Those 4 letters ACID have so many different meanings and I’m pretty sure we all agree on that colorful image that comes in our mind… That said, let me remind you a couple of other significances that are part of the technology vocabulary and history:
You hold ADA and want to delegate your stash to a Stake Pool in order to receive ADA back as rewards. Let’s dig into the full mechanism of staking ADA and generating passive incomes!
1. VOCABULARY Let’s start by defining the vocabulary related to the Proof of Stake protocol , pools, rewards and fees:
Stake Pool: A stake pool is made of 1 producer server (validating the blocks) and 1 or more relay servers (propagating the blocks information within the Cardano network). Relay servers from all the stake pools are interconnected, usually 1 relay connects to 20 other relays, each of those connected to 20 other relays and so on. The producer server is connected to its own relay(s) only. All those servers run the Cardano software and all together is the Cardano Network. Running a stake pool requires network and programming knowledge, it is fairly easy to build and maintain and doesn’t require powerful servers. Of course, all servers must be up 24/7, as close as 100% uptime and running the latest version of the Cardano node software. ACID stake pool has 1 producer server and 2 relay nodes, you can follow the nodes status on the main page of our website: acidpools.com
Stake Pool Operator: This is the person maintaining the servers. As a delegator you should be able to easily contact him/them if you have any questions related to the Cardano ecosystem. I’m Stef and available on Telegram : https://t.me/ACIDpools
Epoch: The Cardano Network implies that all the servers, relay nodes and producer servers, must be synchronized to the same clock. An epoch is a unit of this clock and corresponds precisely to 5 days. The subdivision of an epoch are slots.
Slots: There are 432.000 slots per epoch, 1 slot = 1 second.
Blocks: In average, 1 block is created every 20 slots (1 block every 20 seconds). A block is a set of ADA transactions but can also be empty if no transactions occurred within those 20 seconds. Each block is confirmed by one of the stake pools and is responsible for the rewards distributed to the pool. If the block is missed because the server was down for instance, there won’t be reward distributed to that pool for this specific block. The protocol will automatically assign that missed block (orphan block) to another pool.
Pool performance: The performance of a pool is based on its ability to validate all the blocks it was assigned to by the protocol. If a block is missed (server down or faulty) then the performance is reduced and so are the rewards. A pool can also over-perform and validate more blocks than it was meant to: This can happen when another pool has missed a block and that block was then validated by another pool.
Rewards: Rewards for epoch N are calculated at epoch N+1, based on the performance of the pool and are automatically distributed at epoch N+2.
Fixed fee: Fee that goes to the pool, usually 340 ADA are taken out from each epoch rewards. This fee is also called pool maintenance fee and is set by the pool operator.
Variable fee: Fee that goes to the pool, usually between 0% and 5% of the epoch reward (after subtracting fixed fee of 340) . It is set by the pool operator.
Pledge: Pledge is the amount of ADA the pool operator has locked within his pool. It is seen as a proof of commitment to run the pool as efficient as possible. Pledge is part of the delegation and is also entitled to rewards, like any delegators.
Delegators: Corresponds to each wallet delegating to a pool. Each delegator receives rewards according to the amount he delegated.
Active Stake: Number of ADA currently delegated to the pool. This number is a snapshot taken 2 epochs ago. This number is a variable for the function used to assign blocks to pools.
Live Stake: Number of ADA currently delegated to a pool. It will become the Active Stake in 2 epochs.
From Delegation to Rewards: Bob has 10.000 ADA in his Daedalus wallet and delegate them to our pool ACID at epoch 241: epoch 241: Bob delegates 10k to ACID two days after the start of epoch 241.
epoch 242: Bob is now registered as a delegator to ACID on the blockchain but Bob wont receive rewards yet.
epoch 243: ACID pool has performing well and minted 100% of the blocks assigned to it.
epoch 244: Rewards generated by ACID at epoch 243 are calculated.
epoch 245: Rewards from epoch 243 are now distributed.
From delegation, a minimum of 15 days and up to 20 days are required to receive the first rewards. Then, rewards will be received every epoch (every 5 days).
2. POOL STRATEGIES Delegating your ADA to a pool is of course a way to generate passive income. You can just delegate to a pool and let it run in the background. But if you are interested in the technology, its ability to build amazing tools for our future and support different type of pools , the act of delegating your ADA can have a strong impact on the Cardano network development.
Some pools have a clear strategy to amass the biggest amount of rewards ADA. The same pool operator can run for instance 20 pools and generates a lot of blocks and rewards steadily. On the other hands other pools are single pools ( operator runs 1 pool only) and will choose to redistribute a part of their rewards to charities for instance, meanwhile others will choose to re-invest the rewards in some specific projects.
Our pool ACID is looking into sharing a part of its rewards for a good cause. But for now we will re-invest all the pool rewards into the pool pledge to maximize the chances of getting more blocks assigned and therefore more rewards for us and for you!
So far ACID hasn’t minted a block and have therefore not generated rewards yet. The most complicated for a pool is the 1st block and to do so we accept your precious help to delegate even a tiny amount to our pool so that we get better chances to have blocks assigned to us!
3. DELEGATOR STRATEGIES Here are some facts and additional information that will help you understand better the reward mechanism and choose the best delegation strategy that fits you:
1. You can split your ADA stash into several wallets in order to delegate to several Stake Pools.
2. The average interest (ROI) is between 5-6% per year, whatever the size of the pool.
3. High performing pools will give you rewards every 5 days (5 days = 1 epoch).
4. Small pools might not give rewards every epoch, but when it does the reward amount is usually a lot higher, 12% for instance.
5. Delegating your ADA to small pool also pushes the decentralization of the Cardano network.
6. The pools have no control on your ADA.
7. Rewards are automatically distributed to your wallet by the protocol. The Pool owner doesn’t control/distribute the rewards, the pool can’t hold or steal your rewards.
8. The rewards, automatically sent to your wallet, adds up to your original ADA amount, leading to potentially more rewards in the next epochs, and so on : Compound Interest.
9. Rewards are distributed thanks to a mathematical formula, It depends on the performance of the pool during the epoch and other parameters.
10. The number of blocks (and therefore rewards) a pool will mint in the epoch N is calculated in advance (epoch N-1) from a probabilistic function coded in the protocol.
11. If a pool is saturated (too many ADA delegated to it) rewards won’t be optimum. The current saturation point at the date of this post is around 64 Million ADA.
12. You can change pools whenever you want, the change will be taken into account at the next epoch.
13. When you delegate to a pool, it creates a transaction that is recorded into the blockchain. That transaction costs around 2 ADAs.
Here are some delegation strategy examples you might want to follow. Let’s say you have 20.000 ADA, leading to 1100 ADA rewards per year / 15 ADA per epoch. If ADA is 0.30$, that’s 330$ per year, 4.5$ per epoch.
Strategy 1 – ALL IN to 1 Stake pool in the top 10 PROs: You will get rewards every 5 days, 5-6% ROI on average. Big pools tend to be run by experts and will likely never miss a block. CONs: The pool can get saturated quickly leading to less rewards. You definitely don’t promote decentralization.
Strategy 2 – ALL IN to 1 small pool PROs You are clearly helping a small actor You participate in the decentralization of Cardano network CONs You might see many epochs without rewards
Strategy 3 – Split 50% to a big pool / 50% to a small pool PROs Get some rewards every 5 days Help a small pool (like us 🙂 ) CONs The small pool might not bring you rewards every epoch
I hope you have now a better understanding of the rewards mechanism, pools and delegators strategies. Don’t hesitate to ping me on Telegram if you have any questions! https://t.me/ACIDpools