The Cardano Parameters
The Cardano Network has been running in a decentralized manner since 2021, and most of the stake is delegated to pools with little movement. However, with a new wave of Cardano users, there will be new stake that should be delegated to a pool to ensure the network remains as decentralized as it is, or even improves.
A lot has changed since then, but also a lot is still the same. I think it’s important to have an easy-to-understand explanation of the most important parameters so that everyone can make their own educated choice about which pool to delegate to.
So let’s get started.
- K parameter
This parameter is basically the decentralization parameter. Currently, this parameter is set to 500, which means that, in theory, the network should have 500 equally sized stakepools. A 100% saturated pool means that it has (current Total supply / K parameter (currently 500)) delegated to that pool.
- Pledge
The pledge (also called a0) shows how much skin you have in the game. It also has an effect on the overall rewards, but with the current settings, this aspect is negligible. If you are interested in the effect of the pledge, read here.
Example
I think a0 is currently at 0,3 which means if you have your pool 100% saturated with pledge only, you get 30% more rewards than a pool which is fully saturated (~74M stake) but with 0 pledge.
A pool with 7,4M pledge would generate 10% more rewards than a pool with 0 pledge.
A pool with 740k pledge would generate 1% more rewards than a pool with 0 pledge.
A pool with 74k pledge would generate 0,1% more rewards than a pool with 0 pledge.
- MinFee / minPoolCost
The minimum of this parameter was changed ~8 months ago from 340 ADA to 170 ADA, which means currently an SPO has to set it to 170 ADA or higher. But what exactly does this parameter do? Let’s look at an example with some assumptions. Assumption 1) A pool gets 500 ADA per minted block that has to be distributed. Assumption 2) The pool has a margin of 2%. Assumption 3) The MinFee is 170 ADA.
Example 1
A pool with 2 million stake (1. delegator 1 million ADA and 2. and 3. delegators 500k ADA each) was able to produce 1 block in an epoch, which means the protocol will distribute 500 ADA to the pool & its delegators. 170 ADA (the min fee) will be deducted from that 500 ADA, which goes directly to the stake pool operator, leaving 330 ADA to be distributed. Now the margin comes into play. 330 ADA * 0.02 (2% margin) will go to the SPO as well, which means the stake pool operator will earn 6.6 ADA with the margin. The rest of the rewards will be distributed to the delegators proportional to their stake. Which would result in 1,2% APY. (the low APY is due the fact that i used 1 block per epoch but with 2M stake the avg blocks per epoch would be around ~1,9)
Example 2
A pool with 20 million stake (1. delegator 10 million ADA and 2. and 3. delegators 5 million ADA each) was able to produce 10 blocks in an epoch, which means the protocol will distribute 5000 ADA to the pool & its delegators. 170 ADA (the min fee) will be deducted from that 5000 ADA, which goes directly to the stake pool operator, leaving 4830 ADA to be distributed. Now the margin comes into play. 4830 ADA * 0.02 (2% margin) will go to the SPO as well, which means the SPO will earn 96.6 ADA with the margin. The rest of the rewards will be distributed to the delegators proportional to their stake. Which would result in 1,7% APY. (the low APY is due the fact that i used 10 blocks per epoch but with 20M stake the avg blocks per epoch would be around ~18,8)
What we see here is that the more blocks a pool is able to produce, the smaller the min fee is in relation to the total amount that can be distributed to the delegators.
- Margin
This parameter can be set from 0% to 100%. The margin will be calculated from the rewards after the min fee is deducted, as explained above.
If you wanna play around abit with these parameters to see the expected rewards, check out this rewards calculator : Cardano Reward Calculator and adjust section 3) Stake Pool Parameters