Stake pools in the Cardano blockchain receive rewards in proportion to their control over the network, and delegators receive rewards based on their stake, with the fixed fee and variable margin set by the stake pool operator affecting the rewards.

posted on Oct. 28, 2020

How do the stake pool fees affect the rewards?

We have already talked in other infoblocks about the source of the rewards in the Cardano blockchain and how passive income is possible through a monetary policy, and we have also explained how the delegation cycle occurs until the payment of the rewards. But when a delegator is looking for a stake pool, it is likely that the first relevant factor for choice is related to the financial return it can provide.

In the Proof of Stake protocol, the Ouroboros in the Cardano network, unlike other blockchains that pay a fixed amount per block, the rewards are distributed to the stake pools in proportion to how much stake they control in the network. There is also a performance factor that must be taken into account, but the details of the calculation of rewards will be addressed in another infoblock. What we want to highlight here is the proportionality of the reward according to the amount of ADA delegated. In a practical way, a stake pool will receive proportionally its stake in the network, and distribute part of these rewards to delegators also respecting the stake of each delegator.

Note that the protocol automatically distributes the rewards and operators are not able to act directly in this process. However, there are two parameters that affect the rewards of the delegators, defined at the time of registration of the stake pool: the fixed fee and the variable margin.

Suppose a stake pool received a certain amount of rewards at any given time. The fixed fee, also called cost per epoch, is defined in ADA and charged from this stake pool rewards pot. Currently, the protocol establishes a minimum of 340 ADA as a way to discourage operators from targeting a zero cost of maintaining their infrastructure and compromising network stability. Thus, whenever the stake pool produces blocks and the rewards received cover the minimum value, the operator receives at least the minimum to support the costs.

The variable margin of the stake pool is calculated from the amount remaining in this fictitious reward pot, a value defined as a percentage. The variable margin is then collected from the remaining amount of the pot after the fixed fee is deducted, representing what can be thought of as a variable profit of the operation, which varies according to stake and performance. There is no minimum established by the protocol for this parameter, and a 100% margin represents a private stake pool (as is usually the case with exchanges that operate stake pools).

Once the fees have been charged, the amount in the pot is finally divided between the delegators, in proportion to each delegator’s stake. Thus, if a single delegator holds 10% of the amount of ADA delegated to the pool, she/he will receive 10% of the remaining reward pot. This is the final destination of the rewards.

See you next epoch.