Which strategy should be considered dependent on skill or will to run a stake pool. Explore the different options to benefit from a willingness to help secure and develop the network through either Staking and Pledging to stakepool(s).
Incentives for people securing the network — Passive rewards for ada holders
To operate and secure its network, the Cardano blockchain uses “Proof-of-stake,” The blockchain algorithm randomly chooses the block validator and producer depending on some criteria.
To become a validator, a block-producing node must lock a certain amount of ada into the network as a stake (which can be seen as a security deposit). If a node is chosen to validate the next block, it will verify the validity of all the transactions to be added to the new block.
If everything checks out, the node signs off on the block and adds it to the blockchain; it has produced a new block. As a reward, the node receives an incentive in ada.
The size of the stake determines the chances of a validator to be chosen to mint the next block. The more tokens you have staked in the network (up to a certain saturation point), the more chances to produce a new block.
To be competitive and bring the most utility to the network, block-producing nodes need to run the protocol and mint blocks 24/7.
But not every ADA holder will be able to continuously run a block-producing node that is well-connected to the rest of the network to have the chance to produce new blocks on infrequent occasions.
Cardano solves this by introducing the concept of “delegation.”
This mechanism allows all ada holders to participate in the protocol, regardless of their technical skills and the amount of ada they hold, delegating their right to produce a block on their behalf to another entity.
Those entities, called “stakepools,” are reliable block-producing nodes that hold the combined stake of the group of delegators in a single entity.
It effectively runs the protocol costs (reliable servers with the highest uptime, electricity, operator work hours, etc.). Stakepool operators that bring utility and security to the network minting blocks are rewarded through incentives (in the form of ada) that come from the transaction fees and monetary expansion.
After each epoch, rewards are distributed directly by the protocol among all stakeholders (depending on the size of their stakes) who have delegated to a stake pool.
That is how ada holders will benefit from participating in the network, delegating their ada to an efficient and reliable stakepool, and receiving rewards in return.
What is pool desirability?
Delegators can freely choose which stakepool they want to trust to produce blocks on their behalf. Thus, delegators can directly increase or decrease the chance of a stakepool to create a block and earn rewards.
Delegators want to find their best interest, so they are motivated to choose and delegate to a stake pool that performs well and provides them with the best possible rewards.
Stakepool must then act in the best interest of the network. Delegators are expected to receive rewards to be guarantors of the honest behavior of stakepool operators.
A tricky issue for ada holders will be determining which stakepool(s) (we will explore later the possibility of delegating ada to several stakepools) he should empower to reach his target in terms of rewards.
To ease this process, IOHK engineers and community members have developed tools to assess stakepools performance, helping to sort them out.
The most critical sorting option is a metric called “desirability,” Potential rewards will rank all the registered pools that a pool will pay to delegators.
A pool’s rank is determined by ordering pools in decreasing order of desirability. The most desirable pool will be ranked #1, the second most desirable will be ranked #2, and so on.
For each stakepool, desirability considers:
– reliability (actual number of blocks produced compared to the number it was expected to produce),
– pool costs,
– profit margin,
– level of saturation,
– pledge.
As we said, reliable pools must be online 24/7 providing an up-time of almost 100% to create all blocks they are supposed to. To recognize their work, stakepool operators can declare operational costs when registering their stakepool(s):
– Pool costs for running the infrastructure per epoch (expressed in ADA),
– Profit margin (by percentage) is an incentive to keep the infrastructure reliable, up-to-date and secure.
Pool operators can change their costs and profit margin at any time. The new values are valid when the next epoch starts, and delegators will be notified by their wallet.
The “saturation” parameter has been set to prevent ending up with only a few big stakepools holding most of the network consensus, preventing to reaching Cardano’s primary goal; Decentralization. Stakepool will reach saturation when a certain amount of ada staked is reached. It then starts receiving fewer block assignments from the network and proportionally their rewards.
That means no matter how big a stake pool is, once it reaches saturation, it will lose desirability for new people and drop down in the wallet listing; you don’t want to delegate to saturated pools or close to saturation; otherwise, you will “lose” rewards.
The pledge represents the personal stake of the pool operator (or from his partners) that he defines when registering his pool. It means the operator risks taken tend to prove his genuine involvement in the ecosystem; if the pool does not run perfectly, he would also lose rewards, not only his delegators’.
There is no minimum, but when the pledge is more significant, everyone in the pool gets slightly more reward, which will impact desirability.
For example, if we want to compare two stakepools with the exact costs, margin fees, and an equivalent level of saturation, if one has a pledge of 100 000 ada and one has a pledge of 200 000 ada, the one with the higher pledge will be ranked higher because users will get slightly more rewards from this pool.
A last important point to understand is that desirability is not measured by the Cardano protocol but is calculated by the wallet you are using, either Daedalus (developed by IOHK) or Yoroi (developed by Emurgo). It is the responsibility of the wallet developers to implement this metric, so we would like to advise delegators to proceed to some research on the stakepools they are going to select.
What strategy for a win-win situation (helping secure the network while earning rewards)?
Once the mainnet is launched, most pool operators will strive to attract delegators to generate rewards. So logically, a pool with a low pledge will declare low costs and margin to increase their desirability and chance of being profitable. It is a fair competition, but we must be careful not “to race to the bottom” in terms of performance.
To correctly run a stake pool and bring security and utility to the Cardano network following IOHK recommendations, a stake pool operator needs to run one block-producing node and (at least) 2 relay nodes on three different servers. It does not come at a low price.
One could run his three nodes on a single AWS server, but it would not bring any decentralization to the network; this should not be promoted!
We need to keep in mind that a proof-of-stake protocol is not a wealth generator per se.
People participating in the network, stakepool operators and delegators, are rewarded for their excellent behaviors within the ecosystem.
The overall objective of staking in a PoS protocol is to provide security to the network. The more stakepools are online and producing blocks, the more secure the network becomes.
Another essential criterion to consider is a stake pool’s social impact on the community and beyond. Do not forget that the Cardano blockchain will increase its utility and profitability by reaching mass adoption. It can only be done by having persons developing the community worldwide.
It is the primary purpose behind Proof of Africa. Delegating a part of their ada to such pools would probably not bring the most rewards but will have a meaningful impact representing Africa in the Cardano ecosystem.
This initiative is positioned to contribute to the adoption of Cardano in Africa, and sincerely believe that it will allow African countries to not only diversify their economies but also help the continent to increase its innovation and investment attractiveness.
So, we urge you not to delegate only regarding the rewards you can gather but also regarding the ethical and technical impacts of the different stakepools you are going to delegate to.
Conclusion — Strategy
Delegators have a crucial role and impact in the network since they can affect the number of blocks produced by a stake pool.
Their choice of whom they are going to delegate will depend on the reliability and robustness of the Cardano network.
To maintain a healthy emulation between the different stakepool operators, an interesting idea could be for delegators to divide their staked ada and distribute it to other pools.
It will have several notable advantages:
– Mitigate their risk of delegating to a non-efficient pool,
– Create a healthy competition between operators; delegators are not “lazy,” operators need to provide them with the best possible service,
– Contribute to the decentralization of the network,
– Contribute to stakepools that are not the most profitable but bring added value to the Cardano community.
Delegators are one of the Cardano ecosystem cornerstones; they have a tangible impact that can promote the stakepools they want, not only the most desirable ones.
Delegators need to think in the long run. We all need to create the most robust, reliable, and developed network worldwide.
Disclaimer
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