Cardano stake pools to thrive in 2023
Last year, the number of active Cardano stake pools reached over 3,000 due to adding a few new pools each month. There were roughly 2,000 at the beginning of 2021. Currently, there are about 1.2 million wallet addresses used to stake the ADA. In 2022, delegation expanded to roughly 74% of all ADA in distribution. This growth is expected to continue in 2023. The more ADA staked, the better because staking is what protects the Cardano network. Ada coin owners who have not assigned their coins to stake pools miss out on the rewards given to stake pools for validating transactions and creating blocks.
Ouroboros and Staking
Cardano depends on the analytically sound PoS consensus process of Ouroboros. The delegation of stake, a virtual resource recorded on the Cardano blockchain, by holders of ADA is what maintains the network operational and safe.
Sharing resources in stake pools makes sense as opposed to requiring each ADA holder to run their own computer system in order to participate in the staking process. The system must, however, guard against any pool taking control. Cardano has a reward-sharing system as a result, which encourages the development of stake pools in a way that maintains fairness. The solution also enables stakeholders to create their own stake pools or delegate to existing ones. Operators of pools "pledge" their investment in the latter scenario. This is an agreement to "lock up" a specific percentage of stake to support network security.
Making the procedure simple to use is crucial since the distributed ledger is more secure the more stakeholders are involved in the system. The majority of ADA owners won't want to manage a pool. Instead, they assign their stake to one or more pools they believe will best advance both their own and the community's interests. Due to Cardano's non-custodial nature, no money is ever held up, and all stakeholders are urged to assign their ADA stake from their personal wallets.
By restricting each stakeholder's ability to exert control, dominance is prevented. Operators of stake pools have an impact on the system in proportion to the resources under their control, not to their personal resources. The likelihood of a 51% attack to take over the blockchain increases the more a single person controls a system, the worse off it is from a security standpoint. Another risk is that stakeholders could create numerous pools, which could increase leverage.
The system will eventually converge to a specific number of pools with equal sizes thanks to the limitations provided by the Ouroboros process. Operators receive just compensation for their output, cost-effectiveness, and ecosystem benefits in general.
Smaller and medium-sized pools can contribute to the ecosystem without being absorbed into major operators and consortia, as has occurred with other blockchain networks, like Bitcoin, due to the rewards-sharing structure. The rewards decline as soon as the stake allocated to a single pool rises above a specific level, according to the scheme's design. This motivates ADA holders to change pools in order to increase their payouts, which in turn helps spread the stake among more pools. Because more users are validating transactions, the system is more reliable.
Rewards are given out at the conclusion of each epoch, which is a unit of time employed by Ouroboros and lasts roughly five days. Earnings are immediately distributed to each stakeholder's private wallet together with stake pool operation charges by the Ouroboros protocol directly, not by the stake pool. A complication with some other blockchains known as "liquid staking" occurs when a cryptocurrency's stake is "frozen" by the staking process and cannot be used for other activities like voting. With Cardano, this is not a concern because the stake is indeed liquid. Furthermore, there is no "lock-in" time that might prevent a coin from being utilized in any other way before a stake becomes active.
Deciding on a stake pool
Stake pool operators must specify their operating expenses and profit margin in addition to choosing a commitment amount. The stake pools get prizes at the conclusion of each period. The pool and the stakeholders receive their rewards in three stages. First, the operator automatically keeps operational costs, assuring the viability of stake pools. Second, the pool calculates and deducts the operator's profit. Finally, rewards in ADA equal to each delegate's stake are given to all ADA holders who have delegated to the pool.
ADA holders view delegation as a "vote of confidence" that demonstrates support for the objectives of a pool. ADA owners should research the variables that can affect their staking decision using resources like adapools.org and pooltool.io. A pool's culture, reputation, resources, integrated delivery, competence, and lengthy dedication to the Cardano ecosystem are a few examples of these. Be on the lookout for updates, such as those to the Daedalus wallet interface's ranking system. In order to ensure that your decision and assessment remain as accurate as possible, review the pool's performance and updates frequently.
First published on Sep 22, 2022