A Simple Guide to Cardano Reward Distribution
Ever wondered how rewards work in Cardano's staking system? In this article, we'll break down the process, making it easy for ADA holders to understand how rewards are distributed and managed within Cardano's ecosystem.
Cardano uses a reward account system, which operates with a balance-based model.
Rewards accumulate every epoch, and ADA is automatically delegated to the pool.
To count as voting power in Catalyst, rewards must be withdrawn through an on-chain transaction.
The current system simplifies staking and saves resources.
Cardano uses "reward accounts" to manage staking rewards. Each registered stake address is linked to a corresponding reward account. Unlike the classic UTXO-style accounting, reward accounts use an account-style bookkeeping system.
Reward accounts only accumulate ADA rewards.
Balances increase when rewards are distributed and decrease when withdrawn.
A signature (stake credentials) is required to spend from a reward account.
Withdrawals can be made via on-chain transactions.
Rewards are added to the account every epoch and are automatically delegated to the same pool as the stake. You don't need to collect rewards every epoch to increase your stake.
However, the reward account balance doesn't count as voting power in Catalyst. To increase your voting power, you'll need to withdraw your rewards, boosting your stake.
Why Use Reward Accounts?
You might be wondering why Cardano chose this reward distribution system. Here's why:
Staking should be as automated as possible, requiring minimal actions from stakers. Users receive rewards regularly, which are automatically delegated to the same pool. They don't need to manually collect rewards or withdraw them when changing pools.
Distributing rewards through on-chain transactions would cause a massive increase in transactions and small UTXOs. With millions of stakers, this could quickly become unmanageable. By using reward accounts, Cardano ensures that UTXOs are only created when stakers want to use their ADA rewards, saving resources significantly.
Transparency & User-Friendliness
Depending on the wallet used, users can see their "total funds," "balance," and "rewards." Some wallets combine balance and rewards under "total funds." Wallets also allow users to withdraw rewards through transactions, providing a simple and user-friendly experience.
Cardano's reward distribution system automatically calculates and distributes rewards to all participants every epoch. Stakers can easily monitor pool activity and rewards without needing to perform regular actions. ADA coins held in reward accounts are owned by stakers and can be withdrawn either to boost voting power in Project Catalyst or for spending as desired. This system offers a transparent, user-friendly, and resource-efficient approach to managing staking rewards in the Cardano ecosystem.