(Note that this description became too long to leave it on the main page of the site, but delegators found it valuable, so we moved it to the blog and have referenced it from the main page. This is a very simplified description, and as such, it uses some analogies that are not entirely accurate, but provide an easier to understand description than the mathematics upon which the Ouroboros consensus protocol is built. If future demand warrants, we can do a much deeper dive into the protocol details, although there are currently many detailed descriptions available on the web, and not very many simplified descriptions.)
First, a word about Cardano. Without getting into details such as smart-contracts and advanced identity solutions, Cardano is a system (called a blockchain) – with mathematically proven trust built in – whose basic job is to accurately and permanently record your monetary holdings and transactions so that what is yours remains yours, without the possibility of censorship or seizure, and with many advanced features and benefits over our current financial/economic system. Why should you care about censorship or seizure, even if you live in a “great country”? Think of being forced to leave your land in a war-ravaged country in order to protect your family, only to return after the war to find that the government seized your land because someone else modified municipal land-records and falsely laid claim to what was once yours. How would you prove that the land is still yours? The Cardano blockchain would allow you to do so, as well as ensuring that the money that you would have had to leave behind if it were in a traditional banking system, was not left behind.
Sounds great, eh? So what is this thing called a stake pool?
The automated rules by which Cardano operates (called network protocols) require things called stake pools. In concert with the Cardano network protocols, a stake pool is the thing within the Cardano blockchain that makes sure that your next transaction is recorded and secured, once and forever. The process of recording and verifying your transaction is called producing a block, and blocks make up the blockchain. These transactions are completed using ADA, the currency used on the Cardano blockchain; already accepted by merchants, and convertible into most other currencies, worldwide.
As an example, if Rohit needs to pay Sally 400 ADA for groceries that she bought for him at the store, Rohit would transfer 400 ADA from his electronic wallet to Sally’s electronic wallet, and this wallet-to-wallet transfer would be witnessed and verified by a stake pool, which you can think of as somewhat similar to an electronic public notary.
Now, let’s say that Rohit actually holds 1 million ADA in his wallet, and Sally only holds 10 thousand ADA in her wallet. In this case, Rohit has a lot to lose if the network doesn’t operate properly, but Sally has much less to lose. Because of this, the network protocols are designed to assign more opportunity to protect the network to those with more ADA. But what is needed to protect the network? In short, the network is protected when blocks are properly created within the blockchain, in accordance with the best interests of the entire user base of the blockchain we are considering (the Cardano blockchain, in this case). Another way of saying what we just said is that the network protocols assign more opportunity to create blocks to those with more ADA.
But “creating blocks” sounds like work. Why is it a benefit for a large ADA holder to do more work? Well, that’s because when you do more work to protect the Cardano network, you are rewarded with more ADA! If you own lots of ADA and you are technically capable of running IT infrastructure, you could run your own private stake pool and potentially earn great rewards. But that also means doing actual work to setup the computers and networking gear required to run a stake pool, as well as ensuring that the pool is monitored, 24 hours a day, 7 days per week, and that regular maintenance is performed to keep it all running smoothly! All of that takes a non-trivial investment of time, energy, and money.
Something that we have yet to mention – but is important to understand – is that a stakepool requires stake in order to be recognized as a block creator (known as a Slot Leader, in the Cardano technical parlance). Stake is simply an amount of ADA someone controls for the purposes of validating transactions on the Cardano blockchain. Note that this is much different than controlling ADA with the power to spend it. When an ADA holder delegates an amount of ADA to a stake pool, the owner still owns the ADA and can spend it whenever he/she wishes. It is impossible for a pool to spend delegated ADA, because when ADA is delegated, it is the weight of that ADA that is transferred, not the actual ADA itself. The collective weight of all ADA owned by all delegators to a single stake pool determines the chance that the pool in question will be selected to produce one or more blocks in an amount of time called an epoch. An epoch on the ITN has a 24 hour duration, whereas an epoch for the Shelley Main Net will have a 10 day duration.
Continuing our previous example, let’s say that both Rohit and Sally are equally capable of running computers and networking equipment. And let’s say that the network protocols will regularly assign the ability to produce a single block per day to a stake pool that has 1 million ADA delegated to it, and that the network pays a reward of 100 ADA for producing a block on the blockchain. Rohit could simply start his own stake pool and regularly start earning 100 ADA each day. At the same time, even though Sally has the expertise to run a stake pool, she only has 10 thousand ADA to delegate to her pool. Sally may be assigned a block to produce every several weeks, but how can she get the 1 million ADA delegated to her stake pool so that her pool can also start regularly earning 100 ADA each day? Well, she can convince friends and relatives to delegate all of their ADA to her stake pool. Her parents delegate 500 thousand ADA; 9 college classmates each delegate 10 thousand ADA; and 4 people at work each delegate 100 thousand ADA to Sally’s stake pool. Among those 16 delegators, Sally now has 1 million ADA delegated to her stake pool, and each of her delegators keep their ADA in their own wallets. Everyone’s money is safe; available for spending whenever they need it, and they all split the 100 ADA per day rewards awarded to Sally’s stake pool!
That is fundamentally how stake pools work, and how they tie together delegators and users in the Cardano blockchain. This is a very simplified description, and there are many other things to understand that make Cardano the only blockchain that has a mathematically provable secure Proof of Stake protocol.
It is best to have many pools of roughly equal size to ensure that the network is secure and properly functioning. If there were only a single node and it went down, the block chain would not function. It gets its security and redundancy from the fact that there are many, many stake pools (block creators), thus tremendously lowering the risk that any one node going awry could bring the network down. To promote this, there are reward caps and other rules applied across the entire Cardano network and blockchain. These rules prevent any one stake pool from becoming too large, thus keeping the control of the network heavily decentralized, and controlled by no single entity. This eliminates downtime; keeps the community in control of the smooth operation of the Cardano system, and allows you to continue to own what you own, including your identity!