What is Cardano?
Cardano is a cryptocurrency. It would take much too long to explain exactly what it is and we could never do its complexity justice in this little FAQ. For that reason we would recommend people start here:
Charles Hoskinson’s White Board on the subject is a very good starting point. There has been some reiterations/changes since that initial whiteboard, however, the overall message remains the same.
What is Staking?
Staking is an artificial form of “mining”. Rather than using proof-of-work to figure out who gets the ability to build the block, you stake your tokens (lock them up). The “block-builder” is then chosen via a lottery system.
1 ADA = 1,000,000 Lovelaces
1 Lovelace = 1/1,000,000 Ada
Technically, you only need 1 Lovelace to stake. However, your chance of winning the “lottery” to build the block is virtually zero.
What is a Stake Pool?
A stake pool is an entity which gains the proxy rights to the staking of multiple different ADA holders. These different ADA holders delegate their stake to the pool.
By combining all of their stakes, the chance of their lottery number comes up becomes more common. The rewards are then given to the stakeholders based on how much ADA they staked to the pool. The stake pool then takes a small fee
for running the pool.
Shouldn’t I just stake with the biggest pool then?
Yes, it would technically make sense to just stake with the largest pool so that you would receive awards more consistently (albeit small).
However, the Cardanos Proof of Stake algorithm (Ouroboros) has made it such that there is an incentive for a stake pool to have a proxy rights up to a saturation point for efficiency. After this amount, the rewards decreases.
The plan is for the there to be 1000+ stakepools available at any one time. If you divide the circulating ADA (31 billion) by 1000, you get 31 million ADA. So then, in a world where everyone stakes, each stake pool would have 31 million
ADA with 1000 stake pools. However, in reality, it’s unlikely that many people will actually stake.
My random guess is that maybe 50% of all ADA will be staked on the main net. (My guess is this will be lower on the incentivized test net.) This would amount to 16 million ADA in 1000 stake pools on the mainnet in a perfect world. However, I think we’ll probably end up seeing more than 1000 stake pools with stake pools having between 10-16 million ADA in each pool.