Cardano ADA Staking Rewards Will (Really) Let HODLers Down

Cardano ADA Staking Rewards Will (Really) Let HODLers Down

Everyone is excited about the next big update in the Cardano ADA Roadmap.

As you probably know, at this time only trusted nodes are doing all the PoS ADA minting and the coins minted during this test period will be destroyed.

According to the the developer team’s estimates, in Q2 2018 the minting of ADA coins will become fully decentralized.

So we decided to take a closer look at what kind of return investors might expect from staking their coins when update Shelley is fully deployed.

For those unfamiliar with the Cardano roadmap, Shelley is what the decentralized version of Cardano will be called.

Reward Maths

According to the Cardano monetary policy, the minimum slot reward will be determined by the following formula (copied verbatim):

“The minimal fee = 0.155381 ADA + 0.000043946 (ADA/Byte) x size-of-transaction.”.

We don’t know exactly how the 0.155381 and 0.000043946 constants were derived, but a note contained under it seems to imply that the formula is a work in progress:

Note: Fee calculations and incentives are areas that are currently being researched and their development is in progress.

So, please keep in mind that, while we based these calculations on the officially provided formula, that formula may change in the future. For now it’s all we got, so we’ll use it.

The Staking Lottery

The guys who do the minting of ADA coins are called slot leaders. For every slot N, there will be an algorithmic “election” held to choose the slot leader for slot N+1. The documentation gives us a pretty good hint about how this election will work:

You can think of this election as a “fair lottery”; anyone from the group of stakeholders can become a slot leader. However, an important idea of PoS is that the more stake stakeholder has, the more chances one has to be elected as a slot leader.

By fair lottery we will assume that the probability is proportional to YOUR_STAKED_COINS divided by TOTAL_STAKED_COINS. The documentation also seems to suggest that 2% of total circulating supply is a likely number of total staked coins, therefore TOTAL_STAKED_COINS = 2% of 31112483745 ADA, which currently means 622.249.674,90 ADA.

Note that by using just 2% we are being very optimistic. The more coins are staked, the less everyone makes. This is akin to “network difficulty” in Bitcoin mining : the more hashing power there is, the less everyone makes on average. The same thing works for Cardano ADA, except there is no hashing power involved, but the number of coins staked determine the difficulty. So, for these calculations, our estimates are based on only 2% of all the coins being staked.

Therefore, the probability that you will be elected the slot leader for the next slot by holding a single ADA coin, with only 2% of the coins being staked, is proportional to 1 divided by 622.249.674,90 which is 1,60707195252566E-09 (approx 1,61 billionth of a chance per coin). You may be thinking that nobody will own just a single ADA, instead you will own a TON of ADA that you’ve been hoarding for the bonanza ahead! Sure, but knowing how much chance you have per ADA will allow us to estimate your chance for any number of ADA (just multiply the number of ADA by the 1,6 billionth of a chance). We will get to that soon.

Alright, so we know what your odds are of being elected the lucky slot leader who will mint the next slot and reap the slot reward. So let’s have a closer look at the slot reward formula and apply it to a very basic slot just to see what we get.

Size Matters

We noticed that an empty slot is about 670 to 671 bytes large on average according to Explorer. Knowing the empty slot size allows us to plug the 670 bytes straight into the formula, which gives us a reward of 0,18482482 ADA per empty slot. That is the minimal reward for minting an empty slot.

So if you we were elected slot leader for an empty slot, you’d make around a fifth of one ADA reward. Not very exciting.

Which brings us to our first moderately relevant conclusion: slot size really matters for ADA stakeholders. Minting an empty slot pays next to nothing. Whereas in Bitcoin and other PoW based currencies the block size is irrelevant as far as miner reward is concerned, in Cardano ADA size means profit. Mining a large block or a small block in Bitcoin will always pay the lucky block solver 12,5 BTC (halved approximately every 4 years), but in Cardano you actually need to be elected for a LARGE slot in order to make anywhere near a fraction of 12,5 BTC.

Cold Shower

In my opinion this will be a cold shower for most investors who are hoarding tons of ADA hoping the sheer amount of coins will make them automatically profitable. It doesn’t work that way at all.

Current slot sizes will pay tiny fractions of ADA when minted. Click to enlarge.

Actually, mining a larger block does take more electrical energy than mining an empty block, so the Cardano algorithm is fair in this aspect. The SHA256 hashing algorithm used in Bitcoin mining is has complexity O(n), meaning the work it performs grows more or less linearly(e.g. doubling the amount of data, doubles the amount of work). So, while Cardano does not use SHA256, it does use a hashing algorithm that will perform more work when there are more transactions in a slot. Therefore it’s fair to pay more to whoever mints it. All this is fine.

But as you can see, in order to reap a nice reward, the ADA network has to be very busy on average (lots of transactions equals larger slots), and this will not yet be the case when Shelley is released in a couple of months time. In fact if you sit and watch the live Cardano Explorer updates, you’ll see that most slots are empty 670 byte chunks right now.

Show Me The Money

Alright, so you’ve made it this far down, which means you really want to know how much you’ll make for each ADA you’ve been HODLing so dearly. Let’s get right to it.

As we mentioned before, in order to estimate what the actual ADA reward will be, we need to know the average slot size. So we visited Cardano Explorer and forced our slave chipmunks (*) to type in 1000 slot sizes for slots with at least one transaction in them from the current activity on the Cardano network.

Slot Rewards

The result is not very exciting : the average reward, per slot, is currently 0,2278776822 ADA.

We also measured the average time between each slot and got 19,9363636364 seconds on average. So there are approximately 3 slots per minute, which gives us 4333,7893296854 slots per day. This means that each stakeholder will compete for 4334 slots each day, and their chances will be proportional to the amount of ADAs staked multiplied by the 1,6 billionth probability we derived earlier.

So, if out of the entire 31 billion ADAs currently in circulation, only 2% get staked, you’ll get approximately the numbers below.

Reward Estimates

Here is a brief summary of what you can expect to make per day by staking the amount of ADAs in the left column. As you can see, unless the slots grow hundreds of times, the yield will be very low.

Amount Staked DailyTotal Daily RewardUnit
100000,015871ADA
1000000,158710ADA
10000001,587102ADA
Total Circulating Supply41148,912336ADA
Total Available Supply49378,693374ADA
Empty Slot Size670Bytes
Empty Slot Reward0,184824ADA

Slot Size + ADA Reward Sample

# of TransactionsSize Bytes
Slot Reward(ADA)
279740,505806
123140,257072
110270,200513
110270,200513
110270,200513
110270,200513
213840,216202
110280,200557
113900,216465
322850,255797
213890,216421
110240,200381
110280,200557
110240,200381

Cardano Staking Calculators

New: Try the Crypto.BI Cardano Staking Calculator

There are “staking calculators” available which don’t seem to take slot size into consideration.

(Update: The Cardano staking calculator link was taken down and has since been removed. Formerly linked to ada-calc.herokuapp.com. We’re still looking for a legitimate Cardano staking calculator. Please send recommendations to contact [at] crypto.bi – Thank you!)

By these calculators’ estimates, an investor would make around 9 to 10% yield / year.

Unless there are additional components built into the fee structure and slot rewards, the 10% would be a very optimistic estimate.

Conclusion

The main conclusion is that, unless the Cardano network becomes very very busy soon, like thousands of times busier than it is now, the rewards for stakeholders will be very low.

By our calculations, if the network continues to be as busy as it is now, the yield will be 0,0001587102% which is zero for all practical purposes. Holding a million ADA, which currently means over half a million dollars, will yield a little over 50 cents per day in staking interest. The slots need to become, on average, 1000 times larger in order to reach a fraction of a percent yield per day.

Therefore if you’ve been HODLing Cardano ADA expecting to make a living off of staking come Q2 2018, then you may be in for a negative surprise.

 

(*) And by slave chipmunks I mean I typed them all in myself. No furry animals were hurt in the typing of this article.

 

 

 

 


May 2018 Update: We’ve reviewed much of the feedback about this article found on the WWW and carefully went over some interesting points made at Reddit and other forums. While we, as investors and believers in Cardano ADA, hope the rewards are higher, technically we have found nothing that should justify changes to any of the estimates presented here. Unless the Cardano staking reward formulas are updated somehow, we stand by the estimates made on this text (from January 2018). Every aspect of this text was based on what had been published on Cardano’s technical documentation at the time of writing.



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