profit margin, which is an incentive that operators receive for maintaining and managing the stake pool.
- Pledge: The pledge represents the participation of the stake pool operator. While there is no minimum pledge, the pledge of the larger stake pool operators results in greater rewards for each delegate in that pool. Therefore, you should consider the amount of the pledge when choosing a pool.
If a stake pool changes its fees, these will take effect in the next epoch.
The Cardano consensus protocol, with Proof of Stake, is managed by the Ouroboros algorithm.
A profitable pool results not only from signing blocks per epoch (every 5 days) but also from other factors. In order to sign it needs staking, being an essential variable to be drawn as slot leader in the Ouroboros calculation (the factors taken into account are the vrf key, the % of active stake (sigma), the decentralization factor d and a parameter called nonce that is random).
But a pool can sign many blocks and have so much staking that it becomes saturated (k parameter), so the rewards you will pay will be lower for your delegates. In addition, the more delegates in the pool, the more participants to distribute among them in proportion to their ADA delegation, i.e. if there are few delegates, the reward is higher for each one (always in proportion to their delegation in that pool).
The fee charged by the pool is also an important factor that affects the performance of the rewards, since a high fee means paying less to the delegates.
It can be concluded that the desirable balance will be reflected in the SOR, where the level of saturation is low and with a low fee (pool commission), since although a small pool (with little delegated staking) may sign fewer blocks, it could be more profitable, equaling in the long term a pool with higher staking, which signs often, but rewards relatively less per epoch.
Remember, the number of blocks assigned to the stake pool in each epoch is determined by a lottery process.
This is because each stake pool can only produce the number of blocks assigned to it, and this changes with each epoch as it is the result of a lottery process. And this process occurs for every stake pool, no matter how big or small its total stake is.
In each epoch, transaction fees and 0.2% of a reward budget are placed in a virtual pool. 20% goes to the Cardano treasury, the rest is used to reward funds according to their delegations. A pool operator gets 340 ADA + margin. The rest is distributed to the delegates according to their stake
The selection of the slot leaders
In PoS systems, as in Cardano, the slot leader selection works more like a lottery. We can imagine each ADA coin as a “ticket”, and anyone who participates in the staking can “win” the opportunity to become a slot leader, reaping the rewards in ADA for the block created. Stake pools that have a greater amount of ADA delegated to them have a statistically higher probability of being chosen as slot leaders, and producing the next block, and therefore have a greater chance of reaping greater rewards.
But there are parameters to avoid the concentration of all delegations in a few stake pools, which prevents a small number of pools from exerting a disproportionate influence on the protocol.
Stake pools that become too large may encounter saturation, which is defined as the “K” value, or saturation parameter. Saturation pools offer decreasing rewards to delegates once a pool has a sufficiently high amount of ADA.
Saturation pools are designed to encourage delegates to explore different stakeholder pools, rather than simply choosing the most popular ones. Therefore, you should make sure that the pool you are delegating to is not near its saturation point.
Is it better to lower the pool’s commissions?
The difference in annual return when you delegate to a stake pool with 1% variable commission and another one with 5% variable commission is approximately 1/4% of the expected annual return. The difference in payment is too low considering the benefits of choosing a consolidated stake pool. If a stake pool does not produce blocks, there will be no reward. Here’s the tip: The most important factor to consider when choosing a stake pool is the operator’s ability to keep the nodes in the stake pool safe and operational at all times. The second relevant factor is the saturation of the pool.
Delegate in a small or large pool?
The more active stake a pool has, the more likely it is to sign.
A small pool will take more time to sign a block, but when it signs it gives a greater reward since it has to divide between less stake to balance out the times it hasn’t signed.
Will my rewards be automatically delegated to the stake pool and will I earn additional rewards?
Yes, it’s all automatic, and as a delegator you don’t need to do anything. The reward paid in epoch N will automatically be included in the snapshot that occurs at the end of the current epoch, epoch N. That reward will then be used in block production in epoch M+2 and any rewards acquired from block production in epoch N+2 will be paid at the beginning of epoch N+4.
Redelegate
The change of pool to delegate is registered after the next epoch in which the order is executed.
Register stake address on the blockchain
Stake address needs to be registered on the blockchain when you delegate for first time your wallet. Each new wallet needs to be registered its stake address for delegation, and requires:
- Create a registration certificate.
- Submit the certificate to the blockchain with a transaction.
Registering the stake address, not only pay transaction fees, but also includes a 2 Adas deposit , which you get back when deregister the key, it means to undelegate staking.
What is ROA?
The ROA of each stake pool is basically the direct result of the blocks produced by that stake pool divided by the total amount of ADA in that stake pool for each epoch.
The equation for each epoch would be:
ROA% = (blocks produced by the pool x rewards in ADA for blocks produced x 365 x 100) / (5 x total stake in the pool).
It means that, if a stake pool produces more blocks than statistically expected, then it will have a higher ROA%, and vice versa.
Why is the ROA% of each stake pool not the same in each epoch, and why do some stake pools have better performance than others in the ROA % ?
Remember, the number of blocks assigned to the stake pool in each epoch is determined by a lottery process.
This is because each stake pool can only produce the number of blocks assigned to it, and this changes in each epoch as it is the result of a lottery process. And this process occurs for every stake pool, no matter how big or small its total stake is.
How do I know what rewards I will receive?
At https://pooltool.io under the “Track your rewards” button type any “receive” address in the wallet you are delegating. It will tell you the historical detail of the rewards there.
Then to find out the estimate of upcoming rewards to be paid out, copy the address (it is Bech32), and in https://adapools.org select the pool of interest, and go to the “Delegates” tab, check your address, and it will give you an estimate (quite accurate) of how much you will receive in the next period. Clicking on the address will give you more historical detail.
Remember that the rewards you receive are calculated on the delegation you made 2 epochs ago and the collection will be settled at the beginning of the next epoch of the current one.