Guide to Cardano by Bison Trails

Bison Trails supports participation in the Cardano Network, a technological platform with the goal of creating a financial operating system for the underbanked



  • Cardano is a technological platform, with the goal of creating a financial operating system for the underbanked, which will run financial applications and the ADA cryptocurrency.

  • The full launch of Cardano further aims to enable financial and business experts, with no previous technical knowledge, to create and execute smart contracts.

  • Cardano’s key innovations include its use of evidence-based methods, peer reviewed research, supporting white papers, and mathematically-based platform elements.

  • Earn up to 7% rewards as a Stake Pool operator with both fixed cost and variable inflationary rewards, plus no slashing and no unbonding or lock-up period.

  • Benefit from Bison Trails’ advanced understanding of Cardano’s economics and unique protocol structure, and high level of engagement with both the Cardano Foundation and IOHK team.

What is Cardano?

Cardano is a proof of stake blockchain based in peer-reviewed research and evidence-based models. Its launch takes place in five phases, with the eventual support for smart contracts, sidechains, governance, and a voted-upon treasury system.

Cardano gains its namesake from the Italian Renaissance mathematician Gerolamo Cardano, and its native currency, ADA, which can be delegated on the network, is named after 19th-century mathematician and early programmer Ada Lovelace.

The full launch of Cardano will be executed in five phases: Byron (core of the protocol), Shelley (progressive decentralization—where we are today), Goguen (multi-asset and smart-contract development), Basho (scalability and side-chain enablement), and Voltaire (governance and voting).

While the protocol is currently operating in a limited live mainnet within the Shelley phase, at its full launch its core features will include:

  • Plutus, a purpose-built smart contract development language, which will improve the coherency and usability of the development experience as compared to existing smart contract implementations. This is achieved by use of the functional programming language Haskell, as Haskell allows one codebase to support both on- and off-chain components.

  • Marlow, a high-level domain-specific language for financial contracts built on Plutus, which will allow financial and business experts with no previous technical knowledge to create smart contracts.

  • More than 1,000 Stake Pools for a deep level of engagement and decentralization.

  • Sidechains to greatly expand the throughput, capacity, and capabilities of the network for a variety of diverse use cases.

  • Decentralized governance funded by a treasury of pooled transaction fees and rewards to support development activities, allowing anyone to make a proposal that can be voted on through governance and funded by the community.

Founded with the mission of overseeing and supervising the advancement of Cardano, The Cardano Foundation is focused on core development and ecosystem growth for the protocol. Cardano is backed by Emurgo, a Japanese blockchain technology and venture capital firm, and was launched by IOHK, a blockchain research and development company focused on utilizing peer-to-peer innovations to help increase global access to financial services. IOHK, founded by Charles Hoskinson and Jeremey Wood, will continue to spearhead the development of Cardano through 2020.

Cardano’s Innovation

Cardano’s primary innovation is its mission to be the first blockchain network developed via evidence-based methods and founded on the pillars of peer-reviewed research. Sometimes referred to as a “professor-coin,” it is regarded as being the most research and theory-focused blockchain in today’s ecosystem.

There are currently 90 white papers supporting the development of Cardano, as compared to the fewer than five developed for the majority of blockchain protocols. A foundation built on scientific methods and research helps to support Cardano’s focus on providing security and sustainability via mathematically proven consensus mechanisms.

How it Works

Cardano uses a novel proof of stake consensus mechanism, Ouroboros, which is peer-reviewed and has mathematical backing of its security. Ouroboros is considered secure as long as 51% of the stake is controlled by entities who are not misbehaving, as opposed to the 67% control required by the majority of proof of stake protocols. Block validation within Ouroboros is more akin to that of proof of work blockchains than that of the most common proof of stake protocols. Ouroboros uses probabilistic finality, making reorganization possible due to the blocks being added canonically as opposed to validators finalizing the blocks as they are produced. In its final implementation Ouroboros is expected to enable near-instant finality via an improvement called Hydra.

The state of Cardano will, in its full launch, utilize Extended UTXO (EUTXO) to simplify smart contract use by splitting smart contract execution into multiple transactions. It currently uses the UTXO (unspent transaction output) model, a Bitcoin innovation, to maintain the blockchain’s state. This is unique from other smart contract blockchains, such as Ethereum, which generally tend to utilize account based models.

Cardano’s plan to utilize EUTXO, in addition to those aspects of its block validation which resemble the functionality of proof of work protocols, are two aspects of Cardano that were specifically developed to mirror the simplicity of proof of work protocols while capturing the incentivized participation, scalability, and resource usage benefits of proof of stake models.

Cardano Economics

The main participants in the Cardano network are Core Nodes and Relay Nodes, which together comprise a Stake Pool. A Cardano Cluster on the Bison Trails platform is a Stake Pool that includes a Core Node and one or more Relay Nodes.

Core Nodes function as protocol validators, connecting only to their Relay Nodes and holding the certifications needed for block generation. Relay Nodes stand between their Core Node and the network, ferrying messages and blocks while providing network security. There is no lock up or unbonding period for delegating within the Cardano protocol.

The initial token supply for Cardano was 31.1 billion ADA, with an expected 7% annual inflation rate leading up to a maximum supply of 45 billion ADA. Beginning in December 2020 the maximum stake for a Stake Pool on The Cardano Network will be 31 million ADA, a value set as a byproduct of Cardano’s k parameter.

The d and k parameters, protocol-defined variables that influence Cardano’s Stake Pools, are an important aspect of Cardano’s staking dynamics and level of decentralization.

  • The Decentralization Parameter (d) impacts the amount of work Stake Pools at large are performing within the network

  • The Saturation Parameter (k) impacts the amount of ADA that can be delegated to an individual Stake Pool

The d parameter controls the ratio of the amount of work to be completed by the “Federation of Nodes,” or the original three nodes running Cardano in its early phases (run by the Cardano Foundation, Emurgo, and IOHK) as opposed to the amount of work completed by Stake Pool operators at large. As the d parameter’s value decreases, the amount of work completed by Stake Pool operators at large increases, thus moving the network to its fully decentralized form. With the value set to decrease by .02/epoch, Cardano is slated to reach its fully decentralized launch in mid-March of 2021.

The k parameter controls the number of Stake Pools in the network by way of adjusting the amount of ADA that can be earning rewards when staked to an individual pool. The higher the k parameter, the lower the maximum stake cap per pool, and a pool which has exceeded its maximum stake cap only earns rewards on the ADA staked to it up to that cap. For example, if the k parameter was set so that the stake cap per pool was 100 ADA, a Stake Pool with 100 ADA staked and a Stake Pool with 200 ADA staked would both earn the same rewards. This prevents centralization and impacts the amount of ADA that an individual stakepool can control by incentivizing operators and delegators to diversify their pools and staking in the aim of earning maximum rewards.

Any number of Stake Pools can be operational simultaneously on Cardano, as there is no active set for proof of stake validation on The Cardano Network. In the long term the Cardano development aims to have the k parameter set to optimize the participation of 1000 Stake Pools, but in the current phase of development there are upwards of 1100 Stake Pools participating on the protocol at any particular time and a k value of 500.

Inflation, Participatory Rewards, and Staking

Stake pools earn fees in two ways, via a fixed cost (Pool Cost) and a variable percentage (Pool Margin). The Pool Cost, a fixed amount of ADA that the Stake Pool retains each epoch, enables Stake Pool operators to have confidence in regular, stable rewards from operation of a Stake Pool. The Pool Margin, taken after the fixed fee, consists of an additional percentage of rewards earned per epoch and allows a Stake Pool operator to scale their earnings with their pool’s success.

There are multiple steps to the Cardano network’s inflationary rewards process:

  1. Identify total possible rewards: The maximum possible rewards that can be earned within the network each epoch are identified using a parameter called the Expansion Rate. Taking the maximal supply of ADA, and subtracting what is currently in circulation or in the treasury, leaves a remainder of ADA called the Reserve. During each epoch, a fixed (but parameterizable) percentage of the Reserve is used for both epoch rewards and for funding the treasury, where the amount being sent to the treasury is a fixed percentage of the amount taken from the reserve. Currently the Expansion Rate is set to .3%. As such, each epoch .3% of the Reserve is identified as being the potential total possible rewards and the treasury cut for that epoch.

  2. Pay into the treasury: As of November 2020, 20% of all total possible rewards available in each epoch are distributed to the treasury. This means that as of November 2020, roughly 8.3m ADA go into the treasury, leaving 33.1m ADA available for staking rewards.

  3. Figure out how much goes to delegators: Inflation is distributed differently in Cardano than in other proof of stake protocols, as the inflation rate is equal to the reward rate. If there are 33.1m ADA in potential rewards for stakers (after the treasury fee is subtracted), then the protocol first assumes that this amount will be distributed equally amongst all token holders. However, when its mechanism sees that less than 100% of ADA tokens are being staked, then all the tokens that were meant to be distributed to folks who are not staking are instead sent back to the Reserve. For example, using theoretical numbers: If Protocol A had a 60% staking rate (called active stake) and 10% inflation, the rate of reward for stakers would be 16.67% because they would receive all of those inflationary tokens. If 10% inflation = 1,000 tokens, those tokens are distributed to stakers—the amount of tokens released to circulation does not change. If Cardano had a 60% staking rate and 10% inflation, the rate of reward for stakers would remain 10%. If 10% inflation = 1,000 tokens, 600 of those tokens will be distributed to the stakers, and 400 will go back into the Reserve.

  4. Subtract penalties: Rather than deducting a penalty from a token holder’s initial balance, penalties are deducted from the potential rewards earned. Rewards are deducted most commonly for missing block validation and for having a lack of pledged stake in the StakePool.

  5. Align reward rate with pledge amount: If less than 100% of the max ADA on the Stake Pool is composed of Pledged tokens, the reward rate experienced by the pool is decreased.

  6. Subtract pool fixed costs: Each Stake Pool has a fixed declared cost, taken each epoch from the rewards earned by the Stake Pool in that epoch. This fixed cost is paid directly to the Stake Pool operator.

  7. Subtract pool margin: Of the remaining rewards, the Stake Pool operator also takes a fixed margin percentage.

  8. Distribute rewards to delegators: The remainder of the rewards are split proportionally to delegated stake amongst those who delegated to the Stake Pool, including the Stake Pool operators for whom the pledge stake is counted as regular stake.

There is no mandatory self-bond on Cardano, which instead operates utilizing a pledging mechanism. Pledging is an optional self-bond that increases the reward rate experienced by the Stake Pool, and which most importantly functions as a mechanism to prevent Sybil Attacks on The Cardano Network.

A Sybil Attack, a familiar threat for peer-to-peer networks, is an attack in which a malicious entity can take over control of a network by creating a large number of mirroring pseudonymous entities, thus enabling the attacker to seize control of voting or consensus mechanisms. One of the methods of establishing Sybil-resistance within a network is to set an economic cost as a barrier to entry to the network, thus dissuading potential attackers from launching a Sybil Attack by making the cost of creating those mirror entities too high for the attack to be economically feasible.

Within Cardano, this is achieved by rewarding Stake Pool operators for Pledging their own ADA to their own Stake Pool. A Stake Pool that reaches its stake cap with no ADA pledged earns only 77% of the rewards that a Stake Pool composed of 100% pledged ADA earns, resulting in a Stake Pool operator being dually influenced to self-bond via pledging and thus preventing the likelihood of a Sybil Attack. For one influence, entities are incentivized to concentrate their holdings in as few Stake Pools as possible in order to receive the optimal rate of return. Another influence is that doing so will not only optimize the operator’s own rewards, but will lead to an increased rate of delegation as delegators are also economically incentivized to delegate to pledged Stake Pools due to the higher reward rate of those pools.

Some uses of economic cost as a Sybil-resistance mechanism are critiqued for creating a barrier to entry for peer-to-peer networks, as only those entities with the capital required to meet that barrier can participate and help to secure the network. Cardano differs in this regard as pledging one’s own Stake Pool is optional, rather than mandatory. As such, smaller Stake Pool operators can begin participating at a lower rate of return with a lower amount of pledged ADA in their pool, and can effectively “scale up” as they earn ADA via rewards by pledging an increasing amount of their ADA to their own Stake Pool.

Pledging is key to optimizing rewards on Cardano. The higher the pledged amount, the higher the reward rate experienced by the pool. For operators with low delegation expectations, rewards can be optimized by putting a maximum amount of staked ADA into the Stake Pools as a pledge. Operators who expect to draw a significant amount of delegated tokens can find a balanced rate for delegation fees to optimize the return for delegates, thus increasing participation.


There is no slashing within the Cardano protocol. While there is no eventuality that a penalty will be withdrawn from a token holder’s initial balance, potential rewards can be decreased for poor behavior. The most common penalties are for:

  • Missing blocks: the more block production missed by a Stake Pool, the lower the rewards rate will be for the Stake Pool that epoch.

  • Lack of pledged ADA: a Stake Pool at its stake cap with no ADA pledged earns only 77% of the rewards that a Stake Pool that is composed of 100% pledged ADA earns.


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