The ada token: definition and functionality
Ada (from 19th-century English writer and mathematician Ada Lovelace) is Cardano's native digital currency. It is the sole means to pay for transactions on the Cardano blockchain. Formal ledger rules determine the effects of these ledger transactions, yielding an immutable and independently verifiable record that tracks the movement of ada and other assets over time. Transactions are authorized using secure cryptographic keys that are owned by the ada holder.
As described below, ada holders can opt to stake their ada holding in order to participate in the Ouroboros proof-of-stake consensus mechanism, which determines how transactions are included in successive Cardano blocks. They receive rewards for this in proportion to the stake that has been delegated. In addition, ada allows holders to:
participate in governance activities, including voting on Catalyst ecosystem proposals
pay for the costs of creating and transferring assets such as Non-Fungible Tokens (NFTs)
pay for the costs of using smart contracts
pay for the costs of recording data on the blockchain
transfer ada tokens to other users
1 ada is divided into 1,000,000 lovelace.
As a fully decentralized blockchain, a large network of Cardano stake pools creates 100% of the blocks. These pools gather the ada that has been delegated ('staked') by ada holders, earning rewards that are based on the blocks that the pool contributes to the chain.
Every 5 days (a Cardano epoch), Ouroboros chooses certain pools to add blocks to the chain, in proportion to the ada that is held by each pool. At the end of the epoch, block creation rewards are given to the pools that have been selected and that have successfully created their assigned blocks. These rewards are distributed among those ada holders who staked their ada as well as the pool operator, and contribute to the pool's maintenance, growth, and sustainability.
Since the chance of a stake pool being selected for block creation increases based upon the amount of ada delegated to it, it's important for the pool to attract as many delegators as possible, up to the point when the pool becomes 'saturated'. When the pool is saturated, it has reached the peak return-on-investment (ROI) for its delegators. Any more ada delegated to a saturated pool will dilute the rewards for other delegators, reducing the ROI. The saturation property is designed to avoid a single pool dominating block creation, encouraging staked ada to be distributed among many stake, non-saturated pools.
Check out this staking tutorial for more information.
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