Make Better Decisions Staking Cardano (ADA): Lessons from On-Chain Data

Following on with our staking data series, this week, we take a look at Cardano.

Leveraging our Staking Rewards API, we look closely at Cardano staking and validator data to gain insights beyond price movement. Staking and validator activity uncover insights into investor activity and belief. In addition, exploring the Cardano validator set helps ensure there are no structural red flags ahead and provides insights into the validator business.

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Staking Activity

In the last two quarters, 3.7M Cardano was staked every day. That’s about $1.3M in value at an average ADA price of $0.34 in the past five months. The most significant single day inflow saw 62.4M ADA staked on October 7, 2022. The largest single day outflow saw 77.6M ADA unstaked on November 13th, soon after the FTX collapse. Since October 1, 2022, until February 2, 2023, 400M ADA has been staked, growing the current balance to 25.5B ADA staked.

About 350M ADA was staked during local lows between $0.24 to $0.31 ADA near the end of December. Despite an increase in tokens staked, the Staking Market Cap remains 9% lower than at the start of October 2022. Cardano’s Staking Market Cap grew 66% from the five month low on December 29, 2022. About 72% of ADA tokens is currently staked, bringing the staking market cap to around $10B. The overall marketcap for ADA currently sits at $14B.

Investor Confidence in Staking

Cardano’s Staking Market Cap growth rate has consistently outperformed Cardano Market Cap growth since December 29, 2022, the bottom in the last five months. Since then, Cardano investors have continued to confidently stake tokens, as highlighted by increased staked tokens and Staking Market Cap outperformance. Staking Market Cap growth outpaces Market Cap growth signals a further positive outlook in ADA holder confidence. It’s also important to note that the circulating supply of ADA grows every epoch, meaning Market Cap growth has additional growth drivers.

Tokens staked has grown 4.6% since January 9, 2023. However, the number of staking wallets has declined by 8%. The discrepancy points to wallets already staking were growing their staked ADA positions. As a result, the average staked tokens per wallet increased by 20% from 19.8k ADA staked to 23.9k staked.

Staking Flow Behavior

Going back to staking flows in the last two quarters, we notice a few trends that might help ADA delegators make better decisions.

Look out for abrupt staking inflows when the price declines from a recent local top. The behavior occurred three times during significant price movements in the last two quarters. ADA investors should be patient when abrupt inflows occur as local high prices decline.

Another staking flow behavior within ADA focuses on consecutive days of continued flows. Several consecutive days of outflows, while the price is moving in the same direction, may signal a more significant move in the same direction. Daily flows must be a similar size, and counter flows must be nonexistent or minimal. ADA investors should look for continued flows in the same direction along with the price to anticipate future price direction.

Validators

Validators are a vital component of sustainable L1s. Operating validators highlight a sustainability baseline required for network security and decentralization. That said, we looked at overall validator growth and distribution since 2021 for Cardano until mid-February 2, 2023, using our Staking Rewards API.

Since 2021, Cardano hasn’t seen much change in balance distribution across validators. Impressively the largest validators on Cardano have a very small percentage of staked balance.

A single Provider sometimes dominates the top 10 validators on Cardano. Top validators also constantly change, much more frequently than other L1s we’ve analyzed – likely due to the Cardano validator pool size optimal parameters. A few validators stand out in 2023 based on top balances, including Blockdaemon across several validators in the top 10, Nu.Fi & AdaLite, CARDANIANS.io, WAVE, ADAvault, Pilot Pool, ADALovelacePool, and 1 Percent Pool. The top 10 validators on Cardano account for about 2.86% of staked ADA currently.

Based on Cardano’s mechanics, validators should limit the pool size to a specific balance. The last limit agreed on was 70M ADA. Any validators with more than 70M ADA are said to be saturated, as all tokens beyond 70M don’t earn additional rewards for the pool. Hence, Providers are encouraged to run several validators rather than just a single large one. The goal is to encourage decentralization.

Additionally, validators must maximize their validator size before starting a new validator to maximize rewards. When slicing the data by Provider rather than specific validators, we get a better picture which Providers are key to staking on ADA. The top 10 Providers account for 24.4% of all tokens staked on Cardano across 119 validators as of January 28, 2023. Several of the top validators on Cardano are also a part of our Verified Provider Program. Our program assesses Providers in-depth to help users make faster and smarter staking decisions. If you’re looking to stake with a trusted and verified Staking Provider, look for ones with a check mark on their profile on stakingrewards.com.

Reward Rates and Validator Selection

ADA reward and inflation rates are nearly identical, 3.60% and 3.40%, respectively. Commission rates taken by validators on rewards have also increased from 6.3% to 7.05% on all rewards. On average, current ADA real rate returns are slightly negative at -0.17%.  Learn more about the ADA rewards system and calculate staking scenarios with the Cardano staking calculator.

Breaking down the rates further, we notice significant differences depending on the staking method and chosen validator. Although the average real rate for delegating ADA is -0.17%, running a stake pool returns a 1.52% real rate. See more on current rates and staking options on stakingrewards.com. 

We analyzed rate metrics across all ADA validators on February 2, 2023. Validators were filtered for a minimum of 100 wallets staking, a maximum 8% commission fee on rewards, and a 6% reward rate at most. The smallest validator in the set has a balance of 6.2M ADA staked, and the largest has 154M ADA staked. Validators have a wide range of wallets, between 133 to 35.7k. The overall staked balance isn’t necessarily correlated with the number of wallets. For example, Atomic Wallet has over 35.7k delegators and ~61M ADA. Many other Validators have similar balances but delegate for only a few thousand wallets.

Surprisingly delegators aren’t selecting validators based on reward rates and commission fees. There’s not much correlation with the number of unique wallets, lower commission fees, or higher rewards. This begs the question on how delegators go about their staking decision process. Either delegators lack information or value other factors beyond rates and fees. This perhaps involves ease of use, other features, trust, and many other factors. Further insights into the validator selection process can be found in our State of Staking 2022 report.

Conclusion

Staking and validator activity shows Cardano gained a significant increase in staked tokens in the last two months, primarily from wallets upping their balance, despite declining total wallets staking. Since December 11, 2022, staking flows have been positive. A continued outperformance of Staking Market Cap growth relative to Market Cap highlights confidence among ADA holders in the protocol. In addition, investors continue staking despite a slight decline in the reward rate and an increase in benchmark commission fees.

For investors looking to stake Cardano, look closely at staking flow behavior, as it can lead to price action. In addition, explore your validator options, as a wide range of rewards and commission rates affect your real reward rate.

Check out our piece on Cardano and our Cardano asset page to better understand Cardano mechanics, current reward rates, and staking options.

About The Author

Staking Rewards Research is a team of analysts dedicated to analyzing the economics, profitability, risks, and yield potential of various cryptocurrencies.