In proof-of-stake protocols, stakeholders who stake the most coins have the highest chance of getting selected for maintenance (creating and validating blocks). However, Cardano’s proof-of-stake protocol includes a fairness factor for choosing the stakeholders for work. This allows more nodes to earn rewards from the network just for staking their coin, but the amount of coin a node stakes is still a relevant factor.
To be able to participate in the next reward cycle, your worker node (computer or phone with a crypto-currency wallet) must be online throughout the whole cycle. Due to our lifestyle, we move around with our phones, and our home connections drop and lose quality frequently, so staying online for the staking to work non-stop can be very challenging. A single stakeholder is practically disallowed to participate in the staking process alone.
To earn rewards, we can delegate our coins into “staking pools”. A staking pool is a single worker node that is always online and accessible, and it allows multiple coin holders to combine their coin as a way of increasing their chances of being rewarded. Pools also have a lot working power, so they are able to compete on a much higher level with other pools and stakeholders to be chosen as the winner for creating new blocks and getting the rewards. Finally, rewards that the pool wins are much higher than the ones a single stakeholder could ever get. The blockchain network automatically splits the rewards between the pool stakeholders, proportionally to their delegated stake.
Where are the coins, exactly?
A small percentage of those rewards is sent to the pool’s wallet address, to compensate for the pool setup and maintenance costs. Typically, a staking pool is managed by a “pool operator”. Stakeholders who decide to join the pool will usually delegate their coins to a specific wallet – this is the blockchain address of the pool that is managed by the operator. This is all public and automated, managed by the network protocol.
Some proof-of-stake platforms require users to delegate their coins into a third party wallet, and keep them there locked for a specific time interval. Cardano, on the other hand allows stakeholders to contribute their staking power to a pool, while still holding their coins in their personal wallet. This means that you are able to stake coins, but also transfer them away at any time, without the coins ever getting locked. Should be noted, that if you stop the staking process, you lose the right to future rewards. However, the rewards that you already earned, are yours to keep.
