Delegation lotteries are bad for the community and need to stop

Staking & Delegation Stake Delegation
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IOHK and @Cardano-Foundation regularly delegate millions of ADA to small pools. A high stake allows them to mint blocks more regularly and also generates income for the pool owners.

I totally support that intent because a healthy number of community-run pools is one of many factors that set Cardano apart from other projects in the space.

That having said, I’m probably not the only one to observe a growing number of unsustainable pools, misleading promotions and outright bad actors among pool operators. For regular delegators it becomes more and more difficult to choose a suitable pool. Choose the wrong one and there are no regular rewards or way less than expected. People are confused for a reason.

We have more than 2’600 pools, about 1’000 of which never minted a block. Over 2’000 operate with less than 100k pledge. Most of them are not attractive to delegators, so their owners “compete” against each other with “marketing”, often misleading delegators by advertising with “luck” or with how many blocks their pool is predicted to mint in the next epoch.

For an example of outright fraudulent behaviour, look at this pool and follow the majority of delegators. A group of about 60 delegators jumps from pool to pool every 1-2 epochs. All delegators jump at the same time and most of the 10 pools involved minted zero blocks. I’m just mentioning it because one of those pools recently won a IOHK delegation lottery and, of course, advertised with it.

Delegation lotteries did not create this situation, but they exacerbate the problem. The root cause is the high ADA price which makes running a pool attractive even with modest amounts of pledge. Lotteries add to that attractiveness because they offer a risk-free chance to make even more profit. I ran the numbers in another post.

My point is that we should not allow this to go on. The SPO community contributes to the public image of Cardano. If a pool chosen at random is likely useless or even fraudulent, that image is a bad one.

What can be done? Well, the entities running delegation lotteries (IOHK, CF, others?) could change incentives. It could cost something to participate in a lottery or to win one. The amount of existing pledge could play a role in order to encourage co-operation.

A discussion about this needs to take place.

(full disclosure: I’m running the pools WMOPS, LUKE and LEAKS, none of which ever won a delegation lottery.)

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U are a multipools operator and u opened this topic? Can I ask u Why? U are not in that position to judge who deserve or not to receive the delegation
:slight_smile:

I can provide examples of pools with pledge less than 50k which have a great mission :wink:

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The answer is easy Alex, “greed”!

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Please name a few. People might want to move away from WMOPS, LUKE and LEAKS… :wink:

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Hi @waldmops!

There are some aspects of your post which I share and I want to start with those:

  • There are more pools than needed and many of those will not survive
  • Some of them promote false statement to make there pools look more attractive. Or let’s rather say less disattractive. E.g. “Every pool gives you 5% on the long term, this is not true based on the currently too high fixes cost”. This is not good for the ecosystem because it harms the overall reputation.

That being said I’m one of the operators which is in your opinion just not necessary. I’m running a small pool started in Feb 2021. I put up a marketing campaign where I just give money to my delegators from my own pocket. Also I even had a promotion which was arguing with luck. Actually this was connected with my campaign and meant that you get your rewards in my pool no matter what the lottery says. But if the lottery also one time selects my pool to mint a block the rewards will be above avery which then would be "even luckier.

Let me explain why I’m doing this:

  • As you mentioned there are way too much pools
  • Mine will not survive if I cannot differentiate from other pools
  • And I need to mint a first block to get even interesting for delegation
  • So i set up my campaign were I just pay my own money to delegators to overcome the initial hurdle.
  • The initial hurdle is that when you start a pool you don’t get delegation because you have no delegation.

I know that your opinion on that is that I waste my money with that. The pool is potentially still not sustainable. We will see that. If you think all the pools will go away anyways. Just be happy that I spend my money to delegators which will sooner or later delegate to your pool with a bigger wallet including my marketing budget.

But in my opinion I do have a chance. Also with a <100k Pledge. Currently a 1 mio pledge just returns a 0,04% better ROA for the delegators. So this is not relevant compared to having enough delegation. So I feel like being able to overcome that hurdle if I’m running my pool professional. This means for me in a transparent way. With a good and fair communication to my delegators. With a proper mission and a solid technical setup.

Of course one can say now why all that hassle? A pool is just a pool and needs to generate rewards. But actually I think that operators are generating a lot of attention for Cardano. This is kind of free marketing.

And we are in a free market here. It is natural that you (as a well saturated multi pool operator) want to keep your delegation and don’t want to loose it to new joiners. This is the case in any industry and not always the big ones win. Anyways it’s hard to “disrupt” this market since all need to play the same rules defined by the network parameters.

To come to the point of stopping Delegation. I think that my limited pledge could be irrelevant if my pool gains enough (min 3-5 mio) delegation. Delegation in my scenario would allow my delegators to select my pool (as a to my believe “professional” pool based on my definition above) also based on the potential rewards that may be earned from it and not only because of my unsustainable marketing activity. This would increase my chance to get sustainable drastically.

In my opinion the Delegation makes sense because it increases the chance of a better distribution of pools. Specifically in terms of geography, but also in purpose. Actually I think the Delegation approach is the only reason why a delegator may consider “What is best for the network”. Instead everyone could just host in the same central cheapest location. Also the delegation is not causing the new pool to be created. I think most of the new joiners a beliefing that it is easy money before starting the pool not even knowing about the delegation.

Regarding your proposal of changing the delegation. I think that this process needs to get more transparent. I should not feel like a lottery. I want to be rewarded if I do things right, not for being lucky. There should be some feedback. Without feedback nobody can improve.

Finally I know that you will be arguing that a pool will require to run with a bigger pledge. Unfortunately entering the game late increased the difficulty. There is cooperations as an approach to that but at the moment it feels not right to me to “run the pool in the name of someone with money”. This is not the kind of incentivation which makes it sustainable as well. It’s no fun if you cannot get something out of it at the end.

Maybe my opinion now was a little to exhaustive to be read to the end. But honestly some of your statements got my attention in a negative way.

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Thanks for mentioning this @Alexd1985. I believe i am one of those pools. And you are too!!

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Hi @waldmops can you maybe summarize your point? What is it really your are stating? I have trouble understanding that. Do you want iohk/cf to change their delegation model? If yes, why? Do you want less pools? If yes, why? and in your position, what is exactly disadvantaging you? Just trying to understand before replying. Thanks.

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The argument, in a condensed form, is this:

Delegation lotteries are free money given to pool owners. They make running a pool much more attractive than delegation even for small ADA holders. As a result, most pools are unattractive to delegators because they pay low and unsteady rewards. On top of that, many engage in misleading or even fraudulent “marketing” activities. This actively harms delegators and thus the Cardano community at large. I suggest we find alternative ways to support small pools other than subsidising them with free money.

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Your logic is a bit flawed!

What does Cardano claims it have achieved? Decentralization. Well that is not entirely true!
In a planet with a population of 6.7billion, 2500 pools of which a big part is claimed by Binance, eToro, Adalite, etc I wouldn’t call it decentralization!
The much hated ETH has over 77,800 active validators on Ethereum 2.0!

Cardano needs to find a way to achieve the goal of true decentralization, thus more sustainable pools to be created! CF isn’t pioneer in how they try to achieve this! They decided subvention is the way to go!

Just have a look around in real life to find countless examples of how many funding programmes exist and how much they benefit society.

So you might be looking your pools and be a bit sad/disappointed that with your 2m pledge cannot find enough delegators to maximize your rewards.

It might look like free money to some, or a waste of funds but fortunately the ones handling these funds can see beyond this simplistic logic of rewards!

CF is looking of how to achieve their goal of a true decentralized ecosystem. So I hope they will improve their strategy and continue funding small pools.

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All delegations no matter how big or small are the same and can be seen as “free money”. The delegator decides what is important for them and based on that selects a pool to delegate to. for example delegating 100k ada to a pool that supports street dogs could be someone’s motive. And that is fine right?

Cf and iohk also have ada. It’s their ada and they can decide what is important for them and how to delegate it. Apparently iohk likes to delegate to small pools with a mission they like. Cf has somewhat different requirements. My point is that everybody no matter how big or small is allowed to decide how their ada is delegated.

Of course as a community we can sound our opinion and try to move things but in the end everybody decides for them selves. Even whales like iohk and cf.

As an example we have just started a group for SPO’s with less than 1m to come together and collaborate:

There are also a lot of scammers on YouTube trying to make people send them ada saying they will send back double. As a community we educate people so they recognize scam and fraudulent behavior. So these kind of marketing is no different. The delegator has a responsibility to think and judge and we the community can help them. But that is that.

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Thanks for steering the communication into the relevant topic. Maybe I got a little to generic with my latest post. Trying to focus now on the key question in this thread. Is the delegation still a good thing or not.

We could compare the delegation with a subvention. A subvention makes sense if the giver beliefes he can support a minority in getting self-sufficient and if it brings some additional value to the giver or the ecosystem. Like if the EU is support BIO farmers. They would not be self-sufficient based on the much higher cost. Nobody would buy the products. Through the subvention they have a chance. But it only makes sense if there is a way to self-sufficiency. The result of it is a better diversity and in case of Cardano a better decentralization and variety of operators with different ways of thinking and values.

For me this is a complete different topic. Misleading marketing is a bad practice and is not good for any of us. But this is not happening because of the delegation strategy. It’s just something that happens often in sales. But in the end honest and trustful releationships will win in this game where everyone can decide to re-delegate every epoch. My partly emotional inital answer was because I mixed this part into the question. I’m not sure if you mind my kind of marketing also being bad. It just felt like it.

As in any subvention there are good players receiving it and some which are not earning it. It’s a matter of effort which can be invested by IOG and CF to differentiate or keep the luck strategy up with a little too few transperency in my opinion.

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I’m not seeing a problem here and support the lotteries. The purpose of CF’s lottery pledges isn’t to give out randomly higher reward to small SPOs, it is a way to help make them sustainable. Despite whatever marketing or whatever SPOs employ, the leaderboard tool is used by lots of delegator and people pick pretty much at random between pools which meet a few criteria, such as having minted blocks for a while and already having a few million ads delegated along with not being over saturated. Beyond that I’d guess few delegators care or even want know anything about the SPOs they’re using. Just like savers running around trying to get low mortgage rates or low interest rates on a car loan or the best savings account rates. At least they did that last one before rates went to zero…or maybe they are doing that and that’s why they got into crypto for stablecoin yields and staking rewards from ada or dot or eth 2.0

A delegator may or may not care about any kind of mission or even have any need to understand how SPOs work as a small business model in order to want to delegate, the desire to delegate is financial for the vast majority, just as most SPOs are in it to make money.

When a person goes into town and buys bread from the baker…outside of a personal connection to the owner or one of the workers, they just want bread. Maybe they like a small shop as a dedicated bakery, maybe they just want an easy trip and go to a supermarket…it doesn’t matter if the bread is no good. In this analogy the SPO needs to be minting blocks and giving reward before any other considerations if it is going to be sustainable.

Also there is the elephant in the room about how to manage a pool of stake pools. Even the big ones will end at some point…so if a new set of smaller SPOs is not nurtured into being through things like the lotteries…then the overall network is not sustainable. It is great to have a whale thinking this way about how to split up their funds to get more SPOs off the ground. With thousands of people operating them people will come and go all the time!

This has nothing to do with ‘winning the lottery’ in terms of a very short term reward and is all about making an SPO attractive. The OP in their other thread talked about an annual 20% chance to double their reward without even considering the need and costs of running a node for 5 straight years! That’s a terrible and probably money losing strategy very few people would pursue and who knows if how CF operates with these lotteries will be the same in 5 years considering they’ve been at it for less than 6 months!

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@Cardanoisgreat Viewing it from the angle of a delegator is an excellent way to illustrate the problem and also far less abstract than I was in the original post.

Putting myself in the shoes of a delegator, my thinking would perhaps go like this:

Cardano seems very promising so I sold a few ETH for ADA. Now I have 30k₳ which yields me 4.5% when I stake it on an exchange.

(Reads forums)

People keep saying that exchange pools are bad for the community and it is better to stake with a small pool. Let’s look into that. There are 2600 of them and most are indeed very small and not attractive. Should I really take the risk? Which one should I choose?

Wait, wouldn’t it be possible to run my own stake pool? With my modest pledge I could expect 2 blocks per year and be involved with Cardano. Not a lot, but hosting costs next to nothing and setting up a pool is very easy. Yes, let’s do it!

(Sets up a pool)
(A few epochs later)

Look, the pool minted the first block! I expected that to happen in a couple of months at best and now I’m lucky. Pooltool.io even gave me a badge. I’ll tell everybody on social media about it immediately!

(Goes to Reddit, posts the badge and the numbers: Lifetime luck 487%, epoch ROS 64%)

I know those numbers say nothing about the expected performance of the pool, but they look great, besides other people are doing it, too. Maybe I’ll even attract some delegators this way.

(Learns about delegation lotteries)

The Cardano Foundation delegation program is great! Just by applying I can more than double my expected returns and it costs nothing to participate. And if my pool wins, it can even make five times as much and will be attractive for delegators, albeit only for a short time.

(Participates and wins the delegation lottery)

Now I can advertise with how much stake my pool has: More than 15 million ADA! Delegators will come and some will maybe stay even after the CF pulls their delegation in three months. That would mean others are paying for my cost and my profit. How cool is that? Let’s spend money on marketing, I am now a business owner!!

Okay, that was maybe slightly exaggerated. I know that not all SPOs think like this and I sincerely hope that these lotteries achieve their goal of promoting a healthy, broad pool community. Because of that, I suggest delegation programs incentivise cooperation between pool owners and not reward small pledge solo staking.

My fictitious delegator-becoming-spo is a winner and he will probably praise Cardano any way he can, but in an environment in which virtually everybody seeks to extract profit from everybody else, there also will be many, many, losers, SPOs and delegators alike.

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All right, lets now look it from a scammers perspective!

Oh wow there is this cryptocurrency that it doesn’t cost that much and is in the top five! Well knows and increase it’s popularity! Oh wow Charles is creating some nice videos that looks I can use!
It seems with zero or very low cost and a probability of almost 100% I can make some good money!

Nice let me steal those videos from Charles, go live on youtube and ask people to send me ADA which I will return double!

Oh wow look Daedalus doesn’t have a mobile app! Let me create one and scam some more people!

Solution according to you:
Charles should stop creating videos. Daedalus should either create an official mobile app or maybe even better stop existing at all! Oh wait best solution of all, Cardano should just give up and delete the whole project because of these scammers!!!

You have given zero proof of how stopping delegating to small pools will improve the network and expand decentralization.

On the contrary, even though it might look like a waste of funds to some, fortunately CF/IOG delegation has well proven to achieve its purpose of creating sustainable pools, thus helping the decentralization of the ecosystem.

Bad apples will always exist.

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This is correct because I did not make such claim.

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There was someone who asked you earlier what the exact reason was you worry about this.

if there is pools wanting to run at a loss for a while and spend time on marketing, i do not see how that is anyones business? delegators are free to leave but the sympathy for a growing business and the feeling of some loyalty will outweigh MANY of the claims of pure rewards. loads of my belegators (i run STAYK) are at 1k ADA or makbe 5k and the rewards are fairly small so they take a risk, join a community and help it grow. should we remain blockless for a year then we can always have that discussion with them and retire. people come and go all the time.

if i see your posts on reddit where you try and portray the F2LB community as pool-hoppers that game the system, im really wondering what your actual motive it.

IF these small pools will eventually die out, and your right… they do not need you to speed it up or point and laugh.

IF your wrong and one might become sustainable then there is no reason to bash them now. taken @Alexd1985 as an example, his deleagtion allowed him to greatly help anyone here that was bummed with a question. so adding value is not the same as getting rewards, but it cannot be overstated how important it is to onboard people that create value rather then only draw rewards.

happy to have a chat about these things cause its absolutely a discussion to be had.

but the tone can be a bit more friendly imho.

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Yes, this is the most important part imo.

If I would summarize my point of view in the simplest possible way then I would say this:

The Cardano protocol sets the rules and the cardano community sets the protocol. For the rest everybody has 100% freedom within the boundaries set by the protocol:

  • All delegators decide how, why and where they stake their ada. Even the biggest whales like iohk
  • All ADA holders are 100% free to start a stake pool and decide how they want to market it.
  • All people are able to mislead and to scam everybody
  • All people are responsible for their own actions and decisions.

laissez-faire

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Why, isn’t that obvious? Greed and world domination, of course.

Seriously, there is no hidden motive. I believe I clearly laid out my observations and arguments as an invitation to discuss. This is a discussion forum after all.

Concerning F2LB I admit I didn’t even know what that is until I called out a pool on Reddit for advertising with the “feat” of >100% luck because I consider that intentionally misleading. I only learned from the comments that there is a group of small pool operators delegating to each other in a coordinated way. I really don’t have an opinion on that yet. It is an example of cooperation between pool owners, which I applaud in principle, but I don’t get the point. At best, it looks like a zero-sum game and at worst like a deceptive attempt to make pools look more popular than they are. My first guess was the latter and I’m ready to stand corrected if that turns out to be wrong.

Anyway, that is a separate discussion.

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I agree. The only advantage this strategy can have is that your pool can say they have minted a block… Not a fundamentally sound motive though but i guess delegators will remove all pools with 0 blocks when searching for pools.

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Yes and even if pools cooperate in this way they won’t produce more blocks as a group. The only advantage I see is that each pool can say that they have attracted 60 delegators and therefore the pool must be attractive. Social proof that works for 1-2 epochs before the caravan moves on. If it works, that is.