4 Things to Consider When Choosing a Cardano ADA Stake Pool

We have seen tons of confusion and misconceptions about how staking works and the differences between stake pools. We hope this guide will help clear up any confusion about how staking rewards are earned and what is and isn’t important when choosing a ada staking pool.

4 Things to Consider When Choosing a Cardano ADA Stake Pool

Pool Performance

This is the most important metric to judge. Your ROS can take a huge hit if the pool you have delegated to is missing the slots they have been scheduled for. Pools only receive rewards for the blocks they mint on the blockchain. Poorly maintained pools will tend to miss opportunities to mint blocks, causing the whole rewards paid out to speakers to decrease.

A minor consideration is a hardware a pool runs on. If the server has insufficient resources, they will get caught up with maintaining the tip of the blockchain (or even crash) and miss out on minting blocks. Additionally, if a pool runs on a fanatical server at the operator’s house, it’s vulnerable to power outages. Even if the server runs on an uninterruptible power supply (UPS), their local internet service provider equipment can go down, rendering the pool inoperable for a period of time. Large cloud computing providers, like Microsoft Azure, AWS, and DigitalOcean, provide servers in multiple availability zones in order that even within the event of widespread power outages, pools can remain operational if they have backups in another zone.

Overall, poor performance can be a tough metric to judge. As explained within the previous section, a little pool can have wild swings within the number of blocks they create. So if a pool had a low ROS during an epoch, it doesn’t necessarily mean it’s performing poorly. you must evaluate a pool’s performance over many consecutive epochs to induce a feel for their overall performance. This makes a pool’s transparency important, as we’ll explain later.

Pool Pledge

Pledge is the amount of ADA the pool operator(s) have staked in their own pool. This effectively let’s delegators know how invested the operators are within the success of the pool. Pledged ADA earns rewards similar to if it were staked, so if a pool goes down, its operator will not only miss out on collecting fees for the missed blocks, but they’ll also lose rewards on their pledge.

Pool Size

Pool rewards need to be considered as averaged over time. A smaller pool will divide bigger shares of the reward amongst its stakes (since there are fewer of them), but they’ll statistically get chosen to provide fewer blocks. A larger pool will find more blocks but payout smaller rewards. As long as the larger pool isn’t saturated, the rewards will be similar over time. Also, since it’s a random selection, some pools may have good or bad luck “streaks”. Let’s say that the Cardano network targets about 4.6% rewards (Return on Stake, or ROS). Large pools will tend to pay out more consistent rewards, as there’s lower variance in the number of blocks they mint per epoch. Small pools will have rather more variation in the number of blocks they produce per epoch, then the rewards will vary significantly. Across three epochs, a little pool may payout 1%, 9%, and 4% ROS, but over time the rewards will average out to 4.6%.

This is important to remember when observing pool performance over a brief period of time. A little pool may get “lucky” on their first few epochs and obtain selected for several more slots than average. they’ll appear to pay out a much higher ROS than other pools. However, after several epochs, this will even out to the expected ROS.

Supporting Decentralization

Supporting decentralization is critical to the long-term success of the Cardano network. In order to make sure the blockchain continues to run reliably and with integrity, we need to maintain a healthy distribution of stake across many stake pool operators. you’ll help by not delegating to groups that control a large number of stake pools.

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The above does unfortunately not talk about cost to the delegator incurred by pool rewards.

Lets assume we only consider pools with a 0% margin. The cost to the delegator still varies significantly depending on pool size …

340 / (64 x 750) => 0,7%
340 / (32 x 750) => 1,4%
340 / (16 x 750) => 2,8%
340 / (8 x 750) => 5,6%
340 / (4 x 750) => 10,12%
340 / (2 x 750) => 20,24%
340 / (1 x 750) => 40,48%

Assuming a pool has a 0% margin and that the block reward is 750 ADA, it follows that for every epoch a pool mints at least 1 block the owner will keep 340, which will not be distributed to the delegators. i.e. delegators will loose a significant part of their rewards by delegating to a small pool instead of a saturated pool that makes many blocks per epoch (on average). The minimum cost for all pools is a constant of 340 ADA, which is for larger pools a much smaller slice of the total reward that is taken away before the rest is distributed.

(Strictly speaking, the above is not quite correct for the pools at the bottom, because according to the Bernoulli distribution the likelihood of winning zero blocks in any given epoch is still quite high for a 1m pool. Other epochs will win more that 1 block, which brings the average anual cost down)

Lets also talk about pool margin … If a pool reliably mints at least one block per epoch, the owner receives 6 x 340 => 2040 ADA per month for running two simple nodes. This is far more than anyone should need to run a pool. One could argue, that this amount of pool reward is already plenty and it is therefore hard to understand why a margin of > 0% is needed on top of that.

Still, there often is good reason to charge > 0% margin for example to use some/all of that to do some good in the world. When deciding which pool to delegate to, this can be a decisive factor in line with - “Making the world work better for all”.

Recently, we have also seen operators thinking about ways to reward delegators with extra payouts from their pool rewards. I’d say, this is only natural when the cost of running a reliable pool stays more or less the same in dollar, but the value of fixed pool reward multiplies.

While running a pool on reliable hardware+infra is important, it is perhaps also important to have a look at the pool’s mission and whether/how the pool operator distributes that excess of pool rewards.


Thank you so much @tomdx.