1) Why should I delegate my ADA?
ADA’s consensus algorithm falls under the category of Proof of Stake (PoS).
While not all PoS mechanisms are created equal, all of them rely on coin hodlers to secure the blockchain by staking their coins. The more coins staked, the more capital is required to attack the network.
Therefore, coins hodlers participate in the security of the network and are rewarded for doing so, by coin rewards.
In the case of the Cardano blockchain, stake pools are the nodes that produce and validate blocks
and coin hodlers delegate their coins to a stake pool (or run their own stake pool, if they have the technical capacity).
2) How much is the expected reward from my delegated ADA?
While, the reward varies over time, it currently (October 2022) lies at approximately 4% APR (a.k.a per year).
3) Do I lose the ownership of the ADA I delegate?
No.
Unlike other PoS blockchains (where you have to send your coins to smart contracts in order to stake them), Cardano’s code takes a snapshot of all wallets in the end of each epoch (1 epoch = 5 days), along with the user’s intensionto delegate his/her ADA to a particular stake pool.
So, when you delegate ADA, you just publish your willingness to delegate the ADA in your wallet to the stake pool of your wish.
4) Is there any risk in ADA stake delegation?
There is absolutely no risk in delegating your ADA:
- The delegated ADA remain on your possession (as explained above) and therefore you have no counter-party risk.
- Unlike other PoS blockchains, there is no slashing of your delegated ADA, if the stake pool you delegate to misbehaves.
There is literally no reason to not delegate your ADA. If you don’t, you just lose your potential stake reward, which is proportionally distributed to those who do.
5) Why to not delegate on a centralised exchange or lending service?
- “Not your keys not your crypto“.
Your ADA belong to the exchange and what you own instead, is the exchange’s promise that, if you ever ask, it will allow you to withdraw your ADA. This promise may or may not be fulfilled (e.g. if the exchange is hacked or bankrupted). - There is no guarantee that the exchange possesses the total ADA, equal to the sum of all promises it has sold to its user’s, like you. Due to lack of transparency, they could well be running a fractional reserve scheme (like traditional banks), thereby artificially inflating the circulating supply of ADA (or of any coin in question). Obviously, this harms ADA’s price potential.
- While the exchange/lending service, calls “staking” the service it offers, often your ADA are not staked, but rather lent to other users. The main reason for someone to borrow your ADA is to short it (i.e. bet on its price decline).
Therefore, by “staking” on the centralised exchange, you contribute to ADA’s price suppression.
Exchanges, often offer a “staking” reward higher than the normal Cardano’s reward rate to lure you. Don’t fall for it, you may earn some ADA more, but your total ADA will worth less in USD. - Assuming the exchange stakes your ADA on its own stake pools indeed, you help to the centralisation of the delegated ADA to a small number of powerful stake pool operators.
To this date, Binance is the biggest ADA stake pool operator, with 78 distinct stake pools and over 2.6 billion ADA delegated (out of 25 billion delegated in total).
An attack on a PoS blockchain requires the collaboration of a number (the so called “Nakamoto coefficient“) of node operators who command more than 50% of the stake.
It is your long term interest, to maximise the “Nakamoto coefficient”, by delegating to smaller pools, e.g. pools with small stake, or stake pool operators running a small amount of pools (e.g. 1 or 2).
6) Are my delegated ADA locked?
No.
Unlike other PoS blockchains, there is no lock-up period for your delegated ADA.
You can move them anytime you wish (e.g. to an exchange to sell them).
7) When and how do I withdraw my staking rewards?
You receive rewards 2 epochs after the epoch within which you started staking. An epoch lasts for 5 days.
You can withdraw your staking rewards anytime after they reach your wallet. This requires a transaction that costs the standard 0.17 ADA transaction fee.
8) Are rewards auto compounding?
Yes.
Even if you do not withdraw your staking rewards from the previous epochs, they are counted (along with all other ADA in your wallet) during the snapshot taken at the end of the current epoch (see (3) for more).
9) What is the 2 ADA fee that I had to pay the first time I delegated from my wallet?
The very first time you start staking on a stake pool, you deposit 2 ADA, the so called “staking deposit“. You can withdraw these 2 ADA if you ever decide to not stake ever again. If you just want to delegate to a different pool, the “staking deposit” should remain in tact.
10) How do I un-delegate?
There is no reason to un-delegate, except for withdrawing the 2 ADA “staking deposit” (see (9)).
When you transfer your ADA to a different address, the moved ADA are effectively “un-staked”, or “un-delegated” if you wish.
The remaining ADA in your wallet remain staked.
11) I already had staked the ADA in my wallet. Now I transferred more ADA to the same wallet. Are the new ADA staked too?
Yes.
All the existing ADA in your wallet are counted during the snapshot taken at the end of the current epoch (see (3) for more).
12) What are the AAATO fees?
- 340 ADA fixed fee: On each epoch that AAATO produces one or more blocks, it is rewarded by the Cardano code. The amount is not fixed, but today it is about 700 ADA per produced block.
AAATO retains a fixed 340 ADA fee per epoch where one or more blocks are produced. The number of produced blocks in the epoch is irrelevant, e.g. AAATO retains 340 ADA in case of 1 produced block in the epoch, or in case of 10 produced blocks in the epoch. 340 ADA is the minimum fixed fee allowed by the Cardano code. - 1% variable fee: In an epoch where AAATO produces block(s), the Cardano code rewards it with an amount of ADA. After the fixed fee of 340 ADA is taken out, the remaining ADA (let’s call it “X”) is distributed to the wallets delegating ADA to AAATO, proportionally to their delegation. For instance, if AAATO has attracted a total of 10 million ADA delegation and a single wallet has delegated 1 million ADA, this wallet would deserve 10% of X. By setting the AAATO’s variable fee to 1%, Cardano’s code will automatically distribute to the wallet the amount of 99% of 10% of X, or simpler 0.99 * 0.1 * X = 0.099 * X, or 9.9% of X (rather than 10% of X). To cut a long story short, a delegator would expect about 4% reward annually, if there was no variable fee. With 1% variable fee, he/she will receive 3.96% reward annually. For a delegator with 100,000 ADA, the annual reward would be approximately 4,000 ADA with no variable fee. It becomes 3,960 ADA after the 1% variable fee is applied.
13) Are the rewards uniformly distributed across epochs?
No.
Depending on the total ADA delegated to it, AAATO will deserve to produce X blocks per epoch.
This is the average value of a statistical distribution calculated by Cardano’s code, rather than a fixed amount of blocks. AAATO will produce more blocks than it deserves during an epoch and less than it deserves during another epoch. In the long run, the average will converge to the amount it deserves, based on the delegation it has attracted.
