What is staking and how rewards are distributed

If someone sends ADA to another wallet that person pays a small fee to include the transaction in the ledger. Stake pools are in charge of adding these transactions to the ledger and they receive compensation for doing it.   

In contrast to a proof of work system (like Bitcoin), where everyone tries to solve a puzzle to mine a block and get rewarded, in Cardano, it’s more like a lottery. 

Every 5 days or what is called an Epoch a lottery is held, and all the stake pools participate in this lottery. The winners are chosen to write transactions to the blockchain or what is called producing a block.

In this lottery, each ADA is like a ticket and everyone who participates can win the lottery, but of course, those with more ADA have more tickets and thus a better chance to win the lottery and get rewarded. The theory behind this is that the more ADA you have the more interested you are going to be in the correct operation of the whole system. 

If you want to participate in the lottery you have to be either a stake pool or a delegator.

A delegator is someone who owns ADA and wants to participate in the lottery but doesn’t want to go through the hurdles of operating a pool. Therefore, they virtually join their tickets with the pool operator tickets to increase the stake of the pool and increase the chances to win the lottery and get rewarded. And look how I said virtually joint their tickets, and that’s because delegators never send their ADA to the stake pools, their ADA stays within their wallets all the time and there is no lockup or unlock period. You can think about it like printing a bank statement and sending the bank statement to the stake pool. The stake pool will collect bank statements from all the delegators as proof of their stake and will use them to register in the lottery.  

When a pool wins the lottery and manages to update the blockchain by producing a block it gets rewarded with ADA. The rewards are split between the pool operators and the delegators. Something important is that delegators don’t have to trust a pool operator to split the rewards properly because the rewards are distributed by the protocol, there is no human intervention in that. 

Pool operators have to declare the cost for operating the pool and the margin they are going to earn, and the delegator can see all these values in advance and make a choice based on those parameters. 

The reward for the delegators is usually from 95% to 100% of the ADA received by the pool minus the pool declared cost. These rewards are split proportionally to the delegated stake amongst all the people who delegated in the pool. 

On average you’ll receive 5,5% ADA per year, for example, if you stake 10K ADA then you’ll receive about 6 to 7 ADA every 5 days that will add up to 550 ADA per year.