The Cardano staking mechanism has an exciting parameter known as “Luck.” Numerous people have wondered how this factor works in the system and its significance in staking Cardano.
While this parameter might fascinate you, like it has numerous others in the industry, it’s not magic and can be explained. So if you’re a Cardano staker or plan to be one, this article is just for you.
In this article, I’ll discuss how the Cardano staking mechanism works, the role of the luck factor in staking reward distribution, and how much importance you must be giving it while choosing your Cardano staking pool.
So, let’s dive in!
In Cardano, there are about 432,000 slots available in every epoch, which lasts for 5 days. Each slot can be considered a time slot in which a node is elected to create a block. About one node is nominated every 20 seconds for every slot, which means about 21,600 nominations per epoch.
When it comes to the staking pools’ role in this system, numerous staking pools compete to create blocks. Each staking pool has an operator and a delegator. Operators are the ones who lead the operations of the block, while delegators are the ones who stake their ADA in the stake pool.
Cardano will nominate a slot leader at random. The staking pool which gets selected is known as the slot leader. This pool then gets the chance to create the block that can be added to the blockchain. Here’s where role of luck or lottery plays a significant role.
The Cardano system ensures that the selection process is fair. Hence it implements a VRF (Verifiable Random Function) where a random value is returned when this function is input with the key of a stakeholder. This random value is stored in the block.
Over time, all these previous random values are also taken within the VRF, thus generating the randomness necessary to have a fair selection process.
However, it is essential to understand that not every person has an equal chance. The amount of ADA you stake determines the probability of you getting selected. The more ADA you stake, the higher your chances of getting selected would become.
If you look at this mechanism, you’ll see that Cardano would slowly move towards centralization if there’s one staking pool that has the most ADA. To counter this effect, Cardano has a mechanism deployed, which can help accomplish true decentralization and ensure that, over time, all staking pools receive nearly equal amounts of rewards.
This is a game theory concept where a system is designed such that no incentive is provided to a player for changing their strategy. When you apply this to the Cardano staking mechanism, it means no matter what staking pool any individual chooses; the rewards should be the same.
To achieve this nash equilibrium, the mechanism encourages people to look for more long-term metrics while staking their money. For instance, people would ideally stake their ADA in a pool that already has a larger volume of the said asset to increase their chances of getting nominated.
To counter this, Cardano has a factor known as saturation. The pools which are the most desirable based on their previous epoch’s performance are the ones that are saturated pools. According to ADAPool, these saturated pools are determined by a few factors such as:
- ROA or Return on ADA in the last 30 days gives you an idea about the expected annual return of ADA of a particular pool, based on its previous 30 days’ performance.
- Stake is a parameter that indicates how much money has been staked in the pool.
- BPE or Blocks Per Epoch will tell you how many blocks have been created in the past epochs by that staking pool.
- Luck is another factor representing how well the staking pool has been performing. If a pool creates the exact number of blocks it is expected to; the Cardano luck factor is 100%. If the number is less than the expected number, the percentage decreases, and if the number is more, the percentage increases.
These parameters, along with the saturation, are used to determine the rankings of all staking pools. If you notice, most pools have a luck factor of nearly 100%. This means that staking pools are more or less creating the number of blocks they are expected to.
However, look at the saturation levels and the luck parameters. You’ll see a pattern where the completely saturated pools have a lesser luck factor, which means they are creating a lesser number of blocks and, hence, receiving relatively lesser rewards.
Thus any person must look not just at rankings but also at the saturation level, the amount of money the operator has staked, and the margin. While the first two will be readily available on ADAPool, you’d have to keep a check on the third one across epochs, or you can use platforms such as Pool Tool.
Based on this analysis, people will start looking at more parameters, and the idea is to have a long-term vision while choosing staking pools. Instead of looking at the current size, it is essential to understand the final size based on their saturation levels and the number of staking pools in the network.
So while you have these concepts in mind, let’s go back to nash equilibrium. Just to reiterate, the idea is to have equal rewards for all staking pools.
For this, the saturation levels would need to be the same. People would steer more towards unsaturated pools because their luck seems to be better than the saturated pools, and hence people will get a better chance at gaining rewards. This means they would deposit their ADA in the former unsaturated ones, increasing their saturation. As more people come in, they’ll follow this strategy, and over a while, all the pools will be equally saturated, thus resulting in everyone getting equal rewards.
To sum it all up, Cardano Slot Lottery is a random function but is countered by the intent to accomplish nash equilibrium such that all staking pools over time are equally saturated with the amount of ADA staked in them and hence receive equal rewards.
So as a staker, no matter the strategy, the project will look to equalize all pools and share equal rewards over time.