Beginner’s Guide to Calculating ADA Delegation Rewards

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Beginner’s Guide to Calculating ADA Delegation Rewards

ADA, the native coin of the Cardano network, is one of the largest cryptocurrencies in the crypto market today. Cardano was founded back in 2017 by Charles Hopkinson, the Ethereum co-founder. Like Ethereum, Cardano aimed to provide DApp developing solutions using smart contracts.

The Concept of Delegation in ADA

Cardano focuses more on developing a more efficient, faster, and reliable network than Ethereum. The ADA coin plays a big part in making Cardano reliable and decentralized. The coin helps ensure that its holders are participants in the daily operation of the Cardano network.

Delegation in the staking ecosystem refers to assigning your rights of staking some crypto assets mainly because you lack the capacity to run your node. Take Cardano blockchain as an example. This network leverages Ouroboros, a blockchain algorithm using a specialized PoS mechanism called Delegated Proof of Stake (DPoS).

In DPoS, you don’t stake your tokens directly to validate blocks like in staking. Instead, the network participants select delegates who validate and produce blocks and earn rewards from the network transaction fees.

Using DPoS ADA, investors have two ways of earning rewards within the Cardano network. The first and foremost way is for the investors to use ADA to run their staking pools. 

But, the requirements for running staking pools in Cardano may be high. What if an ADA holder doesn’t fulfill the requirements of running a live node? That’s where the second earning system comes in, delegation. Once you have your ADA, you can delegate the coins to a stake pool and stand a chance of earning rewards. Essentially, the network pays the ADA rewards every five days (Epoch).

Epoch in Cardano Delegation

An Epoch in Cardano refers to a 5-day reward cycle. Since you are staking for the first time, your ADA remains usable until the ongoing epoch round completes. This is the complete Epoch cycle, which takes 25 days;

  • Epoch 1 (5 days): Delegation is in a live state 
  • Epoch 2 (5 days): Delegation reaches the active state, and the pool starts minting blocks garnering rewards in the process
  • Epoch 3 (5 days): Reward calculation 
  • Epoch 4 (5 days): Reward distribution 
  • Epoch 5 (5 days): The round starts from epoch 2

A staking pool with over 15 million ADA releases one block every epoch, i.e., after the five-day duration lapses. You can see the link here, which illustrates how the reward cycle of Cardano works with the epoch calender.

Steps for Delegating ADA

The entire process of delegating in the Cardano network is short and easy. First, to delegate stake, you must post two certificates on the chain, a delegation certificate, and a staking address registration. It involves the following steps;

  • Choose your Cardano wallet, and sign up
  • Transfer your ADA to your wallet
  • Choose the pool 
  • Pay the necessary ADA delegation fee
  • Wait for the epoch cycles to complete and enjoy your rewards

Now, Calculate the ADA Rewards

The rewards you receive for your delegated stakes vary based on your choice of pool, its saturation, and performance. A pool with high ADA saturation will earn more regular and high staking rewards; the vice versa is true. 

ADA rewards calculation and distribution happen within the Ouroboros network. The Cardano network instituted a formula that calculates rewards by combining such factors as transaction fees, monetary expansion, etc. Take a look at this formula;

Beginner’s Guide to Calculating ADA Delegation Rewards - 1Where: 

  • R – the total amount of existing rewards for the Epoch
  • z0 – relative pool saturation size, i.e., 0.5% for several desired pool k=200
  • a0 – pledge influence factor (range is between 0 and infinity)
  • σ – stake delegated to the pool (by the owners and others)
  • σ’ = min(σ, z0) – as σ, but capped at z0
  • s – stake pledged by the owners
  • s’ = min(s, z0) – as s, but capped at z0

This formula is all-inclusive and gives the best way of handling ADA rewards calculation and distribution. The amount of rewards distributed increases with σ until a point of pool out-saturation (once the σ hits the z0).

The Rewarding

After thoroughly calculating the rewards, the distribution process often begins with operators, pool members, and ADA holders who delegated their holdings getting rewarded. 

Before sharing, the node runners will deduct operational costs and the margin. They will afterward distribute the net rewards based on the size of your delegated stake.

While the formula is all-inclusive, it might be pretty complicated for persons not well versed with ADA. As such, you can use simple staking calculators available in the network to get estimates of your rewards. 

Final Word

This guide explores the idea of delegation in Cardano and how the rewards are calculated. Delegation in Cardano is when ADA holders who don’t meet the requirements of running their ADA staking pools assign their tokens to others who stake them on their behalf and generate rewards. 

The process of delegating in ADA is short, involving five straightforward steps and a 20 to 25-day period (epoch 1 to 5). Yes, there is a formula designated to help calculate the delegation rewards, but there are reward calculation tools that all simplify everything for investors. The reward distribution process is also quite simple and depends on the size and longevity of your stake.

Julius Mutunkei

Julius is a blockchain reporter skilled at synthesizing all crypto-related information to make articulate texts easy for anyone to grasp. With a beginner's level certificate in Financial Analysis, Julius can read, interpret and report crypto findings to help investors exercise the best judgment in their decision-making process. When he is not caught up in the crypto frenzy, Julius likes playing a game of FIFA with his online buddies.