There are a now handsome number of proposals or CIP drafts that address the fact that there is some systematic disadvantage to SPOs, at least until they have crossed some threshold, which is something like 5-10 million ADA Stake, above which they are competitive. Basically, Michael Liesenfelt originally initiated the discussion with CIP-50 and basically no significant new or additional aspects have been contributed to the parameter changes so far. Consequently, similar CIPs, such as CIP-075 or CIP-082 were closed after review. CIP-50 is still under review.
I had expressed my concerns in a comment on CIP-50 CIP-0050? | Shelleys Voltaire decentralization update by michael-liesenfelt · Pull Request #242 · cardano-foundation/CIPs · GitHub that CIP-50, on the one hand, jeopardizes the funding of small pools with relatively rare block leaderhips and, on the other hand, does not add certain systematic centralization problems at all.
If the fixed fee were eliminated, smaller pools with relatively infrequent block leads would immediately face existential problems.
On the other hand, I think there is a strong threat to decentralization from so-called “encapsulated” MPOs, usually exchanges and other financial vehicles. They are characterized by the fact that they hold ADA on behalf of their customers, but these customers do not have their keys. Staking products are then offered, which are not a direct on-chain-staking, but ultimately a financial product, which is called staking. In most cases, the customers’ ADAs are then also blocked for a certain period of time, up to 90 days.
The problem was that in total the exchanges and financial vehicles were not far from 50% stake share. They do not act on the Cardano blockchain on behalf of customers, but in their own interest.
The SEC addressed this problem in the action against KRAKEN, and since then the SPO share of the total stake also increased slightly from 21% to 27%.
So far, however, there is no chain policy approach besides this regulatory approach to effectively limit these centralization tendencies.
I believe that an effective way to solve or improve this issue could be to change the funding of the fixed fee. From my point of view, this has not been discussed so far. The competitiveness of the smaller pools would be suddenly established or improved, as there would be no or less disadvantage for potential delegators to delegate to small pools.
If the sum of fixed fees were first subtracted from the sum of total rewards for each epoch, one would have funding of fixed fees by all pools - relatively speaking, each pool operator would pay the same share of rewards earned, there would no longer be a disadvantage to small pools, and operators of “encapsulated” pools would no longer have a competitive advantage.
Current Fixed Fee (FF) Funding:
Maxpoolrewards - FF - VF (Variable Fee).
Proposed Fixed Fee Funding:
Total Epoch Rewards - Total Fixed Fees (i.e., number of pools with at least 1 block in the epoch * 340) = Total Epoch Rewards after Fixed Fee.
The maxpool rewards would then be calculated from the total rewards of the epoch after fixed fee.
From a game theoretic point of view, one could counter that this change would create too strong an incentive for an infinitely high number of small pools.
On the one hand, a pool that is never or almost never a block leader gets nothing, so the number of pools would not go to infinite. On the other hand, one could add a factor that regulates the ratio of general funding to funding by the respective pool, should the number of pools increase to an undesirable extent. All other parameters could still be left as they are to create a gradual incentive to favor pools that are close to the saturation limit set by k, or if it goes above it, to penalize them. The current extreme disadvantage of small pools, which makes it very difficult to nearly impossible to reach the 5-10 million ADA Stake threshold, would be history. Delegators who wish to delegate to small pools that, for example, fund specific projects to be supported, would now have no disadvantage in delegating to small pools (except for higher volatility in rewards).
So I refrained from pouring this into formulas and just wanted to put the basic idea up for discussion.