Cardano Staking: What Should You Expect from Your Stake Pool?

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We have written another detailed report on Cardano Staking. This one covers the limits of the protocol in terms of ROI and the limits on staking pools to achieve high ROIs consistently.

We hope you find this useful. Thank you for your trust and support.

SkyLight Pool

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Thank you very much, that’s a great read!

It explains something which worried me up to now: How is it possible that a pool with 0.6% stake produces >1% of blocks and becomes saturated. You have the solution:
Cardano protocol allows for assignment of multiple slot leaders. This is to ensure that blocks are produced. When multiple slot leaders produce a block, the network picks one and discards the other. This happens by design and is, again, outside the control of pool operators. This means, no pool will have a perfect track record of 100%. Currently there is no systemic way of identifying these cases. Pool operators find out, after the fact, that their slot was over-allocated as some other pool produces the block they were supposed to produce.

I kind of disagree with some other statement:
A pool may win a block with 1 ADA and … Should you invest with such a pool?
The answer should be obvious, but we will state it anyway: No.

You are right that the probability of getting a reward is extremely small but it can not be compared to gambling. If you have pig pockets with 10 million ADA in it you could chose to put all in one (private, not saturated) pool and be relatively sure to get some reward every epoch. Or you could delegate 1 ADA each to 10 million pools where the vast majority will not produce a block, but very probably some will do and the result in the end will be the same as delegating to a larger (not saturated) pool.

Indeed there are some factors which makes delegating to 1 ADA pools a stupid decision:

  • Every pool comes with costs and such a pool will never be able to cover its costs.
  • Delegation comes with costs of 0.8 ADA so there would be only 0.2 left for staking
  • It’s quite some effort to delegate to ten million pools. I would not like to do that… :wink:

I myself stake 10kADA at a very small pool with only 80kADA total stake. Up to now we didn’t produce a block, but maybe once per month this could be possible. Is that gambling? I don’t think so. If you think in longer terms than one epoch, it just makes no difference at all.

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Hey herr rossi. Thnx for placing this. I also have delegated my ada to a very little pool pool, FLOWR (the only dutch pool with at the moment 100k staked) and i do it to support them and letterly the decentralisation of cardano. I hope more people will do the same.

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I see your point, especially about earning some cash every epoch with ADA10M.

But my point was that the system produces some high returns every epoch for some small pools and the chances that these pools would repeat these returns are small, hence chasing returns this was was a futile idea. It was like gambling in that it was a game of chance to get those returns, but even then the upside was limited, which is why a one time game of Powerball would produce better expected returns.

Let’s explore this a bit further. Let’s say you have $2 and you want the highest expected return for it:

Option 1: Buy a lottery ticket. Let’s assume that the jackpot for the Powerball is $300M. Powerball odds are 292M to 1. Each ticket costs $2 and the expected value of a single game with $300M jackpot is around $1.02.

Option 2: Invest that same $2 into ADA, which would be roughly 55ADA at current rates. With the total stake of 10B ADA your chances are 10 B to 55 to win a block which has the payoff of 1.2K ADA. That’s roughly $43 and your expected value per epoch is image. The difference is that your 55 ADA doesn’t expire, i.e. it can be used to play this probability game indefinitely.

Based on expected returns alone, I would still go with a lottery. Why? Because even with $1 expected return, playing a lottery ticket one time is 4.3M times better than investing 55ADA in a pool. To get to the same expected value you’d have to play 11.8K years (4.3M/365, assuming each epoch still lasts a day) .

The second point was that as more ADA is invested into a pool with high ROI, it’s return will go down but payouts would be more frequent. At the end (over a long period of time) ROI for performant pools with the same fee structure will all be same, whether it has 100 ADA or 10M ADA. There is just no point from a probability and profitability point of view.

You also had a good point about the pool costs being prohibitive for 1 ADA pools.