I understand where you are coming from. But we have to differentiate between costs here.
The network has operating costs and R&D costs. You pay for operating costs via stake pool fees and for R&D via treasury.
I would not even write off treasury transfers as costs as all that money is basically your equity in Cardano earmarked for its future improvements. Now assuming that projects that get financed by treasury create value for the network, you actually earn “dividends” on treasury transfers through increased adoption or higher market value of ADA.
Let’s say you are entitled to 100 ADA through staking. Of this amount you are likely to transfer 20ADA to treasury and pay say 10ADA to a stake pool.
Here your real costs is just 10ADA, which you can choose to avoid if you solo stake.
The point I make is that you don’t necessarily get diluted by 5% lets say. But by 0.5% if you delegate.
You may keep all of your 5% reward but pay electricity cost for staking on your own. Assuming you have a 200w computer that runs 365 days and electricity cost of $0.08 per kWh, that works out to just about $140/year.
I do recall this conversation in the past and you are absolutely right about inflation. However I believe only a small % of people will look at it that way just as the vast majority of people don’t think about inflation now unless they live in Venezuela. Staking rewards are based in behavioral economics and to most 5% is 5%.
lol I saw that after I wrote my response. I have a feeling we had this discussion before… you views… umm evolved
I appreciate how you analyze who gains most from rewards (considering initial cost layouts). I think they will have a system in place that would encourage stake pool operators to stake a large portion of pool’s resources so they will have upfront costs…
I dont recall my evolvement of the essence, but Ive nailed down a simpler way to put it. Which is actually the point I write a lot here is to sharpen that part. Though yeh haha we had this talk before - and I dont disagree with you, Ive never had - your point about me writing it of as a cost is kinda correct, but it is not in a sense of a balance sheet analysis, sure then we can it R&D. But this is front end cost with back end reward, it is a cost also for a company, but just not one you expect to write off, but that is not what, staking is being presented as, at all. That is all I am poking at.
What do you mean with operators to stake a large portion?
Are they required to have a set amount of ADA themselves staked to run it? makes sense, do you have any references on this or more details - is that what you have heard around.
or would a pool operator be able to have 0 ADA and run entirely on other peoples stake and just collect a fee.
For security reasons, it might actually make sense that the pool operator have to have a set elastic % of ada staked equal to the size of the entire pool. Like 10% this would automatically cap pool sizes, as the operator continuously have to up the size - this would force a big spread ADA into many pools very naturally + this also takes out any bad acting from the pool operator as any bad acting affects would affect themselves being heavily invested.
Setting a fixed minimum, would not achieve that goal to the same degree, it would seem inferior at least.
They don’t require a set amount of ADA from stake pool operators, BUT the reward scheme is skewed toward those operators that do stake. The rewards are such that the pool rewards go up as you commit the larger portion of pool stake yourself.
All else equal, those who delegate their stakes to pools (naturally) would look for pools with higher proportion of operator-commited stakes. Daedalus could sort them according to this profitability feature, which I think is genius.
This is done to prevent sybil attacks, but also reduces the likelihood that pool operators won’t commit any ADA to their own pool.
You can find the detailed analysis of how it works here.
Okay, I have a question. It seems as though I should already get this point, but I don’t.
I used the Cardano calculator and reinvested the results annually for 10-20 years. I got a return much higher than is being talked about here.
From this discussion, (which is giving me a different idea) I am having a hard time seeing why I should stake.
I could hold Ada on my own, not staked and the appreciation will be what ever it will be. But if there is negligible return, why stake? I think I saw .5% eventually from this discussion. Which is very different from the calculator.
There, the rate goes up considerably every year. Now obviously that calculator is NOT a promise of gain, but it paints a completely different picture of a buy and hold scenario for 20 years. That’s my plan. I’m trying to understand my incentive to KEEP my ADA locked up on the network.
If you reinvest your gains annual (this does not take into account taxation which must be considered) it looks promising. It starts at around 3% and goes up over time to 50-70%.
If the model is that wrong, that would be good to know but I think it’s supposed to be at least an approximation if certain conditions are achieved.
I welcome any response, but before being too harsh, please check out the Cardano Calculator so you understand what I am looking at. Thx
We were talking about the value of ADA in relation to staking and inflation. The .5% was an example of the dilution of your ADA holdings (which affects the value), not the increase in the amount of ADA tokens you would have.
So if you stake 10,000 ADA for a year with a 3% return, and then have 10,300 at the end, the value of your holdings, even with the extra 300, would not have increased by 3% (not counting the price increasing from other factors) because the total supply increased as well. But this is only temporary until the total supply of 45 billion is reached, after that all rewards will come from fees and there won’t be any more inflation.
I plan on staking long term too. I think it’s worth it to increase the amount of ADA you’re holding because obviously as the value increases with adoption you’re better off having more. And I think the long term value appreciation of ADA will more than outpace the inflation.
The reason you’d want to stake (as opposed to just hold) is that you’d gain more ADA. If you stake, you will get a reward. if you don’t stake you will get zero rewards. Any rational person would pick delegated staking over just holding. It isn’t difficult…
Conceptually (delegated) staking isn’t that different from just hodling. You just assign your staking rights to a pool and forget about it. Your ADA rewards will accumulate in your account and as you get more ADA, it will automatically be used to earn you more rewards.
Let me tell you what would happen if you don’t stake:
you will miss out on early rewards that are higher in the beginning
even if you later decide to stake, you will earn less because you missed on earlier rewards and your share of the pie shrank, in other words you’d be selected less often to validate/earn rewards.
No one knows what the “returns” would be. Assuming the initial inputs of the calculator you referred to hold, the first year yields the largest return of 3 something percent. This is not a fixed return as the function has a diminishing yield.
I am not sure how you came up with these numbers. Your return in ADA starts at 3% and then goes down. Are you calculating your return in USD?
I would probably follow you much better if you could just walk me step by step on what you did here.
I ran the numbers with a set stake and reinvested for 10 and then 20 years. When I added the new total I moved the year forward 1 year each time and did the calculation again.
In the model, the percentage goes up considerably each year. If you try it you will see what I mean.
I agree with everything you’re saying in regards to inflation being a tax on ADA holders, and it isn’t a “reward”. I’ve made a few posts about this on Reddit myself over the past few months. The only counter arguments I have in regards to network fees are 1) You are assuming that competition from other protocols are forcing the transaction fees down to a minimum threshold, and 2) You are neglecting the security aspect from ddos attacks (as @Steve pointed out). Additionally, if I am staking 1MM ADA to a stake pool from my wallet and I am only earning 0.1% in rewards, what incentive do I have to care if they are missing blocks or are a malicious actor.
“Oh no, I missed out on my 0.1% return!!!” - Said no one.
Network participants are in charge of protocol security. Because of this, they have to be incentivized to actually care. If the staking returns are so small that they are negligible, then the protocol has no security. If the protocol has no security, then it is worthless.
