Choosing a stake pool and delegating your ada
(Written by @ElliotHill of the Cardano Foundation)
When delegation and staking launched with the delivery of Shelley, we released a short ‘staking for beginners’ article to guide you through the process of delegating your ada to a stake pool. Now, a few epochs later, staking rewards are being paid out, and you should have a decent idea of the rewards percentage that you are receiving from your chosen stake pool.
However, delegation is a dynamic process. There is no need to delegate all of your ada to one stake pool forever and never explore other pools. At the same time, there are opportunities to delegate your ada to multiple stake pools from different Daedalus wallet addresses if you wish to experiment with pool allocation.
Here, we will explore some of the key concepts of delegating your stake, and discover the relationship between stake pool fees, staking rewards, and pool saturation. We will also discuss some of the trade-offs between delegating to one or multiple pools simultaneously.
What is the difference between staking and delegation?
Delegation and staking are two separate concepts. All ada holders have a right to participate in consensus on Cardano by running live nodes and staking ada to support the network. However, not all ada holders have the skills or desire to participate in the consensus mechanism actively.
As a regular ada holder who doesn’t run a stake pool, you will be taking part in stake delegation. Stake delegation is the process of allocating some or all of your ada holdings to one or more stake pools, who stake on your behalf. Therefore, you are not actually ‘staking’ in the real sense of the word, but rather delegating your right to stake.
Delegating stake pays rewards in ada, but there is no fixed reward. Instead, rewards are calculated according to several factors such as your amount of delegated ada tokens, the fees of your chosen stake pool, and network parameters. We will explore these concepts in detail below.
Slot leader elections
To understand how to choose a stake pool according to its size or desirability, we must first examine how slot leaders are chosen to validate blocks.
As we discovered in last week’s technical blog, in a proof of work (PoW) blockchain miners use hashing power to validate blocks. Therefore, the higher the hashing power a miner has, the greater the likelihood that they will be chosen to validate a new block.
In PoS systems, and more specifically Cardano, slot leader elections function more like a lottery. We can envisage each ada token as a ‘ticket’, and anyone participating in staking can ‘win’ the chance of becoming a slot leader—reaping block rewards paid in ada.
Stake pools that have a greater amount of ada delegated to them have a statistically higher chance of being elected as a slot leader and producing the next block, and therefore have a higher likelihood of reaping greater block rewards.
Naturally, this will usually result in more regular rewards for delegates, and potentially earn those delegating their stake to large pools more ada rewards. However, it’s not this simple in practice—let’s find out why below.
Small pools vs. large pools
As we discussed above, larger pools with more ada delegated to them are more likely to be chosen to validate new blocks. Therefore, if this were the only factor at play, it would logically follow that pools with more ada delegated to them will pay out greater rewards to delegates for an epoch.
However, there are many trade-offs to be made throughout the staking process. Each stake pool determines its fees, and it can be difficult to choose between a small stake pool which charges low pool fees, or a larger pool that charges greater fees.
Stake pools that become too large may encounter pool saturation, which is defined as the ‘K’ value, or saturation parameter. Pool saturation offers diminishing rewards to delegators once a pool has a sufficiently high amount of staked ada, preventing a small number of pools from exerting disproportionate influence over the protocol.
Pool saturation is designed to encourage delegators to explore different stake pools, rather than simply choosing the most popular pools. Exploring different stake pools will not only potentially yield maximum rewards, but it also helps keep the network sufficiently decentralized. So, you should ensure that the pool you are delegating to isn’t nearing its saturation point.
Similarly important are network parameters, such as transaction fees per epoch, daily stake pool running costs, and pool saturation. We will explore these concepts in more detail below.
What is pool desirability, and how is it measured?
We’ve examined pool saturation and running costs, but there is another important metric to consider—pool desirability. As there is a long list of available stake pools, pools are ranked according to how likely they are to produce more user rewards.
Desirability is decided by a combination of reliability, pool costs, profit margin, saturation, and the pledge amount. These concepts can be described as follows:
Reliability - Stake pools need to maintain 24/7 uptime to validate new blocks if it is chosen as a slot leader. Pools with the greatest uptime have the highest reliability.
Pool costs - Naturally, although much lower than PoW systems, stake pool operators have some costs associated with running a pool. These costs are declared in ada for each epoch.
Profit margin - As well as pool costs, which cover the stake pool operators outgoings and don’t necessarily represent profit, they may also charge a profit margin—an incentive pool operators take for maintaining and running the pool.
Pledge - The pledge represents the stake of the pool operator. While there is no minimum pledge, larger stake pool operator pledges result in greater rewards for every delegate in that pool. As a result, you should consider the pledge amount when choosing a pool.
As we can see, pool costs, the initial pledge, and profit margins, which are set entirely by stake pool operators, affect your rewards from delegation. If a stake pool changes its fees, they will take effect in the next epoch, and you will be notified of this change through your wallet.
It is worth noting that even though stake pool operators set pool fees, they are not responsible for paying out staking rewards. Instead, this is handled automatically by the protocol, so the stake pool operator themselves cannot disrupt reward distribution.
How can I delegate to multiple pools?
Currently, it is not possible to delegate to multiple pools from a single wallet address. However, it is possible to split your ada holdings over multiple addresses and delegate separately to different pools.
You may want to do this to compare rewards between stake pools, or altruistically to promote greater decentralization within the network or help a small pool grow.
Tactically choosing a stake pool
Hopefully, you should now see that choosing a pool to delegate to isn’t just a clear case of selecting the pools with the most ada delegated to them—as these may also have the highest pool costs and profit margin fees.
Instead, there are bound to be instances where choosing a pool with less ada delegated to it but with lower fees and a greater pledge is more profitable or a pool with lower fees that has been steadily increasing in desirability, and so forth.
We recommend comparing pools and their estimated pool rewards by using the Cardano staking calculator. You can learn more about stake pool desirability and how to choose a pool in this comprehensive video.
If you are still wondering how you can delegate your stake, read our step-by-step guide, or follow the simple infographic below!
Read more articles in our Shelley blog series below: