GUIDE TO BLOCKCHAIN & CARDANO (ETHEREUM KILLER)

Let’s try to understand in a simple way,

                                                                      Think blockchain as an account book in sky, people all over the world can see and write in it with ink and when once it gets dry no one can change the entries (transactions) or delete them. It's not just 1 book, multiple identical copies can be made by any person. When someone tries to add  new entries, everyone who holds the copy verifies it first and decides if new entry is right or wrong. If the entry is correct, it is allowed to be added and the person who wrote gets rewards.

This process leads to decentralization, meaning:-

  1.  Everyone can participate

  2.  Data is distributed to many individuals (no single person holds all information)

  3.  No middleman or central authority.

If everything is available in public domain then how it gives privacy? 

This is where crypto (encryption) comes in play. Every piece of information is heavily encrypted by network before putting it in public domain so identity of person is not revealed.

BUT ​decentralization is not cheap, it comes with a big cost that includes nodes (hardware that keeps copy of book), energy

(electricity) to run hardware, money (for making infrastructure, server, internet, technical skills etc).

Now let’s come to mining or staking. As we already know that the person who writes the new entry gets reward, it is natural that everyone wants to write new entry but how to decide who writes next.

There are two ways of solving this problem and these two solutions in crypto world are called mining (Proof Of Work) and minting/staking (Proof Of Stake).

Mining (PoW):- This is used by 1st and 2nd generation crypto (Bitcoin, Ethereum). In this method the network broadcasts a complex mathematical problem to everyone who holds the copy of blockchain (book in sky). The person who solves the problem first (using computing/silicon power) is given permission to write next entry, thereafter a new problem is sent to everyone on network to solve again and the process continues.

Problems in this method are:-

   1. It is not fast enough (can only perform few transactions per second).

   2. The race to find solution first has resulted in using more and more resources which consumes too much electricity.

   3. A person with large number of resources stands greater chance of winning the race and everyone does not have                   similar chances of winning.

   4. Mining is more profitable in countries having cheaper electricity cost (mostly in developed countries), so people in               developing countries do not have equal participation leading to the problem of geographic exclusion.

Minting/Staking (PoS):- This method is used by 3rd generation cryptos like Cardano (ADA). In this a virtual lottery is done by network itself, randomly selecting 1 Lovelace (1 ADA= 1 million Lovelace) and whomsoever owned that Lovelace at the moment will be given permission to write next block (entry) and gets rewards in return

In this method the person who holds more ADA has more probability of winning lottery but 1-person alone cannot own large number of ADA. So, his probability of winning remains very low. Not everyone has time and skills to run a node (hardware) by himself as doing this requires infrastructure, technical knowledge, keeping node online 24/7 etc.

Here, a stake pool comes in, which helps everyone to come together and delegate their stake (ADA) to pool. Pool does the work on their behalf and will return the rewards to delegators by subtracting pool's cost. The proportion of reward received by a delegator is decided by the number of ADA delegated.

In simple terms:- A person delegating twice amount than other person will receive twice the rewards (amount of reward is directly proportional to the ADA delegated to pool)

Frequently asked questions

Where do rewards come from?


During each epoch (5 days), a 'bag' collects all transaction fees and newly minted coins. At the end of epoch these collected ADA are redistributed.




How distribution occurs?


a. A fixed amount goes to treasury (used to fund developers for making better code and improving Cardano) b. Then each pool gets their part proportional to their size.




Distribution of rewards to all delegators in a pool?


Reward amount recieved by each delegator is directly proportional to the stake (ADA) delegated to pool. Eg In pool x there ared 2 people delegating their ADA. Person A delegated 75 ADA and Person B 25 ADA. In this case rewards will be distributed in ratio 3:1.




Does delegating means transferring ADA to pool?


No, you do not transfer any ADA to pool. Your ADA remains in your wallet and can be withdrawn/spent anytime you want.