Understanding Cardano’s Staking Rewards System
Have you ever wondered why Cardano’s staking rewards have been steadily decreasing? It might seem confusing at first, but there’s a logical explanation behind it. Let’s break it down.
Why Staking Rewards Decrease Over Time
Staking on Cardano is like drawing water from a reservoir. The reservoir represents Cardano’s treasury reserves, which were filled when the network first launched. Every epoch (5 days), some of that water is distributed to stakers as rewards. However, since the reservoir isn't being refilled at the same rate, the amount of available water gradually decreases over time.
There are two main reasons for this:
Reserve Depletion – In the early days, staking rewards were supplemented heavily by Cardano’s reserve funds. But as these funds are used up, fewer ADA are available for rewards.
More Participants – As more people stake their ADA, the same rewards pool is shared among a larger group, reducing the individual share.
Even though the percentage of rewards is decreasing, the goal is for the Cardano network to transition to self-sustainability, where rewards primarily come from transaction fees rather than the reserve.
The Value of ADA and Staking Rewards
The rewards on the Cardano network are paid in ADA, and Cardano’s long-term strategy is to increase ADA’s demand and utility.
Think of ADA as a rare gemstone. If more people find value in it, the price of each gemstone rises, even if fewer gems are mined each year. Similarly, even though staking yields (percentage returns) are decreasing, if the value of ADA increases due to adoption, utility, and ecosystem growth, the actual value of your staking rewards may remain stable or even grow.
To support this, Cardano is building a thriving ecosystem, including:
DeFi Platforms (Minswap, Indigo, Liqwid Finance, Lenfi) to increase ADA’s financial use cases.
NFT and Gaming Markets to drive real-world usage.
Enterprise and Government Adoption to establish ADA’s long-term credibility.
This broader ecosystem means that ADA can increase in value over time, making up for lower staking percentages.
Why the Gradual Decrease is Necessary
The decrease in staking rewards is not a flaw—it’s a designed feature to ensure sustainability. Without it, the network could run out of incentives too quickly, leading to problems down the line.
There are two main ways this affects stakers:
Slow and Gradual Realization – Similar to how a melting ice cube doesn’t seem to change much at first, but over time, it becomes noticeably smaller, staking rewards decrease in a way that isn’t always immediately apparent.
Potential Stake Drop-off – Some people may get discouraged when they notice lower rewards, just like how a water tap that drips too slowly might cause someone to turn it off completely. However, the system is designed to encourage long-term commitment rather than short-term gains.
Cardano’s Plan for Long-Term Stability
To maintain a healthy staking ecosystem, Cardano has several safeguards and innovations in place:
On-Chain Governance (Voltaire Era): Ensuring decentralized decision-making over treasury funds.
Hydra Scaling Solution: Increasing transaction throughput, leading to more transaction fees as staking incentives.
Treasury Funding and Voting (DReps): Allowing the community to decide how funds should be used to support ecosystem growth.
Conclusion
Cardano’s staking rewards system might seem complex, but it’s designed for long-term sustainability. While the percentage of rewards naturally decreases, the ecosystem’s growth and the potential increase in ADA’s value aim to compensate for this decline. The system isn’t about quick, short-term profits—it’s about building a long-lasting, decentralized financial infrastructure that benefits all stakeholders in the long run.
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