What you should know about Cardano. Part 2

In this article, I continue with the summary about the data and metrics of the Cardano blockchain.

In the previous article I have explained about the structure of the blockchain, protocol metric data and governance. Now it is the turn of staking.

Your keys, your ADAs

To have ADAs it is highly recommended to have a non-custodial wallet, because leaving your funds in exchange is risky, since you don’t own the private keys and your funds can be hacked, confiscated for legal issues, or the company owning the exchange can go bankrupt. The official wallets are Daedalus or Yoroi, but there is also ADAlite which has a good reputation. Here you can download them from their official sites: Yoroi , Daedalus , ADAlite.

Remember to always download the wallets from their official sites, accessing with your browser. Never access from an address sent to you by email, it can be fake (phishing).

Daedalus: it is a full node wallet that connects directly to the blockchain. It is only possible to install it on a PC, because of its demand (requirements of 64-bit dual-core processors, 8GB RAM, 15 GB free disk space and broadband Internet connection). The advantage is the privacy of connection, as there are no intermediaries between you and the network. The disadvantage is that it can take a few minutes to connect, and if you connect it after many days, it must update all the blockchain data since your last connection.

Yoroi: It has two versions, one is Yoroi Mobile that runs on the cell phone (Android or IOS) and another is Yoroi Desktop Extension for Chrome or Firefox browsers. It allows us to develop the interface faster as it is a lightweight wallet because it does not store the entire blockchain. The advantage is that it requires little computer input and network connection, and has desktop and mobile versions. The disadvantage is that to operate you connect with servers of the company EMURGO, its developer, intermediating your wallet with the blockchain. It should be clarified that EMURGO is a serious company, responsible for the commercial development of Cardano.

You can restore a wallet on another device (mobile or pc). If you have changed your mobile, lost it, your pc has broken, do not worry, having the recovery words (passphrase or seed) generated when you created the wallet, the 15 words for Yoroi or the 24 for Daedalus, you can install any of these on a new device (remember that Daedalus is only pc) and restore the wallet, and you will see all your funds as before, and your delegation in the stake pool will remain the same and collecting rewards, since you don’t need your wallet installed (or connected) for the blockchain to continue working.

You can even restore in Daedalus, the wallet created in Yoroi, or vice versa, they are compatible and will ask you for the corresponding amount of words (15 or 24). The spending password you are asked to enter to restore can be different from the one you had in the original wallet when you created it, unlike the seed which is unique.

Finally, you can also restore a wallet in another device even having your original wallet active, and thus you would have the same wallet in two places, or as many active “copies” as you want to operate your funds from any of them, but this is not recommended because they are more “windows” of vulnerability for hacking or loss of your devices, compromising your funds.

Do you want to participate in the consensus?

Delegation and participation are two separate concepts. All ADA holders are entitled to participate in the Cardano consensus by operating active nodes to support the network. However, not all ADA holders have the ability or desire to actively participate in the consensus mechanism.

The usual ADA holder who does not operate a stake pool participates by delegating his participation. Therefore, he is not really “participating” in the real sense of the word, but rather delegating his right of participation, he deposits the power of his participation in the stake pool operator he chooses, that is why his responsibility in the decision is very important, it is the consensus of the network, it is the blood flowing in the veins of Cardano.

Rewards come from two sources: commissions per transaction and funds drawn from the ADA pool.

In the case of pools, each lead pool gets a fraction of the rewards to cover its operating costs and a profit margin. The remainder is distributed among the delegators of the lead pool in proportion to the share they have delegated to the lead pool.

As of this date the estimated bounty per epoch is approximately 4.6% according to the official calculator. A few months ago the annual average was higher (5.5%), as rewards have been reduced because monetary issuance is decreasing (Cardano’s monetary policy is deflationary). With increased usage by smart contracts to be deployed with Goguen, the number of trades will increase and thus the rewards. Eventually the rewards will be shaped only by the network fee, as in a few years the ADA issuance will have ended.

Important concepts to keep in mind when delegating

The first point that a delegator absolutely must know is that delegating to a stake pool with low variable commission does not imply that you will necessarily earn more rewards than delegating to a stake pool with higher variable commission. Rewards are only earned on the epoch as long as the pool has signed at least 1 block.

The difference in annual return when delegating to a stake pool with 1% variable commission and another one with 5% variable commission is about 1/4 % of the expected annual return. This is too low a payout difference considering the benefits of choosing a consolidated stake pool. If a stake pool does not produce blocks, there will be no rewards. Here’s the tip: The most important factor to consider when choosing a stake pool is the ability of the operator to keep the stake pool nodes safe and operational at all times. The second relevant factor is the saturation of the pool.

A pool can sign many blocks and have so much staking that it becomes saturated (parameter k), so the rewards it will pay will be lower for its delegators. In addition, the more delegators a pool has, the more participants there will be to distribute among in proportion to their ADA delegation, i.e. if there are few delegators, the reward is higher for each one (always in proportion to their delegation in that pool).

It can be concluded that the desirable equilibrium will be reflected in the ROS, where the level of saturation is low and with a low fee (pool commission), since although a small pool (with low delegate staking) may sign fewer blocks, it could be more profitable, equaling in the long run a pool with higher staking, which signs more often, but rewards relatively less per epoch.

What is ROS?

The ROS (return over staking) of each stake pool is basically the direct result of the blocks produced by that stake pool divided by the total amount of ADA in that stake pool, for each epoch.

The equation for each epoch would be: ROS% = (blocks produced by the pool x ADA rewards for blocks produced x 365 x 100) / (5 x total stake in the pool).

It means that, if a stake pool produces more blocks than statistically expected, then it will have a higher ROS%, and vice versa.

The ROS% of each stake pool is not the same in each epoch, and some stake pools perform better than others in ROS. It happens because each stake pool can only produce the number of blocks assigned to it, and this changes in each epoch as it is the result of a lottery process. And this process occurs for each stake pool, no matter how large or small its total stake is.

The delegation cycle

The delegation cycle takes, in full, end-to-end, 5 epochs, or 20 days, from the start of the delegation to collection. It can be less than 20 days, if you delegate at the end of an epoch. The delegation included in “your” epoch 0 (the one that starts your delegation) will be taken in the snapshot that occurs at the end of epoch 0. That reward will be included as active staking in the production of blocks in epoch 2 and any rewards acquired for the production of epoch 2 blocks will be paid at the beginning of epoch 4.

The rewards are automatically included in the delegation for the following epochs, and as a delegator you do not need to do anything.

This chart will help you to understand:

If you change pool to delegate, it is recorded after the end of the next epoch in which you execute your order.

Thus, the cycle is not interrupted even if you change pool, as you will be collecting the rewards from the previous pool for 2 more epochs.

When you initiate delegation for the first time, on a wallet, the delegation address needs to be registered on the blockchain when you first delegate your wallet. Each new wallet needs to register a delegation key to delegate, and requires:

  • Create a registration certificate.
  • Submit the delegation certificate to the blockchain with a transaction.
  • Registering the delegation address not only pays transaction fees, but also includes a deposit of 2 ADAs, which you get back when you cancel the address registration, which means unregistering the delegation.

How do I know the rewards I will receive?

At https://pooltool.io in the “Track your rewards” button you type in any “receive” address of the wallet you are delegating. It will tell you the historical details of the rewards.

You can also do it at https://adapools.org in “Rewards”, with the same address.

How to read the Cardano blockchain ledger?

Each wallet is composed of two types of addresses:

  • Spending address: the one we usually use for value transfers.
  • Staking address: where the rewards paid by the protocol are hosted. From this address it is not possible to send funds to other accounts, only to the expense (claim) address.

With Shelley, a new format was introduced in the addresses, the BECH32, to be able to delegate and vote, as I explained in the previous article on governance.

Morphology:

  • Spending address (103 lowercase alphanumeric characters): addr1q9xz02yynlfyuq2n64fvxsxsxerwu6qhgwkct9yn1rgl9rr6j4kjnefp9t8xdhuskpm2vszvm2y3vk32vq3r6vze3hs9jq07tkmf.
  • Delegating staking address (103 lowercase alphanumeric characters): 55b4a7948484ab399b7e42c1da999901336a245968a9808888f4c166578155
  • Bech32 staking address: (word stake + 54 lowercase alphanumeric characters): stake1u92mffu5sj4nnxm7gtqa4xgpxd4zgkjg4xqg3axpvcmczeq57gxkz

Wallets with a balance greater than zero have at least one address with money received, but can have more addresses that add up to the wallet total, because Cardano has deterministic hierarchical wallets (HD).

HD wallets are used for privacy, where the new address you create has zero balance, so that whoever sends money to your wallet does not see the balance of your wallet. Once you have used a wallet address to receive funds, a new one will be generated for you to use optionally. These addresses, (public keys) are also governed by a single key pair (the same private key), this means that previous addresses you have used can still be used and you will not lose control of them.

In order to read network transactions, a browser must be used. For Cardano there is the one designed by IOHK, and also others. Below I copy the links of the most common ones:

https://explorer.cardano.org/en.html

cardanoscan.io

adastat.net

https://adaex.org/

For the explanation I will use CardanoScan, which in my opinion is the clearest in its accounting exposition, although all of them register the same information structure.

A clarification, both the IOHK scanner and ADAex show as error those addresses that have not yet registered operations in the network, and it is not that they are invalid, nor that they must be registered first to then be operated, but simply as it searches the network and does not find it (it had no transactions) then the error message appears. Public addresses have integrity from their cryptographic structure and not by their registration in the network. An address that does not have integrity will not be accepted in the validation of transactions or incorporated into the blockchain.

The transactions that are displayed in the following examples are randomly taken from the web, and I do not know the holders.

The transactions can be read from:

  • the sending address,
  • the receiving address or
  • the transaction hash (the hash that records the operation between the source and destination address).

Let’s start by reading from the transaction hash.

For example for the Hash:

3947f8216288467c7d448479b20cf1c8dc38b45b7c3bdd8ab5623454dfe19140

The details of the operation are shown:

It shows the block in which the transaction was recorded, the number of confirmations (low with less than 5, then medium and high with more than 10), the slot in which the designated pool validated, the UTC time, the total network rate, and the total outgoing. The certificate refers to the staking key, showing 2 in this case since both the sender of the money and the receiver are delegating.

It then displays the movements involving the transaction addresses, in this case only two, one sending and one receiving, but there can also be more addresses because of the UTXO structure of the addresses involved (it may be that the sending wallet needs several addresses to total the amount).

From the sending address, a transaction is executed for 1,641.266481 ADAs, with a fee of 0.175137 ADAs arriving at the (lower) net fee amount.

If we look at the operation from the address that sent the money, it looks like this:

We see that the transaction we are analyzing has an OUT for the net amount and rate on 03/03/2021.

Minutes before it had a cash inflow (IN).

In another example, if we consult in the explorer this hash: bae50f7845a33a3b6628bc1a39d98a1ca1ca1e8b03d6ab204115d6555867898d723, we will see that there are several addresses that send money, since by the amount involved they need several of them that compose the wallet. This fractionation, as I explained, is because of the UTXO structure.

Finally, the network structure for registering delegation keys is similar to those mentioned for registering transactions but the difference is that they have in addition to the network fee, the deposit of 2 ADAs of guarantee and the creation of the certificate.

Passion for crypto and liberty. Pasión por el cripto y la libertad. Twitter @liberlion17 website: liberlion.com