Public blockchains are driven by computers that communicate in a decentralized node logic. There is no central server that all nodes from the network connect to. Instead, the nodes are independent and communicate directly with other nodes in the network, without having to request permission from any managing entity. But if there is no central entity that manages the network, who pays for the infrastructure?
Permissionless blockchain networks operate through incentive mechanisms, which pays operators the return on investment through a predetermined monetary policy.
In Cardano’s blockchain, the stake pools receive rewards at the beginning of each epoch, which lasts for 5 days. For this, it is created a virtual rewards pot that contains resources that will be distributed to the operators.
Two different sources contribute to the rewards pot: the transaction fees and the monetary expansion.
Let’s begin with the most simple one, the transaction fees. This source corresponds to the total amount of ADA from each transaction processed by the network. The total amount of the fees is collected throughout the epoch, contributing to the rewards pot.
The second one corresponds to the monetary expansion, that works like a type of inflation of the amount of ADA currently in circulation. However, the injection of those coins in the market depends on the reserves.
In Cardano’s blockchain, there is a maximum number of coins that will be issued, defined by the protocol: 45 billion ADA. This is the total amount of coins that will exist in the future.
Currently, about 31 billion are in circulation. A significant portion of the amount that is not in circulation composes the reserves, representing about 13 billion ADA that will be minted through the time and distributed for the operators. This is the primary source of the rewards at the initial epochs of the network. Still, the influence of this source gradually decreases as the quantity in reserves starts to flow into the market.
Every epoch, a fixed proportion is removed from the reserves to compose the virtual reward pot. Currently, this proportion is defined as 0.3% of the current amount in the reserves.
These two sources form the rewards pot. A portion of the total in the pot is directed to the treasury (the collaborative fund maintained by the community). Currently, 20% of the rewards pot goes automatically to the treasury. The remaining rewards are finally distributed between the stake pools that produced blocks during the epoch, proportionally to the amount of stake they control.
That’s it. This is the reward history!
Are you still struggling to understand the rewards scheme on Cardano blockchain? We made this interactive story to help you to understand easily. Check it in full screen!