Over-delegation exists when the the baker's own personal staking balance does not cover 10% of the overall staking balance. It can also occur if the overall staking balance exceeds the staking capacity as determined by the frozen deposit limit. Events that would trigger this is a new delegation, or an existing delegator's account balance increases.
Rewards to over-delegators are reduced or eliminated. This way, the rewards for delegators who are within the staking capacity are not diluted.
For example, starting in cycle 643, a new delegation to Tez Nebraska of over 14,000xtz caused the staking balance to exceed the 112,000xtz staking capacity. Part of this delegator's balance did not push the staking balance over capacity, so when it comes to rewards, the new delegator will receive reduced rewards to the extent that its delegation exceeded the staking capacity. Had the bakery already been over-delegated at the time of the new delegation, the over-delegator would receive no rewards until the over-delegation condition ended.
Starting with cycle 720, Tez Nebraska has altered the method for calculating rewards while over-delegated. The only delegator whose balance would be capped for rewards purposes will be the new delegator who triggered the over-delegation. After the over-delegation begins, any new delegators will receive no rewards until the over-delegation ends.
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