As Cardano is a proof of stake (PoS) system, owning ada not only allows you tobuy goods or services, but also confers upon you the right and obligation toparticipate in the protocol and create blocks. Stake delegation is a mechanisminherent in the Ouroboros protocol thatallows the protocol to scale even in a setting where the set of stakeholdersmight be highly fragmented.
Anyone who owns ada can participate in stake delegation while retaining theirspending power. Note that you can spend your ada normally at any time,regardless of how you delegated it. This mechanism will enable stakeholders toparticipate in the slot leader election process in each epoch.
Stake delegation gives rise to stake pools that act similarly to mining poolsin the Bitcoin protocol. Stake pool operators (SPOs) must be online togenerate blocks if they are selected as slot leaders.
There are three options ada holders can consider for delegating their stake:
- Run their own stake pool
- Agree with a third party to run a private stake pool for them
- Delegate to other stake pools.
note
If you are not familiar with Cardano CLI or stake pool operations, seedelegation tips here.
Stake delegation requirements
Delegating stake requires posting two certificates to the chain: a stakingaddress registration, and a delegation certificate. Posting certificatesrequires funds, so a user setting up their first wallet will need abootstrapping mechanism. This mechanism relies on the possibility of baseaddresses using astaking keybefore posting the registration certificate for that key. Note that the stakeaddress can be based either on a single key or on a script such asmulti-sig.
Delegation scheme
With the concept of delegation, any stakeholder can allow a stake pool togenerate blocks for the Cardano network. Then the protocol will distribute therewards to all participants, including the fees for the SPO. A stakeholderdelegates to a particular pool ID, which is the hash of the operator'sverification key.
To limit the delegate’s block generation power to a certain range of epochs andslots, the stakeholder can limit the proxy signing key’s valid message space tostrings ending with a slot number in a specific range of values. This simplescheme is secure due to the verifiability and prevention of misuse properties ofproxy signature schemes. This ensures that any stakeholder can verify that aproxy signing key was actually issued by a specific stakeholder to a specificdelegate, and that the delegate can only use these keys to sign messages insidethe key’s valid message space, respectively.
The funds belonging to one staking key of a user’s wallet require posting asingle transaction, containing a delegation certificate. This will only incurthe usual transaction fees. In particular, a stakeholder needs to pay a depositfor registering a stake address and not for the stake delegation itself. Once astake address is registered, the stakeholder will only pay fees to set thedelegation choice.
Note that the stakeholder's stake will count for the pool's stake during thereward calculation.
Stake delegation scenario
Imagine a user who is about to receive their first ada, through redemption, froma trade on an exchange, or some other source. They will set up a new wallet, andcreate an address to receive those funds. This address will be a base address,using a staking key that is generated by the wallet, but not yet registered onthe chain.
After receiving the initial funds, the user can then participate in staking, byposting a staking key registration certificate, and a delegation certificate fortheir staking key. Once the key is registered, newly created addresses can bepointer addresses to the staking key registration certificate.
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