This is becoming quite frustrating, and I am starting to believe that decentralization is more of a fluff idea than something that is practical and sustainable. I have a little over 136K in stake. I was able to convince some of my family and friends to stake with me, but I haven’t minted a single block since they joined my pool back in early March. I monitor my nodes and ensure that they are always upgraded to the latest version and working as expected. How can I possibly compete against other stake pools when I never mint blocks? Now that I have introduced my inner circle to Cardano, they simply look at the delegate tab in their Yoroi wallet and see firsthand how much interest they are missing out on by staking with my pool. I doubt that I will have them with me much longer. I have minted only 2 blocks since late October 2021. I am truly ok with not making a ton of money being an SPO as I initially started down this journey because I believed in the democratization and decentralization aspects of Cardano. My real challenge is that now that I am an SPO and see firsthand how the Cardano staking process works, and I am doubting that my initial thoughts around Cardano were true. Curious to get others take on this?
Unfortunately, that’s not enough to get regular block production by far.
You’d need 1 million stake to get a block every epoch on average and (with current parameters, especially minimum pool fees) far more to offer competitive yields.
This doesn’t mean that decentralisation does not work. It is still decentralisation, when we have hundreds of pools with millions of ADA staked each.
But it sure does mean that we should be more honest to people considering to start a stake pool. There is quite a hurdle. If you cannot or do not want to do the marketing to get in the range of millions of stake, it won’t be profitable for you or your delegators.
Parameters can be tweaked to benefit smaller pools, but I believe that that has limits. In order for proof of stake to be proof of stake, the chance of producing a block has to scale with stake. There are billions of ADA staked and only thousands of blocks to be produced per epoch. It is a matter of statistics that producing a block will alway be pure luck if you are far below a million stake.
Yes, I understand that I should not expect to produce a block every epoch, but would expect to produce one every ten epochs. But my genuine concern is how to keep new delegates? Even if I do manage to get new people to join, they will easily see that they can earn much more. Yoroi makes it pretty simple to do so and only the largest pools are shown with the highest returns.
In terms of staking returns, small pools simply cannot compete with bigger pools. It is given by the min. pool fee.
The hardest part of successfully running a pool is the ability to attract and keep delegators.
The technical side of running a pool is the easy one.
I think, for many in the crypto-space (especially newcomers) there is a misunderstanding of what decentralization in a blockchain is all about. First and foremost, it is about preserving the blockchain itself. It does this by providing security and reliability. Decentralization removes (reduces–depending on the degree of decentralization) custodial risk, and critical points of failure.
In Cardano, the proof-of-stake protocol has one of the nicest features of any other proof of stake blockchain I have seen–a non-punitive stake pool protocol that isn’t so complicated to run (i.e. you don’t need a team of professionals). This feature aids in “decentralizing” the stake pools on the technical and financial level (financial due to the low capital requirements).
However, because “stake” is crucial to the protocol’s selection criteria in determining which pool produces a block, there will always be pools with larger stake producing more blocks.
You might think that the difference could be much smaller, but there is a problem with making a protocol too distributive–namely someone coming in and opening up a ton of pools that produce bad blocks or no blocks at all. Thus having “stake” provides incentive to produce proper blocks.
The Stake Pools were designed for the blockchain–not for equal incomes of stake pool operators. The “rewards” of the blockchain only indirectly support decentralization. Just because larger ADA holders are able to earn more rewards doesn’t translate into a badly decentralized blockchain (correlation is not causation). What might confuse some is that a highly centralized blockchain “typically” does have a feature where just a few are gaining most of the rewards.
There is ongoing discussion, and a lot of thinking (including by myself, privately) about how to keep stake pool operators going, and to maintain and grow a decentralized set of stake pools.
When I look at other blockchains, I don’t see one that has a better stake pool operation than Cardano. That doesn’t mean it’s perfect, but just look around and compare. I just can’t find a better one.
Anyone wishing to be an SPO should check out these two sites in order to understand how much stake is needed to mint blocks at various levels of regularity.
Unless I had a million ADA in the stake pool, I would not ask relatives or close friends to stake with me (unless they were very well off and just wanted to help me get started) because I know they could do better elsewhere. A caveat to that would be if I had something else they could earn, but again, there’s still that chicken and egg problem.
So how does an SPO get stake? At this stage of Cardano, I think it requires having something else, and developing a stake pool as a part of that “something else.” So, if they were an NFT producer, they could have special NFT’s for staking over a period of time. If they were a dapp developer, they could have a stake pool for dapp users to stake with etc.
If an operator is able to stake $100k, they might want to keep operating (if they don’t have to pay too much for computer rental). They won’t produce regularly, but they will produce. There are other opportunities that might come along to help them. Some DEX’s have chosen small stake pools to help with their token distribution etc.
The TL;DR is that decentralization is not about equal rewards to participants, promoters, operators etc., but rather the security, reliability and viability of the blockchain.
Although we are affected in a similar way with our pool, I am basically with you that a certain entrepreneurial risk or corresponding responsibility is part of it. But in your answer the most important aspect is missing and that is the very high dominance of pool groups, especially of exchanges. See the table below.
In reality, the table shows that single pool operators only account for significantly less than 20% of the total stake. In contrast, pool groups like Binance can accumulate maximum stake per pool. In addition, they can offer rewards for ADA-staking (currently over 11% at 90 days commitment) that no SPO can compete with in the long run, even if they were able to gain several million stakes in delegation.
What is the prescription to counter this trend? if this is not a threat to decentralization, what is?
|Group|Stake|Stakepercentage|Number of pools|
|Single pool operators||4,343||18.2%||2,139|
Multi-pools that are just for some reason able to attract “normal” delegations and exchanges are two very different problems, in my opinion.
Exchanges having lots of stake can hardly be countered by incentives/tweaks aimed at active participants choosing a stake pool. It’s people buying ADA on exchanges and just holding them there without any interest in participating further. I’d see two ways in countering that, but both do not have much to do with staking/rewards/delegation. 1. Really participating could become so interesting that enough people move from exchanges to their own wallets. 2. ADA could continue to underperform in short-term “value” craziness so that all the cryptocurrency gamblers just go away.
How do they do that, anyway? The latest calculations I have seen were that even a fully saturated, fully pledged private pool “only” gives something like 5.5%.
Best proposal I have seen is: CIP - Shelley’s Basho-Voltaire decentralization update
Those returns have nothing to with staking returns on Cardano. They just give it the same name. Because you have to lock your ADA on Binance to ‘stake’, not everyone does it, so they can use rewards form users that don’t ‘stake’ to pay users that do. Also, the amount for which this percentage holds is limited and the places are also limited. Besides all that, they can use other earnings (from fees, from lending,…) to pay ‘staking’ rewards.
Yes, that’s right and I know that, but does that mean it’s okay that multi-pool operators dominate the network, whereas only about one fifth of the stake is allocated to single-pool operators? I have yet to receive an answer that even begins to confirm that this is a problem.
Surely exchanges have much more resources to attract ada holders, but I think it would certainly make sense to strengthen single pools and restrict multi-pools. The a0 parameter obviously does not contribute (enough) to this. Unless it is intentional…
As long as people keep their ADA on exchanges, the exchanges will keep their pools running.
Imo it is OK.
What do you propose to “restrict multi-pools”?
Nearly everybody acknowledges that the minimum operator fee has to go down, so that smaller pools are more competitive.
The proposal by @Michael.Liesenfelt to remove the pledge advantage for large, private pools also has gotten a lot of positive feedback.
But both will not take away stake from exchanges. We can’t forbid them to run pools. And even if we could, they could still do it clandestinely.
This proposal will also hurt small single pool operators.
CIP-50 would improve yields for all stakeholders and give an SPO the freedom to operate with a minFee of 0 or 340. You would have the freedom to keep the minimum fee of your pool at 340 so you ‘wouldn’t be hurt’.
Your CIP is about a different reward formula. The min fee is irrelevant there, because that’s just a parameter change that doesn’t need a CIP.
Binance can and does engage in yield farming their holdings. Which does allow for higher yield. At the same time there’s no guaranteed yield when staking on Binance. If you read the fine print you’ll see that Binance can opt out to pay less or no yield at all without any reasoning.
When staking with a native wallet with a stake pool on Cardano you’ll get regular rewards (depending on the pool) from a pre-defined algorithm. That’s a big difference from promised yield from exchanges.
It’s not that hard to imagine that in the not-too-distant future, three or four pool groups may dominate Cardano and offer far more attractive incentives for delegating than single pool operators.
Summarizing the responses so far, it doesn’t matter and I cannot accept that.
I honestly don’t have a recipe for limiting multi-pool groups, but it would make sense, so for example a formula that progressively lowers the saturation threshold the more pools are in a pool group, so that above a certain level it is no longer profitable, otherwise too many pools have to be operated.
The difficulty in this case is probably rather to recognize it beyond doubt without it being possible to circumvent it. apart from exchanges, there are in any case also economies of scale for multi-pool operators with the present parameters. Dr. Lisenfeldt’s proposal, while brilliant, may have the effect of accelerating this development under these circumstances. (Among other things because multi-pool operators can rather afford to let the fixed rewards go towards 0).
The protocol doesn’t know about the concept of “pool group” at all up to now. And as you already say …
… it is hard – I’d say next to impossible – to implement that.
We know that pools are in a group, because they are kind enough to tell us that they are a group. If we start to punish them, they will simply stop telling us.
The goal of the Liesenfelt proposal and others is to limit their ability to offer far more attractive incentives. I would first try them.
I completely disagree. Besides min. pool fee multi pools have no advantage over single pool operators. And even with that fee as soon as a pool has enough delegated ADA being single pool or multi pool that advantage is gone.
And, btw. it has already been discussed and is likely to happen anytime that min pool fee will be reduced to about 34 ADA from 340 ADA.
Min. pool fee is more an advantage of large over small than an advantage of multi over single, isn’t it?
Anyway, it would be good if it goes away.
Multi pools may have a scale advantage. If they develop the ability to automatically administrate a whole fleet of pools, they obviously have less administration cost per pool. I honestly don’t know if that is a problem, if the multi pools that get “normal” delegations are a problem at all.
As said, the exchanges and custodians are a whole different story. They stake ADA that aren’t really theirs, but the owners don’t care (or even find it convenient). DEXes could become a similar problem if a relevant percentage of the stake is locked in liquidity pools or in swap requests and orders.
But there is also no obvious way to mitigate that. Humans can analyse the chain and say with some certainty “This looks like an exchange.”, but using that as an oracle to limit the staking possibilities? Sounds awfully complicated and exploitable.
It is a economic fact: A pool causes costs and efforts. The costs and efforts per pool are smaller for a pool operator that runs 10 pools than for a single pool operator who runs 1 pool, because it includes not only the pure operation and maintenance, but also marketing, training, etc. That sounds logical, doesn’t it?