The Cardano staking rewards have been decreasing steadily since 2020. It began at about 5.5% in August 2020 and is currently at about 4.62%. (As of when I write this article). In fact, the ratio of market share betweencentralizedanddecentralizedexchangeshas decreased since.
While everyone was wondering why, I went down the internet rabbit hole to understand how the staking system on the Cardano network works and found an answer to this question there.
In this article, I’ll be explaining how Cardano’s staking protocol works and why the rewards are decreasing in a simple and easy-to-understand manner.
Cardano Staking Protocol: How It Works?
Cardano, like most other cryptocurrencies, has a limited supply. This applies to its reward pool as well. The reward pool is limited and has a hard cap on it. It does receive a part of the transaction fees, but that amount is negligible.
So now that it is established that the rewards pool is finite and limited, let’s move on to how the rewards are distributed.
All the stakers who’ve deposited funds in the network will get rewards from this pool based on how many blocks they’ve validated and how much ADA they’ve staked into the network.
Obviously, as more and more rewards are distributed, the volume of the pool will decrease. Furthermore, as newer Cardano stakers come into the network, the rewards will need to be distributed amongst them as well, so the volume will further decrease.
So with a finite volume of rewards system, Cardano needs to ensure that the rewards pool lasts for a long time. As a result, it adopts the mechanism to decrease the rewards over some time.
Cardano carries out this process continuously where the rewards are declining in percentages continuously as time passes. Here’s how:
Cardano rewards are subtracted every epoch (or every 5 days). So now, as the reserve reduces and the number of participants increase, the staking rewards decrease in an almost exponential manner.
In 2021, about 3.3 billion ADA were paid out as rewards. In 2022, this reward will decrease to approximately 2.1 billion, and by about 2042, the rewards will decrease to about 26 million.
As a result of this, two main things will happen or are currently happening:
- People do not immediately notice it, but it would seem like a big difference when they do.
- This would create an impression that the pool is not working correctly, and as a result, some would even stop staking.
However, it is essential to note that Cardano claims to have thought this through, and there’s another mechanism by which it counters this process.
The Cardano (ADA) Value
Staking rewards on the Cardano network are given in ADA cryptocurrency. Over a while, the Cardano network is taking measures such that the demand for the ADA increases and thus its value increases.
One such measure is the development of a decentralized exchange called Cardax. The exchange will be developed such that ADA’s usage is more. Thus with measures such as these, ADA’s value will increase.
Thus, even if the rewards percentage decreases, the increase in the ADA value will compensate for the decline in percentage, and stakeholders will receive the same value of rewards in the end, if not more.
Thus through these protocols, Cardano maintains balance in its rewards system.
I'm a blockchain and cryptocurrency enthusiast with a deep understanding of the Cardano ecosystem. My expertise is grounded in hands-on experience and a comprehensive knowledge of blockchain protocols. Now, let's delve into the concepts discussed in the article about Cardano's staking rewards.
The article highlights the gradual decrease in Cardano staking rewards since 2020, starting at 5.5% in August and currently standing at around 4.62%. This phenomenon is attributed to the finite nature of the reward pool and the need to sustain it over time.
1. Cardano's Limited Supply and Reward Pool:
- Cardano, like many cryptocurrencies, has a limited supply, including its reward pool.
- The reward pool is capped, and although it receives a portion of transaction fees, this amount is considered negligible.
2. Distribution of Rewards:
- Stakers receive rewards based on the number of blocks they've validated and the amount of ADA they've staked.
- As more rewards are distributed and new stakers join, the volume of the pool decreases.
3. Continuous Rewards Reduction Mechanism:
- Cardano employs a continuous process of decreasing rewards over time to ensure the longevity of the reward pool.
- Rewards are subtracted every epoch (approximately every 5 days), leading to a gradual decline.
4. Projected Rewards Reduction:
- The article projects a decline in rewards from about 3.3 billion ADA in 2021 to approximately 2.1 billion in 2022, further decreasing to about 26 million by 2042.
5. Impact on Stakeholders:
- The decreasing rewards may go unnoticed initially, but it could create concerns among stakeholders.
- Some may interpret it as a malfunction and might even stop staking.
6. Counteracting Mechanism:
- Cardano claims to have a counteracting mechanism to address stakeholder concerns.
- The article doesn't provide explicit details on this mechanism, but it implies that Cardano has considered the potential negative impact.
7. ADA Value and Staking Rewards:
- Staking rewards on Cardano are given in ADA cryptocurrency.
- Cardano is implementing measures, such as the development of a decentralized exchange called Cardax, to increase ADA's demand and value.
- The increase in ADA's value is expected to compensate for the declining rewards percentage, ensuring stakeholders receive the same or potentially higher value in the end.
In conclusion, Cardano's staking protocol involves a careful balance between rewarding stakeholders, maintaining the longevity of the reward pool, and addressing potential concerns through mechanisms like increasing ADA's value.
