October 2024 ought to be a memorable month in Cardano’s development calendar. During that period, the Cardano Summit 2024 shaped up to be quite an exciting event. When it is remembered, it is all for the technological advancements in the Cardano ecosystem, highlighting interoperability, decentralization, sustainability, and real-world adoption. The only account we have of progress is Cardano’s ability to deliver high transaction speeds in an efficient ecosystem, as crowned from initialization, a third-generation blockchain.
According to a piece titled “Insight into crypto transfers transaction speeds — what factors come into play?”, published in October, the speed of crypto transactions depends on network congestion, block size and block time, consensus mechanisms, gas and transaction fees, node distribution, and geographical factors. The determinant factors are certainly out of one’s control, although we learned a few tips on how to optimize for faster transactions.
We published two consecutive pieces at the near end of the month — Everything you need to know about staking on Cardano and Staking ADA: Understand how to stake your ADA to earn rewards and support the network. This is how we learned about how staking works in Cardano, delegating vs. running stake pools, the benefits of staking, key considerations and the future of staking in the former, and in the latter, how to stake ADA, the risks involved, and choosing a stake pool. These articles went viral on our social media, and a question came up: What does staking ADA have to do with making a network faster?
In this memo to Cardano users and the Web3 community at large, and with nothing but more insights into staking ADA, we delve deep into the topic to suggest that while staking doesn’t directly increase transaction speed, it plays a vital role in making the Cardano network stable, efficient and resilient. As a crucial component directly influencing security, decentralization, and sustainable infrastructure, staking should indirectly increase the speed of transactions. This article will no doubt seek to clarify how true this is to those lost in the dilemma.
Securing the Network Through Proof of Stake (PoS)
Cardano’s proof of stake consensus algorithm, Ouroboros — emerging as the bread and butter that makes the blockchain special and fully functional — as defined by Charles Hoskinson, depicts infinite, ethical, and scalable solutions for which real-world opportunities are delivered while still preserving through reduced energy consumption. As the first of its kind, Ouroboros is provably a secure protocol pioneered through scientific research. Its implementation on the Cardano blockchain was, in effect, a differentiation from how networks, which in the past had already cost us by sacrificing either of the quality features in the blockchain trilemma: security, decentralization, and scalability.
Without delving into the different implementation models, how Ouroboros works is the key point of interest. Through a unique criterion, Ouroboros selects validators to add new blocks and validate transactions. The selection depends on how much ADA a user is willing to stake such that the possibility of being chosen as a slot leader increases with increased stakes, an equivalence of the miner’s case in Bitcoin’s proof of work (PoW) mechanism. Operating in timeframes otherwise known as epochs, further divided into slots, each leader in a slot adds a block to the chain once it’s their turn. Stake pools are available to have leaders combining resources from ADA holders to increase their likelihood of being selected as leaders. Here’s our simplified guide to the Ouroboros algorithm.
Then comes the role of staking ADA in powering the Cardano network, which entails fueling transactions, enhancing network security, governance and voting rights, powering smart contracts, or making a long-term potential investment. Whether you are making payments, transferring assets, or executing smart contracts, ADA facilitates the process while keeping transaction costs low. The security enhancements through staking range from decentralizing the network so that no single entity can manipulate it to preventing Sybil attacks (using multiple fake identities to control a network or system) through an economic barrier where an attacker must own a significant ADA amount to control the blockchain.
The deal with staking ADA can be summarized as a way to protect Cardano from centralization and attacks that could disrupt performance. As a secure network, Cardano is less prone to delays, bottlenecks, or slowdowns that could degrade user experience. As such, we can infer that staking ADA is the first fundamental defense layer for which Cardano processes transactions smoothly and keeps block product integral.
Enhancing Network Decentralization and Resilience
The idea of staking to secure the network is closely related to the concepts of decentralization and resilience. However, many people do not understand that the cost of going past a PoS chain is actually the amount of funds staked by all the validators in their quest to validate all transactions. As an incentive, staking encourages more users to participate in the network, reducing the centralization of power. The decentralization effect grows if even more users participate in the validation process, whether as node validators or delegating their ADA to a stake pool. A proof of stake (PoS) ecosystem is more accessible than other options like Proof of Work (PoW) models, and that, sets Cardano apart from other cocky blockchain networks out there.
When decentralization is mentioned, it is questioned because of thin empirical evidence linking it to business outcomes instead of being embraced for its implications through developmental interventions in stimulating business activity and performance. At business levels, decentralization navigates the complex intricacies of global operations by maintaining quality software, hence driving the purpose of empowering digital societies. As a decentralized family, Cardano provides the freedom of authority to make decisions. This means that anyone involved in Cardano can validate operations. What this attribute drives in the ecosystem are strategic thinking, organizational culture, and operational efficiency.
In performance, decentralization on Cardano ensures data and tasks are distributed across multiple nodes. By distributing workload across multiple devices, Cardano is more resilient and performs better. Coordinated experimentation, feedback, and improved custom solutions for different problems also exist. We cannot emphasize enough that there’s been value addition through decentralization. Of course, it was challenging that Cardano uses Plutus and Haskel for smart contracts as opposed to EVM and solidity, unspent transaction output (UTXO) — like Bitcoin — a rival to Ethereum’s account-based model, and different signature schemes and elliptic curves — more about all this in a future article.
By example, we witnessed in the middle of 2022 when joint efforts from Input Output Global and Wanchain paired to bring bridges and sidechains to Cardano’s mainnet for interoperability. What this cooperation brought to Cardano was cross-chain bridges and additional security. There would be no interoperability without decentralized, non-custodial, bidirectional cross-chain bridges connecting Cardano to other networks, and the bridge node’s authentication proves the correctness of data stored on Cardano.
Fast forward to November 2022, Midnight was launched as a solution to build scalable and even more complex DApps. Once the first sidechain-based project was live, Cardano started unlocking even more potential with the release of the Cardano Sidechain toolkit. It was obvious that the new realm of development in Cardano proved more performance in the blockchain, with four more creators later leading the development of sidechains and, recently, Charli3, which speeds up real-time updates for Cardano users.
What you need to know here is that the value chain that links products to value for users originates from staking, which a decentralized ecosystem has evolved to make Cardano a fast, performant blockchain, and there are no congestion and pitfalls like in centralized networks. This operation model has been a way to keep Cardano efficient over time in consistent transaction speeds. Learn more about how Cardano side chains speed up transactions and enhance scalability.
Ensuring Timely and Efficient Block Production
Some logical background is helpful, and this is the start of how blocks are produced in the Cardano network. ADA, Cardano’s native token, is staked to secure the network through the proof of stake Ouroboros mechanism as a form of participation in securing the network and incentivizing decentralization. The regime in action is a two-option process, the first of which you can stake ADA and the second where you delegate your ADA to a stake pool responsible for network validations. When the latter is done, though, it is not a transfer of ownership of ADA, but a support to the network’s decentralized operations. Still, many published articles don’t explain the role of stake pools — or the staking process — in block production.
One commonly known idea is that the probability of being selected to create a new block depends on your “stake weight” — the total ADA delegated to a pool. If your weight is high, you’re frequently selected to produce blocks — we could add that you will get more rewards — but still, this depends on other factors such as pool performance and reliability. How are blocks minted on the blockchain?
The answer is a bit complex, but we’ll keep it simple. In every second (slot), every stake pool checks a verified random function (VRF) through a slot ID and the signing key of the VRF. In turn, an expression coined for one occasion is produced from two out of three outputs of VRFs from previous blocks produced in the previous epochs. A threshold is then made based on the total value of the pool’s stake and a number lower than it is produced by checking the VRF. Moreover, there’s a slot coefficient of 5% that dictates that for all the slots, only 5% can produce a block — on average, a block will be made every 20 seconds.
While the standard process means that you must reach a threshold to produce a block, we can likely end up in a situation where two or more pools create a block simultaneously, a situation called slot battle. Only the pool with the lowest number decided from a second VRF creates the block, as seen in this Ouroboros issue. In the past, it used to be the same VRF number, but this would give smaller pools an advantage because they needed a small threshold to produce a block — they’d always win the battle.
Another case would be in the event of a race condition where several blocks try to reach the next pool before the next slot, a scenario called height battles. A good example is when one pool uses 1.5 seconds to propagate a block to the next pool and another uses 0.5 seconds — the receiving pool will prefer the recent block, passed over in 0.5 seconds. At the time of writing, Cardano is well-optimized, so we rarely see such cases with block propagation taking 1 second or less.
The long and short of block production can be summarized as follows: A signed transaction is submitted to the mempool of a local Cardano node, and the mempools are constantly synchronized between peer nodes. A stake pool makes a new block by taking all transactions in its mempool and adding them to the end of its chain. Peer nodes realize that a particular stake pool has a new block (the longer chain), so they validate its legitimacy and add it to their chain. Transactions in the propagating block are cleared from all node’s mempools. The process is repeated until all nodes are synchronized.
Of course, only with staking can we have efficient block production. Many decentralized operators set up robust node operators enabled by the staked ADA to maintain efficient block production schedules. A reliable block product is vital for confirming transactions promptly and preventing network delays in processing transactions, undoubtedly leading to better network speeds.
Incentivizing Network Participation for a Scalable Future
Up until now, it has been clear that staking ADA is an incentive that inspires network participation for a scalable future. This includes securing the network through PoS, promoting decentralization and resilience, and ensuring timely and efficient block production. But we wanted to stress a little more about how network participation shapes a scalable future. Staring at a publication by Emurgo — one of Cardano’s founding entities — we gather that the Cardano staking system works to incentivize two primary objectives: ensuring stakeholders are online and participating in the protocol.
It is through the stakeholders holding assets in a ledger that it is maintained. As a requirement imposed on stakeholders, they need to be online to maintain sufficient network connectivity that collects transactions and, in turn, has their PoS blocks reach other participants without substantial delay. Not many people are able to run their servers (nodes) or create stake pools, hence, they delegate their ADA to pools of their choice to unique delegation addresses. This conforms with Cardano’s decentralization approach where everyone contributes to ledger maintenance. In this approach, ADA holders combine their assets in a single entity to engage in the PoS protocol using the stake of all members with a pool manager to run and process the transactions.
The blog post titled “Stake Pools in Cardano” by IOHK further explains that a manager cannot spend the stakes of their pool members and that any stakeholder can relocate their stake to any other pool or aspire to become a pool manager. In practice, the costs of running a pool are deducted before pool rewards are distributed across members. The blog further explains how non-myopic strategies are used to promote decentralization, Cardano fairs well with respect to this analytic paper, where equilibrium strategies are coined as such that stakeholders have a specific way to create pools, set their profit margins, and delegate to other pools with respect to long-term thinking biased to no stakeholder is better off following a different strategy. This model encourages more participants to secure and maintain the network.
High participation is key to stability in Cardano. A larger pool of validators reduces the risk of transaction processing bottlenecks. The rationale for this active participation has paid off for the Cardano ecosystem through peer-reviewed layer-2 scaling solutions, Hydra for their name, that increases transaction throughput while keeping the network cost-efficient and with rigid security. Besides scalability, Hydra has been known to support the network by maintaining a stable, participant-rich network. Staking ADA has been a pillar in strengthening Cardano’s infrastructure and paves the way for future scalability upgrades that directly impact speed.
Staking ADA as an Indirect Performance Booster
Many times, we have stated and will restate here again that the role of staking ADA resolves to increase security on the network through Ouroboros, enhance Cardano’s Resilience, promote decentralization, keep block production integral and timely, and incentivize participation towards a scalable and sustainable future. It can be said that staking ADA is nothing but Cardano’s means of self-preservation and improvement by creating an environment where the network consistently performs well under any conditions, setting the foundation for speed-enhancing innovations.
With nothing but a bright future ahead, there’s only one thing left for you who read this post can do, and that is:
Please do the Cardano and Web3 community space a favor; you have the mandate to either join us in building the digital ecosystem or to watch us create the future of the internet. Just stake some ADA.
