Proof-of-Stake at large
In the larger view, appreciation and PoS rewards are the two most common ways users gain from holding their crypto. The first, though admittedly not promised, is the rise in the fiat price of a particular coin. The second is participating in producing more of the coin they hold, through staking––where “Proof-of-Stake” gets its name (more on that below). In the case of PoS blockchains, we are talking about creating new tokens through a validator.
Blockchains run on a series of decentralized validator nodes that produce “blocks.” The work done by validator operators (sometimes called validators themselves) on their nodes is critical to the operation of the network and requires time, knowledge, and resources to do it well. Therefore, validators are rewarded for the work they do. In a PoS blockchain, those validator operators distribute rewards to each of the people who stake their coins on their node depending on their allotments of coins staked to the node. Further, many PoS blockchains incentivize validators to lock-up delegated funds for a particular time (a few days, all the way to more than a year depending on the chain). Next, users must transfer their funds to a central wallet or lock them into a smart contract.
But why have your funds locked up for any amount of time? Isn't there a way to have your cake and eat it too?
Thankfully, this is not the case for all PoS blockchains. After speaking with many ADA holders over the last couple of years and admittedly trying a few slices ourselves, I'm here to report on Lido's behalf: the frosting tastes delicious!
Cardano Staking: undoing the lock-up problem
The Cardano blockchain offers a different user experience. In the case of staking on Cardano, you are delegating your wallet, and not any specific amount of ADA. So, instead of sending your ADA off to a smart contract, it remains in your staked wallet, accessible at any time. Meanwhile, you continue collecting staking rewards every five days based on your stake amount.
Note: It is this act of staking, or “delegating,” your wallet to a pool that gives us the frequently used title delegator. It is we delegators who are authorizing validator operators to act on our behalf through the rewards process mentioned above.
How is it possible for this to happen every five days? The answer, in a word: epochs.
Each of these 5-day periods is called an epoch. During each epoch, Cardano scans your staked wallet to get the total amount of all delegated funds to a validator operator, or Stake Pool Operator (SPO) in Cardano-speak that has produced blocks during the previous epoch. This information is used to calculate the two rewards for your entire pool according to the total amount of ADA inside all associated wallets and how many blocks it produced during the epoch. The blockchain is then programmed to distribute pool rewards to each person in that pool according to their percent of ADA held after taking out and sending the pool fees to the SPO. Each wallet receives, on average, 4.5%-5% APY over a year.
There are currently 2,957 Cardano Staking Pools from which to choose. Some are set up as straightforward businesses that provide the operating of the stake pool as a service. Many try to attract delegators by offering benefits aimed at delegators or at the wider community. Some examples are that SPOs might host blockchain-related news on their website, or they might build a dApp; whatever the case it’s about offering more value to current or potential delegators. Others have positioned themselves to keep their business afloat while advertising that some of their earnings will go to charity. These pools aim to direct some profits to one of many different causes that allow users to passively delegate while feeling good, knowing their SPO has a greater purpose.
We at LIDO nation propose a third option: namely, a way for our delegators to take a more active and democratic role in the support and funding of various projects, causes, and charities that aim to do good in our world; more on that in part two––get excited!
Want To Go With LIDO?
Here's the part where we tell you about our stake pool, LIDO. Not because we are in the habit of shamelessly plugging the financial driver of our work, but because it's an extraordinary time for us, and given the gravity of the situation, we must tell everyone who'll listen.
If you read our latest news release, you heard that the Cardano Foundation recently recognized LIDO by delegating their wallet containing in excess of 14M ADA to our pool. In so doing, we have started consistently producing blocks every epoch for the first time and rewarding our delegators accordingly! Until now, most of Lido's work has been Catalyst-funded, an opportunity for which we are grateful. However, as we advance, more and more of our work has the chance of being self-funded. "Has the chance" because the other part of this news is that the Foundation's wallet will only be delegated for a few months. Hence, this is peak time for us to encourage new participation more than ever. Suppose we are successful at joining hands with enough new delegators. In that case, after we no longer rely on this massive but temporary delegation, we'll still be above the threshold for producing blocks each epoch so we can continue to distribute rewards to all who have chosen to earn their rewards with LIDO.