You surely have heard a lot about staking pools and delegation
Let's take BitCoin for example. It relies on a consensus mechanism called Proof Of Work (POW)
in order to secure the network, this specific method requires a lot of calculus in order to be able to write a
block (or let's say page) in the ledger's record, this is due to the
mathematical problems each node validating transactions has to do in order to be able to write the next block in the blockchain.
It is an expensive but yet effective method to deter malicious players into infiltrating the network, but this creates a new sort of problems, such as centralization
of the nodes responsible for writing the new blocks of transactions, where only the big players can participate in the network and with all of this big calculus rigs
comes energy consumption. As you can find in this article
about this energy consumption issue:
The PoW mechanism requires a vast amount of computing resources, which consume a significant amount of electricity.
Bitcoin's energy consumption can power an entire country.
In the wild, there are a lot of mechanisms for proving that a block is written in the right way so
that malicious players cannot tamper with the transactions to their advantage, such as
(the famous double-spending attack).
Cardano, on the other hand, uses another consensus mechanism, called Proof of Stake (POS)
This consensus method doesn't require huge amounts of calculus in order to prove
that a transaction is valid, the code embedded in the protocol used by it
determines who will write the next block of transactions through
a pseudo-random selection (I say pseudo-random for simplicity of explanation, if you want to know in depth, go check the
favouring the nodes that have "staked" something, in other words, the node has put the skin in the game, the more the node has something at stake
the more likely it will be chosen to write the next block of transactions.
The node operators put at stake the equipment, the know-how in order to maintain their rigs, and a pledge, which
are some funds belonging to the node operator, these funds are blocked for the purpose of putting more skin in the game but... That's not enough in order to make them eligible for writing
blocks to the distributed ledger. They need rights to vote!!! Power given by the masses! That's where delegation comes in...
And now... Delegation
When someone delegates their ADA, THEY ARE NOT GIVING AWAY THEIR MONEY, delegation is not about trusting your funds to someone else, this is
your one responsibility, I want to make that very clear to you.
And I also want to make very clear that YOU MUST NOT ACCEPT ANY MESSAGE THAT CLAIMS ANY RELATION WITH THIS POOL EXHORTING YOU TO SEND YOUR
FUNDS TO A WALLET OR TO SEND FUNDS TO POOL OR TO ME, THAT'S A FAKE MESSAGE FROM SOMEONE WHO WANTS TO STEAL YOUR FUNDS.
In the Cardano network each and every ADA is a ticket,
like a lottery ticket, each "coin" has not only it's monetary value but it has also a vote power, when you delegate
your ADA you are not blocking your funds, you can still use your funds as you please, what you are doing is like saying:
"Hey I'm betting that this operator will
be a chosen node, one that will get elected to write the next blocks, so I'm supporting this guys/guys/company/corporation.
I'm giving my vote power to them, if they win the elections,
they will write the next block or blocks of transactions and I'll get some rewards out of that".
And what happens if the pool you chose wins the elections? Well, as happens with any other cryptocurrency that the operator (aka miner, minter) receive a compensation from fees out of
transactions, if a pool gets to be chosen to create a new block (hence mint) when the block is registered, the pool will
be rewarded with all of the transaction fees of that block or group of blocks, then a fee will be applied to that total reward's amount, the result of that last fee will
go to the node operator, which is usually a low fee, ranging from 0% to 6% most of the times, this fee will serve as reward for the pool operator with that he can cover the
costs related to the operation of the node. The remaining 94% - 100% of the rewards (depending on the operator's fees) after the pool operator fixed fee will be distributed among
all of the people that gave their vote power (or delegated) their ADA to the pool following some rules established by the protocol, I cannot explain everything here because is
complex as there are a lot of factors involved for determining how much will go to the delegators, but I know a fraction will go to the Cardano
treasury and this funds will serve for funding development, more or less the Return Of Investment so to speak will go around 5% per year to delegators, more or less.
You might be thinking, if you inject a lot of resources (equipment, advertising, prestige) as a pool operator, wouldn't end up as for BitCoin?
Wouldn't end up that a few people run and dominate the network? Yes, it could, but the protocol has its way to prevent this from happening, each node has a "saturation point"
where the rewards will be capped if they get "saturated", which means that for that saturated node the rewards won't be as high as for the pool with few delegators that won the
lottery for writing the next block or blocks. This is made this way to incentivise decentralisation, otherwise the Cardano network will be another BitCoin or Ethereum so to speak.
This should keep the greed out the whales and let everyone else participate.