A lot of Cardano delegators are wondering why their rewards are not where they used to be, but are getting lower and lower over the years, months, epochs…
That is why we wrote this article explaining the reason and logic behind this.
Your instincts are correct. This is how Cardano protocol is designed. But why is that?? Well the reason lies in the supply and demand.
We could argue that one of the greatest invention in cryptoassets is limited supply.
Therefore there is only 45B tokens and that is the law. The supply will never change (immutable).
So how are the Cardano rewards paid out? Well there is a predefined fixed part of that supply that is reserved for the rewards. We could call that the rewards pot.
*This is roughly true although the rewards pot can get some Cardano from the fees paid from the transactions. Given that this is such a small part of the pot we could neglect that variable for now and just say that the pot for rewards is fixed.
You could say why not just get all the rewards from the fees? Well it turns out having a predefined fixed rewards pot is a nice way to boost the adoption at the beginning, start of the adoption curve.
The reward pot
So given each epoch the rewards pot looses the ADA for that epoch. If this happened at the same pace the pot would be empty in a fixed number of epochs. This is not good as it should incentivize the adoption and should last for a long time. Therefore the idea here is that the rewards are exponentially smaller. Given that there will always be some rewards in the pot but the initial adopters will get more of the rewards.
This is nothing new as we can turn and look to the first cryptoasset the famous BTC which kinda does the same thing. With BTC there is an event called the halvening and what it basically does is cut the rewards in half every 4 years. The goal of this system is the same… to extend the pot used for giving the rewards to the miners so it will last a long time.
Cardanos’ half life
As with BTC, Cardano also has a half-life, which is basically the time in which the rewards will be cut in half. The difference here is this is done continuously and not in a discrete fashion. Therefore Cardano ADA rewards are slowly getting lower from epoch to epoch.
What is the advantage here is that it is not as shocking and is more predictable for the users.
One minor disadvantage is that the users do not know this and maybe don’t even notice it in a small period of time, but notice it on a larger scale. That can result in thinking their selected pool is not working as it should.
Of course with discrete rewards halving you will notice this right away and probably google what happened.
The demand size of the equation
You could say that as Cardano rewards go down as time passes people will have less incentive to run pools and stake their ADA… but there is always the other side of the equation. So if the supply is fixed and if the demand is growing ADA should go up. Therefore the value per reward should on the long enough time frame decrease but if ADA value would increase the rewards should still be quite good. In the end there is still value in rewarding the first adopters.
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Let us know if you find any mistakes.