ADANOMICS – Cardano ADA supply, reserves and rewards
Where do Cardano ADA staking rewards come from?
I often get asked “Where do ADA rewards come from?” and “Can I expect to earn consistent returns from my investment in the coming years?” It is important for Cardano investors and community to understand that this is not some magical pixie dust that gets sprinkled on stake pools and delegators, but a scientifically derived and mathematically accountable system that takes a multitude of economic variables and Cardano product lifecycle stages into account.
During each epoch, rewards are distributed amongst all stakeholders who have delegated to a stake pool, either to their own stake pool, or another pool. These rewards come from two sources: transaction fees and the monitory expansion of ADA, also known as inflation. These sources are allocated from the following inflows:
- Transaction fees – fees collected by
stake pools during an epoch are divided among stake pools and delegators based
on the number of blocks they produced.
- Monetary expansion from ADA reserves – each epoch ADA reserves are multiplied by 0.003% and this sum is distributed among stake pools and delegators based on the number of blocks they have minted. Number of blocks minted by a pool is a random lottery and frequency of participation in the lottery is based on the number of ADA staked in the pool.
The reserve consists of ADA that has not yet been added to circulation and is derived using the following formula: total supply – circulating supply-treasury = reserves.
Current ADA supply looks like this:
Total: ADA 45,000,000.000
Maximum: ADA 45,000,000.000
Reserves as of 8/26/21: 12,933,609,332
Current Cardano EPOCH 286 payout: 38,800,827.996 + transaction fees – treasury deposit
45,000,000,000-32,066,000.000=12,933,609,332 this number, or slightly under 13 billion ADA, remains in Cardano ADA reserves and treasury as of August 26, 2021. In EPOCH 286 which will end on 8/28/2021 38,800,827.996 ADA or 0.003% of rewards plus transaction fees will be distributed in rewards to stake pool delegators and operators. In the next 287’th EPOCH the remaining reserves will again be multiplied by 0.003% and so on until ADA reserves are completely depleted in the year 2148. If you think the effects of EPOCH turnover are too far ahead to make a difference, consider that by the year 2043 ADA reserves will dive under 100 million ADA and reward payouts will be approximately 300,000 ADA per EPOCH.
Why you should stake your ADA right now?!
Cryptocurrency folklore is ripe with stories of tech savvy and lucky people getting insanely rich by mining Bitcoin in the dawn days of crypto adoption, in the years 2009-2012. The legends proclaim that those lucky ones were able to mint tens of Bitcoins on their laptops within a week’s time. While some accounts are far fetched, other do hold water. Bitcoin has gone through 3 halfing events by 2021 and each time the Bitcoin mining reward has been cut in half. The mining difficulty in those days was exponentially reduced in comparison to today as the number of miners was miniscule. The Bitcoin halfing occurs every 4 year to counter what’s knows as “Moor’s Law” where computer processing power is doubled every 2 years. While Bitcoin reward is slashed in half at each halfing, the number of miners increases, thus diminishing returns as only a set number of Bitcoins can be mined each day. Historically, the halfings have increased the value of Bitcoin in FIAT pairs approximately 6 months into each halfing, as the reduced mining inflow takes effect.
“If you own ADA you are entitled to new ADA created from transaction fees and monitory expansion.”
Cardano experiences a “halfing” of its own every EPOCH, or every 5 days. As the reserve are reduced every 5 days and the number of delegators increases, the effect is a reduced number of ADA distributed among an increased number of staking participants. If you own ADA, you own a right to a portion of ADA being added to the circulating supply. However, if you own ADA but you do not stake it, you are giving up your right to receive staking rewards to someone else who is staking their ADA.
“If you own ADA but you don’t stake it, the rewards will be paid out to other people, and not you.”
What will ADA staking rewards look like in the coming years?
As rewards are subtracted from ADA reserves every 5 days and added to the circulating supply, the reserves shrink on ongoing basis and so do the rewards pay outs. In the table below you may notice that this continued grinding has an exponential reduction effect on the remaining reserves as well as the amount of ADA added to the circulating supply EPOCH after EPOCH. Reduction in reserves means reduction in rewards. As I write this article, just below 13 billion remains in ADA reserves, but in just one year the reserves will shrink to around 10 billion ADA.
The table below shows the shrinking of ADA rewards in the coming years as ADA flow from reserves into circulating supply via reward payouts. One should note that the biggest remaining reward payout is scheduled for 2021 where roughly 3.3 billion ADA will be paid in rewards. In just 5 years the yearly reward amount will dip below 1 billion ADA.
“In time the rewards you are not receiving from not staking will have a significantly higher valuation than they do now”
As reserve payouts shrink, reward payouts will also shrink
and your staked ADA will continue to earn a decreasing amount of ADA from your
stake. Therefore, it is critical to begin staking your ADA as soon as possible
to maximize your earned rewards and increase the amount of ADA you will earn
from staking in the future by increasing your position, as a higher staked amount will entitle you to a higher reward.
“Every EPOCH or 5 days, reward payouts are shrinking, therefore you will never earn more in the future. The time to stake is now.”
Thank you for taking the time to read my article. Please follow Cardano stake pool LEGA on LinkedIN and other social media.
Valentin Komarovskiy, MBA
Stake Pool Operator – LEGA