340 ADA Pool Fee is becoming more of a concern

I know this is a subject that irritates many of the larger pools and technical people in Cardano but I am sorry but I have to bring it up again as I believe that it is a compliance concern. I have worked in compliance for the past 20 years and I am actually quite surprised that this is not being addressed.

There are 3178 Stakepools. If you look at Pooltool you can see that 57% of current pools have a Lifetime ROS of < 3 % and 38% have returned 0%. This is significantly below the expected 4.5% expected by Delegators. Small pools only minting 1 or less blocks in an Epoch are taking greater than 50% of rewards which is basically ripping of the Delegators. You can come up with all the technical defences in the world for this but from a compliance perspective I see this as a real issue. We cannot promote Cardano as being a strong eco system with 3000 plus pools when over half of them give a return of less than 3 % when the community message is that you get 4.5 % from staking. Yes the large pools are returning close to 4.5% but that is not the point. Delegators do not know this and Delegators do not understand the process. They pick a pool and expect this return. As long as the minimum fee is set at 340 ADA every delegator out there is at risk of not getting anywhere near the expected return if they randomly select a pool. Now you can say what you want as this is basically an unregulated area. However regulators are increasing likely to look into matters where the small investor is not being looked after. Many small investors are being told that you stake with a small pool and you get 4.5% return or you will get the same returns as large pools. This is not true and needs to be addressed. The easiest way to do this of course it to remove the discriminatory 340 ADA pool fee so that small pools can give a return to their delegators that approaches that of the larger pools being a value approaching 4.5% over time.

If we want Cardano to be decentralised we have to be honest about how the delegation process works and this is no longer about a small Stakepool being competitive. This is about the facts that a Delegator should be told when choosing to make a delegation to a Stakepool. If I were a Delegator and did not know much about the Delegation process I would believe that I have right to know how the system works.

Cardano can not hide behind the idea that this is a decentralised process and so the community decides as it is not the community that is deciding what the parameters are for min Pool Fees etc. Responsibility lies on IOG and the CF with regards to this and they have to address the compliance concerns

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It was discussed at an SPO a while back but haven’t heard anything since. I agree it needs to be changed,for the survival of the small SPOs and for the network in general.

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Yes - I have been on these calls but they need to look at it from a compliance perspective and not a technical side

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Why we want the protocol to stipulate a minimum that a service provider must charge makes no sense to me. Particularly when I learn that there was no basis for this min fee in the research and modelling done by Aggelos and team. Their research and modelling was based on a min fee of zero.

The min fee is bizarrely somewhat like government regulation which is producing unintended consequences. In the decentralised world, shouldn’t we be letting people set their own prices and fees?

It is simple to reduce the min fee and this should be done first.

In the longer term, the reward equation needs to be redesigned so that pledge actually achieves its intention in the protocol design.

For those that haven’t read about @Michael.Liesenfelt CIP it is worth reading the comments at:

The work done by @ADA-Link brings great clarity to the reward formula: https://github.com/cardano-foundation/CIPs/files/9389814/Stakepool.Pledge.Influence.in.Stake.Rewards.Distribution.pdf

After reading this you will wonder why the current reward equation looks like a dog’s breakfast.

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Charles Kettering said, “A problem well stated is half solved.” Allan Ginsberg wrote about the same problem in his poem Howl, which is discussed in an excellent essay Meditations On Moloch | Slate Star Codex

Further, the problem you’re describing makes attracting new delegators to Cardano from outside the community challenging because there is no straightforward answer regarding return on stake.

If IOG and/or the SPO community won’t take the issue seriously, then maybe it’s worth seeking a legal opinion.

CHG

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Maybe it’s time to change the k parameter again.

In this blog post, Carlos talk about the optimal pool amount of 500 pools with a max. stake of 64M which we still have.

That would force the delegators to redistribute their stake and thus also push small pools.

Would that be an approach?

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Any reason why someone selecting a pool to delegate to randomly should be entitled to getting the same reward as someone who does their homework and selects a pool wisely?

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Thanks

I think it just comes down to reputation and trust. Whether people should do their own homework or not is a matter for another discussion but if people miss out or lose out on rewards within an ecosystem then that ecosystem could potentially come under the scrutiny of regulators - not saying it would but the climate we live under today is all about protecting small investors.

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If a delegator try’s to help a small pool with 2 million ADA and they have 100,00 pledge, you would get less then the operator of the pools most of the time at 340 ADA. It wouldn’t make any sense to delegate to promote smaller pools. I wonder how much delegation a pool has to have to get the 4%.

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This is absolutely the point - small pools just cannot get off the ground while this min Pool Fee exists - you can manually share the 340 pool fee with delegators but this is a cumbersome and manual process

Take a look at this online calculator. It gets the current total staked Ada etc. from the Cardano blockchain and allows you to input pledge + total stake and see rewards for operator and delegators. Change the values and see how this affects rewards.

Currently the highest rewards available to delegators is 3.95%. That is based on a pool with total stake of 64 Million Ada and pledge of 1 Million.

However, if you go to adapools.org and look at the leader board lifetime return figures, you will see values of 4.6%. This is because the older pools benefit from their average being pulled up by their rewards earned 2 years ago when the emission rate was much higher. Older pools will always have higher lifetime returns metrics due to how the emission of rewards decays over time. It is an unfair comparison with newer pools.

Maybe adapools should only show 1 month and 3 month average returns rather than lifetime figures because this is confusing to newcomers. I think metrics like “lifetime returns” could be exacerbating the drive of people away from delegating to small pools. The “lifetime returns” metric is something a newer pools can never match even if completely saturated, with low fees and high pledge.

Take a look at how adapools.org shows the metrics in their rankings and see if you agree.

The best rewards delegators can expect currently is around 3.9% and will continue to reduce over the forseeable future.

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Started a stake pool some 20 weeks ago now… and thus far it’s just more work and expense.
with basically zero hope of getting delegators because it doesn’t make sense to stake with my pool.

so i’ve been using the time learning the ropes, fine tuning my setup and accumulating some ADA in the hope of at one point actually earning something on being a SPO.

but i did understand the monumental task i was signing up for, but i really believe in the Cardano ecosystem…

.
the main problem as i see it…

delegation needs to be enough to mint block consistently, i forget the number… something like 2mil ADA minimum and then this delegation also needs to happen within a very narrow timeframe.
else the delegators will be “punished” for basically not delegating enough or quickly enough.
.

duno what the solution to that problem is tho…
but will try to dedicate some thought cycles to make one…

yeah i agree… stuff like the metrics of adapools.org rankings doesn’t help either…

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That would force the delegators to redistribute their stake and thus also push small pools.

Would that be an approach?

My personal view is that it is a very heavy handed way to force people to re-evaluate their choices. If we want to force people to re-evaluate their choices every so often, we should just do that directly.

One of the challenges crypto is going through is a shift from user base of highly engaged crypto-nerds to a much less engaged group of retail buyers, who barely know what they are buying, other than that other people are excited about it too.

(Queue up the inevitable, self-indulgent navel gazing about whether “delegated authority” represents a loss of decentralization.)

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I have heard this 340 ada fee mentioned several times, but never got any answer as to who introduced it and for what reason. Do you know the history of this?

Welcome to the forum. There are better people to answer this than me but I heard it was set down in the early days to help cover the hardware costs - not sure that makes sense however given how ADA has change dramatically in price over the past 2 years (in both directions)

Thanks so much for the response. It is interesting to me that the answers I have found on this are always ‘apparently’ or ‘I heard’. Do you have any idea who would be best to ask, and in which forum? Trying to find my way around.

IOG have SPO calls monthly where you can ask these questions and there are Discord channels and Telegram groups - not sure if you will ever get a definitive answer to this as I am still trying to find out myself

I can join even though I am not an SPO?

Ask Charles or Aggelos. @solegga ? My understanding is that the 340 min Ada fee was not determined from the research. Actually, it seems that the researched design was based around a min fee of zero.

Sebastien Guillemont may know the answer? @SebastienGllmt ?

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i really don’t see what the issue is with the fee…

if we consider 2 mil ADA staked with a 4% gain… equal to 80k ADA a year
so the SPO earns 340 per epoch and 60 epochs in a year. giving us a total of a bit over 20k ADA in a year

so lets move into dollar values.
at time of writing 20k ADA is 10k $.
from that we need to subtract overhead expenses of a minimum of two computer systems, two internet connection… but lets just call this null and void because there are much larger factors.

considering a new stakepool has to entice 2mil ADA as delegators, i will assume most don’t have the free funds to throw 1m $ at a stakepool, so lets assume it takes 2 years for this to happen.
that means literally no fee for two years.
and then if we assume another two years after so calculating 4 years into the future.

then the 10k $ earned would in the current market be half that a year due to it being shared over the years.
so ill be kind and call it 500$ a month.
out of that avg monthly earned you need to pay for hardware, operational and maintenance costs.

sure it gets better if considering over a 4 year period, or starting out with 2mil+ ADA staked.
the only redeeming thing is that ADA is low in price currently and thus one can argue that over time it will gain in value.

people make it sound like the fee is a big thing, when it barely even covers the operational costs for starting up… sure it might also be improved, but then there is less incentive to run a stakepool for longer.

right now the fee will incentives a run time of a stake pool of about 5-6 years, before the start up becomes a faction of the consideration and then ofc why would one shut it down ifs it going well…

the SPO Fee is 25% of the minimal earnings of a pretty much fully operational pool.
doesn’t seem so crazy when considering that a stake pool if full at 64m ADA
making the SPO minimum fee, 25/32 of a % = 0,78%

while being responsible for “customers” i guess is the best term we can use for delegators.
earning 2560000 ADA a year.

If anything i would say the fee is insufficient, its irrelevant at the top and doesn’t payout at the beginning.
i get that it doesn’t payout at the beginning, that makes sense… no point in paying people for participation, plenty of people wanting to be paid for participation…

anyways long story short…

i think the fee is a lot more advanced than people gives it credit for… i’m sure it can be improved, but i don’t think the math holds up against the fee being a bad with.

only been at this SPO stuff for like 20 weeks so excuse me if i get some of the numbers wrong… if anyone can or want to do them based on exact numbers and investigate the behavior of it below the 2mil staked mark… then sure… it might look a lot more unfair…

but i doubt the fee is unfair… and i doubt the numbers really will support it.
if investigated unbiased and considered over a full life cycle of a stake pool.