The new reward equation zone with an a0 pledge leverage limit of 100.
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I was thinking about whether Binance would be likely to stake to community pools.
I think if your proposal gets the nod, Binance might find it more convenient and less costly to stake to community pools. Pledge leverage of 100 may not do it, but if the leverage got lower over time it might.
When multi-pool delegation is easier, without splitting wallets, Binance can easily spread their total Ada across a huge number of community pools, and there is no lock-up to stake. Whereas if they had to lock-up say 10% as pledge that would be significant. Also, I think long term, there won’t be much profit in running a stake pool as I think fees will tend towards marginal costs. Stake pool operators will probably earn money more through additional bolt-on services. If it does go that way, there won’t be much profit incentive with running pools and Binance may find it just easier to stake.
I find it interesting that when Binance was first staking they were creating many 100% pledge saturated pools but now their pools have almost no pledge. This indicates to me that they found it too painful having to manage when users could withdraw their Ada. The protocol punishes the stake pool severely if its pledge is not met by cutting their rewards to 0. I use Binance and it was quite common to get a message saying that withdrawals were “temporarily down”. Maybe so many users complained and this made them decide to give up on the extra yield??? It seems to me that more pledge does “cost” Binance. Whereas a normal pool operator with a long term vision is prepared to pledge maximally.
Also, I am pleased to see that smart contract staking seems to be going the way of allowing users to vote on which pools to stake with. I was a bit worried that these large DeFi lending smart contract platforms would have out-sized control.
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Many thanks for your hard work put into this. Looking forward to support this CIP.
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Here we go!
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The section The Proposed Reward Formula still wrongfully states that the current a0 parameter ranges from 0 to 1.
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Thats so scary and wired … makes me feel more than xSPO 
@Michael.Liesenfelt So looking once more back at this, I came to the conclusion that your formula essentially gives each pool a different ‘saturation point’ based on its pledge (still capped by saturation based on k). So pledge only determines how big your pool could grow, it doesn’t give you more rewards (for a certain stake) like with the current formula (those extra rewards are for most occurring pledges very low, but they do exist).
You’ve chosen 100 as a start value of your a0 (based on current k of 500). This means that any pledge above 680k is meaningless. There’re however dozens of public pools with already a higher pledge. So those actors still have an advantage to split pools, so the value should probably set lower… So take e.g. a0 set to 50 which leaves only about two dozen public pools with higher pledge. Most pool operators want to earn something with their pool and be profitable instead of just covering costs. For that to happen (especially when min fixed fee drops considerably), you’ll need to have a chance of becoming one of the pools with high enough saturation (based on k). Let’s say 20M+ stake should be a reachable goal… But with a0 set to 50, that means that you’ll need at least 400k pledge for being able to reach that goal… Not a lot of pools will be able to reach this and a lot of SPOs will be very unhappy.
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BrouwerQ,
I love the review and the continued feedback. Your suggestions have definitely contributed to and improved this CIP. Would you be willing to take this comment and post it on the official pull request thread here:
I agree with your point but I still think a0 should be initialized conservatively high and slightly reduced by 5% at a time measuring the feedback each correction. a0 of 50 would be a great goal. The Single Pool Alliance has an average leverage of 22 and getting to within half an order of magnitude of that leverage for the entire network would be awesome.
Large stakeholders would still have an economic motivation to split pools (just like things are now) and attract delegators for fees but even a tiny pool could on average offer competitive yields to delegators. Furthermore on the pull request conversation page I show a few new charts which show how leverage factor a0 limits the unchecked economic returns of whale backed multipools.
I completely agree that they’ll be able to offer attractive rewards to delegators (but that’s probably more due the reduced min fee), but they won’t be able to offer attractive extra rewards to themselves anymore if they haven’t got a big enough pledge I fear…
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On the other hand, they will get a chance to attract delegation which they are currently being denied.
While min-fee remains 340Ada, delegators who understand the incentives won’t stake to pools with less than 10M total stake already. They won’t stake with a pool where min-fee represents more than a small fraction of rewards.
In other words: While min-fee is a fixed amount, it needs to go lower for small pools until it represents only a small fraction of a delegators rewards.
The only way astute delegators can grow a small pool today is if a group of them comes together with collectively 10M of stake and all stake at once with a small pool to grow its total stake from 0 to 10M. This allows them to spread the min-fee across the entire 10M of collective stake so it represents only a small fraction in fees.
By reducing the min-fee to 30 we can remove this 10M stake hurdle before a small pool becomes competitive.
The pool operator then gets to decide about profitability / viability over time by attempting to build while managing its percentage fees.
Currently the 340 min-fee is the equivalent of a barrier to entry in the traditional finance world.
Min-fee 340Ada
should be translated to:
A pool can’t be competitive until it can control 10M in stake
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What you are saying is because dropped min fixed fee, not about his proposal for the new rewards formula. And they can’t attract enough delegation anymore if pledge is low because they will start losing rewards at some point (way below the k saturation).
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I agree, the min-fee issue is separate to the @Michael.Liesenfelt proposal.
I was just pointing out how reducing min-fee allows small pools the opportunity to build size. You seem to be indicating that proportional pledge will be an issue for small pool operators. I think the only way you can make things fair with regard to pledge is to require it to be directly proportional to pool size. I don’t think it would be a good idea to try to engineer an incentive structure where small pools require proportionally less pledge using some sort of formula that produces a curve.
I think many people are trying to come up with this magic formula that produces some sort of reverse discrimination towards small pools. I believe the mathematics should be level and fair in relation to pledge primarily because I think it is important to not build in any unintended consequences for the security of the protocol. By the way, it is possible for pledge to be borrowed using “Liquidity bonds”. See: Liquidity Bond Market. If you’ve been around the Cardano… | by Optim Labs | Medium
I would like to see both min-fee reduction and @Michael.Liesenfelt proposal adopted.
The @Michael.Liesenfelt proposal quite separately will level the playing field further. In particular it will:
- Force pool operators to pledge adequately.
Since pledge is more locked up and therefore less liquid, doing this does have a cost. This may result in large operators like Binance preferring some staking with community pools in order to have better liquidity. - Remove the whale extra yield advantage.
This may cause some whales to split their wallets and stake across many smaller pools. - Therefore hopefully leave delegators primarily thinking about the value of decentralisation rather than about how much yield they earn when choosing a stake pool.
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How is it more locked up? You can’t just move it now either…
I think they’ll just pledge what is needed…
What exactly will cause this?
Delegators will primarily think about yield. Believing something else is believing in fairy tales…
I stand by the premise that more pledge should be rewarded, not that not enough pledge should be punished…
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First, you are both awesome and greatly appreciated.
You are both correct.
I stand by the premise that more pledge should be rewarded, not that not enough pledge should be punished…
Pledge isn’t rewarded directly with an incentive, but indirectly with being able to earn more margin from more supported delegators. I do think ‘punishing’ high leverage ratio actors is necessary for Sybil defense. I don’t see it as a punishment though, I just see it as an impartial ceiling like 1/k.
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Regarding pledge:
Pledge is more locked up relative to just staking. You can’t just change your pledge amount easily. If you want to spend some of your pledge then you need to do the following:
- Create a new stake pool certificate with a different pledge amount.
- Wait 1 epoch. (This might be 2?)
- Then remove the extra pledge.
If you don’t follow these steps then the protocol will punish you. You lose the staking rewards for the pool operator and all your delegators for the epochs where your pledge was unmet.
This could be a bit of a pain for Binance depending on the pledge ratio we end up with. @Michael.Liesenfelt has proposed this start at 1:100 (1%). Maybe Binance won’t care about this.
In relation to Binance, I point out the following:
- Early on after staking started, Binance was running a number of fully pledge saturated pools in order to earn 1.5% extra yield. I am a Binance customer and there was a period of time around then that it was hard to get Ada off their exchange. Binance kept posting messages about transfers to the Cardano network being down. I suspect this was because they didn’t want to withdraw from fully pledged saturated pools and suffer lost rewards so they were delaying transfers until after epoch transitions and maybe there was also some wallet shuffling required at their end. I don’t know, because I don’t have any inside knowledge.
- However, I note that now they seem to be running all their pools with minimal pledge which means that they are choosing to forego the extra yield they can earn by running fully pledge saturated pools.
I find this interesting because the extra yield they can earn by running fully pledge saturated pools is significant at around 1.5%. For example: Why don’t they run half their pools fully pledged and the other half with minimal pledge?
I suspect the reason is that they value the liquidity more than the extra yield. If that is the case then I think it is significant. Certainly Binance would do whatever makes the most financial sense.
This is why I think there is a possibility that Binance and other exchanges may find delegating to community pools easier if they are required to pledge a decent percentage of their total stake. Maybe 1% is not enough, maybe it needs to be 5% before they squeal.
You might be right. Nevertheless, pledging a decent amount does have costs because the pledge amount is relatively more locked up compared to just staking.
Currently there are a number of large whales that are running fully pledge saturated pools in order to earn approx 1.5% extra yield. If this extra yield advantage, only available to whales, is removed, then maybe they will spread their stake. Running a stake pool does cost time and money and there are risks that it can suffer failures. Consequently, there is a benefit in multi-delegating across many pools because it spreads the risk. If the yield is no different then why not select the lower risk option? Furthermore, it is my belief that the whales probably best understand the value of decentralisation, so they may wish to spread their stake for this reason too.
That is why removing the whale extra yield benefit is important because it is encouraging whales to run fully pledge saturated pools in order to earn a much higher yield than the rest of us.
If extra rewards are removed then this could be considered a punishment. I guess it depends how you look at it. I take the alternative view that they are just missing out on any extra benefit beyond what their leverage limit allows.
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I think I misunderstood you because I thought you were saying that pledge was more locked up with his formula than it is with the current one…
The rewards you’ll miss out with this formula will be much more than what you could now get extra.
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I don’t understand why you think this.
I’ve watched the youtube video a couple of times recently. The entire philosphy of “Pledge” weighting the amount of saturated Stake in the pool up to the k parameter just wins every time for me. As my pool grows in staking and thus, I get to take profit, I then would expect to increase my pledge. Right now, the pledge factor really doesn’t mean anything and bears out the fact that I reduced an original 250k down to 50k after 6 months of Shelley running.
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FYI,
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Hello @Michael.Liesenfelt
I know it’s a bit late to comment here 
, but I just had some time to look trough your proposal and I figure I’ll add my view.
In this current model:
z0*K=T is always guaranteed (considering minimum available pools).
Where:
z0 is relative pool saturation based on K
T is total ADA in circulation.
This relationship can’t be broken. This insures that all ADA is equal and has same voting rights and opportunity as any other ADA.
If I understand your new formula correctly (and I’m not sure I do 
), you basically redefined a0 to be modifier for relative pool saturation. Thus, allowing for z0*K<T
This is equivalent to saying that there is a possibility that not all ADA has room to be gainfully delegated, so some ADA has no incentives to delegate.
Also, allowing outside influence over this equipoise opens the network to an attack.
Binance (for example) could split their 62 fully saturated pools into 300 pools that would offer full rewards.
Just a few players like this could effectively run out all small pools out existence in very short time since they have full control over ADA their 100% saturated pools.
This may encourage consolidation into cartels so they can get control over significant slashing power over delegator rewards (which would now be possible by just reducing pools pledge).
Once those cartels are established they just drop their pledge levels in most pools so they can create an environment where only a few pools give full rewards and there isn’t enough room to gainfully delegate all ADA in circulation.
Then they can choose who gets to earn rewards, because there will be enough of them to block delegation certificate transactions of delegators. Which means you couldn’t switch pools or start delegating with out their permission. So, if you want max rewards you have to ask them for permission.
This is equivalent of having to ask your elected official for permission to vote. Should not be possible.
This may even create an incentive to run at a loss for a while for such cartels, since taking over the network would be ultimate profitability.
Some may argue that there always will be enough pools to counter this and provide z0*K>T.
However, we don’t know this for sure. We can’t just assume that things in the future will work out. Any changes we make must always be mindful of:
- Delegation must be permissionless
- Always room for delegation of 100% of ADA in circulation.
- No one can influence protocol parameters in a way where there is a possibility of attack scenario on delegators (or otherwise).
Hope I understood your work with a0. If I misunderstood let me know 
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