Governance Action Type:
Info Action
Title:
Proposed changes to Cardano Foundation Delegation Strategy
Abstract:
In this document, we propose small but impactful changes to the current Delegation Strategy adopted in October 2023 by Cardano Foundation (CF). The aim of this proposal is to gauge Community sentiment around what we have considered to be a set of issues since the adoption of the new Delegation Strategy (October 2023).
Specifically, we address four issues with CF’s Delegation Strategy, which were all introduced without Community consultation and implemented unilaterally in October 2023:
1) CF delegation is currently made up of few, large “packages”;
2) CF delegation is currently awarded with no cap on existing stake in recipient Pool;
3) CF delegation is currently awarded as a result of a non-competitive process, with decisions made outside of public scrutiny and sometimes to pools who didn’t want delegation or didn’t intend to apply for it;
4) CF delegation is currently awarded to Stake Pool Operators who received it the previous year.
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By voting on this proposal, voters can express their opinion on the following question:
Should CF Delegation Strategy be amended to include the changes proposed herein?
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The following are our proposed changes:
1) CF delegation amount should be lowered to 10M ADA from the current 20M, which will also increase the number of Pools that receive the delegation;
2) CF delegation should be awarded to Pools which have maximum 10M ADA delegated to them;
3) CF delegation should be an inclusive, competitive process, for which applicants should apply at every round;
4) CF delegation should include a 12-month cooling off period.
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In this proposal we will analyze each of the perceived weaknesses and provide motivation in the form of supporting evidence provided by subject-matter experts, as well as reference public discussions had with CF representatives in appropriate fora. Further, we shall provide a rationale for change requests, explaining why, in our view, proposed changes would strengthen the impact of CF delegation for the Stake Pool Operator Community.
Motivation:
Although this proposal was submitted in response to the announcement of the 2024 recipients of CF delegation (November 22, 2024), we wish to make it clear that it is NOT a criticism of the currently selected Pools. Rather, the proposal aims to focus on the PROCESS leading to the selection of Pools for CF delegation, in an attempt to make it more transparent and available to a wider group of Stake Pool Operators.
Cardano Foundation (CF) is one of the Founding Entities of the Cardano Blockchain and has a pivotal role in shaping its public perception as well as its internal politics. This role is increasingly important as the Network progresses and evolves, particularly with the advent of On-Chain Governance features.
How CF chooses to delegate its own ADA is ultimately a decision that rests with CF. Nevertheless, CF has a very central role in the Cardano Ecosystem and is perceived as a leading authority in all-matters Cardano. This is an aspect of CF’s role in the Cardano Ecosystem that cannot be trivialized and only touted when convenient. On the contrary, CF’s leadership and subject-matter expertise (perceived or realized) should be self-evident in every action and decision made by CF. CF should always represent the best interests of Cardano and its Community, including the interests of the wider Stake Pool Operator Community, even if those interests somehow conflict with CF’s own.
For these reasons, how CF chooses to delegate their ADA is a matter of public relevance. Let’s see how, in our view, the current Delegation Strategy adopted by CF in October 2023 might not be directly aligned with Cardano’s best interests.
1) CF drastically reduced the number of pools they delegate to, by increasing the size of the delegation packages [1]. Delegation rounds used to be run every three months, with 44 pools selected each round, for a total of 176 pools per year: this is in stark contrast with the current 26 pools per year [1]. Before October 2023, CF had conducted seven delegation rounds, during which they received 1731 valid applications with an average of 65 pools shortlisted every round. In doing so, they delegated to 161 unique pools [1] which equates to an average of 23 new pools per round. Conversely, with the new strategy, only 30 Pools received delegation in 2023 and 26 Pools in 2024. Of the latter, only 6 were new: this shrunk the number of Pools receiving delegation from over 160 to 36 in 2 years.
While this change may smoothen the delegation process and simplify CF’s operations (by having fewer wallets to move) it does nothing to support decentralization. Other changes to the delegation strategy, implemented simultaneously and unilaterally in October 2023, also smoothen the operational side of this delegation process, but we will return to those later in this document.
The increase in delegation size from approximately 14M ADA in July 2023 to approximately 20M ADA in October of the same year, resulted, as we have seen, in fewer wallets to move and leaner operational requirements for CF, but also, necessarily, reduced the number of recipient Pools. We argue that this decision should be entirely reversed, by essentially doubling the number of wallets and halving the delegated amount.
10M ADA distributed to twice as many Pools would give a broader range of Operators the opportunity to reach an attractive mark of profitability for their delegators. This profitability mark, maintained for a finite period through CF delegation, would in turn provide marketing opportunities for more Stake Pool Operators to attract organic delegation [2]. We argue that, with the current influx of investment capital into Cardano, this is even more important than it has been in the past: it would allow this new capital to flow to a higher number of attractive Pools, thereby contributing to the decentralization of stake.
2) During last year’s delegation round (2023), CF Delegation inadvertently resulted in oversaturation of recipient Pools. We are aware of two such incidents: AOS and BERRY [3, 4], and the effects of these “mishaps” can be clearly seen on pool.pm or other explorers. This fact per-se is completely unacceptable, resulting in rewards being lost for all delegators to the recipient Pools, not just for CF. This was a direct consequence of the increase in delegation size and completely overlooked by those in charge of dispensing the CF delegation. Aside from being a very easy-to-avoid mistake (we have explorers on Cardano), this situation has much broader implications.
A Pool with maximum 10M ADA delegated to it at the time of receiving CF delegation, would increase in size to 20M ADA or less, for a whole year. During this time, the Operator might be able to further grow their Pool, thanks to the attractiveness of the CF delegation. This could be done with limited risk of oversaturating the Pool, even if during the delegation year K were to be increased, thereby lowering the saturation point of Pools.
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Example:
10M ADA or less Pool current delegation
+ 10M ADA CF delegation
= 20M ADA for a year
20M ADA in total delegation
+ 10M ADA for organic growth
+ 5M ADA cushion for additional growth
= 35M ADA in delegation
A Pool with 20M ADA will now have room for at least 10M ADA in organic growth over the year to stay under 35M ADA*.
* 35M ADA delegation goal, so the Pool will not be oversaturated if K is increased to 1,000 over the year of delegation.
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On top of risking oversaturation of recipient Pools, not having a size cap also directly contradicts the very purpose that CF Delegation should have. The purpose of a rotating Delegation from any entity, is to bootstrap the operations and profitability of the recipient Pools [5]. It should not be a “forever delegation” and should provide an adequate level of profitability to the Pool’s delegators, to attract more organic delegation. This, at the very least, should be the expectation of the Strategy. So what would be a reasonable expectation in terms of organic delegation growth?
With adequate marketing over 12 months, the recipient Pools should be expected to grow their delegation organically (thanks to the attractive profitability awarded by CF Delegation) to an amount that would make the eventual rotation of CF’s Delegation to a competitor Pool acceptable in terms of profitability of their operations. Let’s look at a practical example:
If a Pool receives CF Delegation for 10M ADA, with current network parameters their profitability for delegators is expected to reach an attractive mark. If over the course of 12 months (the duration of CF Delegation) they manage to grow another 10M in organic delegation, when the CF Delegation is rotated out they are able to maintain this profitability in an independent way.
Naturally this is an ideal scenario. Nevertheless, CF should take this into account when devising their Strategy: they should leave enough room in the Pools they delegate to, so that the latter can, at least theoretically and in-line with the current saturation parameters, grow their delegation organically by as much as they have received “in-kind” from CF.
Further, delegation should not be reasonably awarded to Pools which are already independent and profitable from an operations’ standpoint. Overlooking this sends the message that the delegation is for CF’s financial benefit and is to be considered a “token of appreciation” for work done, rather than being an attempt to bootstrap Pool profitability and consequently increase decentralization of stake. This is why we are proposing that CF set a cap on the size of the pools they delegate to.
As we have already noted, CF may choose to delegate as they see fit. However, if the intent of the CF delegation is to be a “token of appreciation” or simply a maximization of CF’s profit, then this intent should be explicitly stated in their reasoning for delegation. Being honest about their intentions for the delegation is a key point to support transparency regarding this entire program.
3) Rotating delegation programs by the founding entities of Cardano are not novel. IOG started doing this in 2021 and CF had started back in 2020. Before October 2023, delegation rounds were independently applied for by all Pools wanting to be considered. Needless to say, the application process itself made the Delegation Strategy more democratic and also made it clear that “if you wish to be considered, you have to put some work in”.
We are not suggesting that having an application form submitted every year by all Pools wanting to be considered would completely eliminate the lack of transparency in the choices. However, the current, publicly-declared internal cherry-picking of recipient pools [1] is the very definition of a non-transparent selection process. This complete lack of transparency in the choice of recipient Pools has raised some legitimate concerns about the credibility of CF [1, 6, 7], but it doesn’t have to be a forever problem.
Having an application form to be filled in by all candidates every 12 months, and communicating this in a timely fashion in appropriate public fora is the first step to resolve the current lack of transparency. A second step would be to publicly announce the composition of the committee or group currently in charge of selecting Pools for delegation. If such a committee or group doesn’t currently exist within CF, it should be created and then its composition made publicly available. Having this information publicly available would mitigate some of the effects of the current lack of transparency, for example by reassuring the Community that no Stake Pool Operators are present in a committee or group charged with selecting Pools for delegation, which would constitute an obvious conflict of interest.
As noted above, strong confidence in CF’s role as a founding entity in charge of many aspects of Cardano’s public perception and internal politics is ever more important in the era of Governance. Increasing the transparency of the process leading to the delegation of approximately 500M ADA could do a lot to strengthen Community confidence in CF.
4) Pools currently don’t even have to apply to get CF delegation: they are cherry-picked [1]. This resulted, in 2024, in a “sticky” CF delegation for 20 out of 30 Pools previously selected in 2023. Not rotating delegation to new pools every year restricts access to attractive profitability marks for all other Pools which may be eligible for delegation. Further, the lack of an application process and rotation of delegation, limit CF’s ability to keep tabs with the evolution of the Cardano ecosystem: applicants would bring new projects and new ideas to CF’s attention. This, combined with a 12-month rotation, would ensure that CF is delegating to the most current and eligible builders and contributors.
Rationale:
The present proposal is merely an Info Action, aimed at gauging Community sentiment around what we perceive to be a set of issues with the current Cardano Foundation (CF) Delegation Strategy. As an Info Action, it shall have no direct effect on-chain. Nonetheless, we feel that this could spark a discussion around the topic and set the scene for changes to come into effect in 2025.
Specifically, to the points made above regarding the four characteristics of the CF Delegation Strategy that we propose to address:
1) In a recent call with Stake Pool Operators, CF admitted to the struggles of small Pools in attracting organic delegation and competing against larger Pool operations [8]. Although considering a plan of action to address this in 2025 and the three years following might have some merit, CF could back these public statements with actions having immediate effect.
Instead, CF representatives have recently called delegating smaller packages to more Pools “economic madness” and encouraged Community members to “do the maths” [9]. We agree that CF would incur a loss of profit by delegating smaller wallets to more pools, but we argue that the loss would be minimal and could be easily mitigated. Let’s look at some numbers to quantify this loss:
i) According to pool.pm data [10], CF currently controls 28 wallets containing 20M+ each for a total of over 570M ADA. These wallets are all delegated, and assuming a conservative 2.5% per annum return would generate over 14M ADA in returns every year.
ii) For argument’s sake, let’s assume that the entirety of the minfee awarded to Pool Operators is detracted from CF (this is an incorrect assumption, as minfee is detracted from the rewards of all delegators to a Pool). Minfee is currently set at 170 ADA per epoch: if CF wishes to pay the bare minimum, they should delegate to Pools with the lowest possible minfee. This would result in a total minfee collected by the 29 Pools of: 170 ADA * 73 epochs * 29 Pools = ~360K ADA. Over 14M in returns of stake, this number is less than 2.5%.
We agree that delegating to more Pools in smaller amounts would have CF incur higher amounts of fees, thereby resulting in a diminished return of ADA. However, we argue that doing so would bolster the message by CF, showing the Community that they are indeed helping Pools which need it, despite some minor financial loss.
Further, CF could adopt a strategy to mitigate this loss of ADA and simultaneously help the Cardano Ecosystem as a whole, not just Stake Pools Operators. For example, using Decentralized Finance (DeFi) services available on Cardano would generate income for CF and transaction fees for the Network: to make up for the ~720K ADA lost to fees using DeFi, CF would need to find opportunities offering at least 0.1226% APY with the assumption of monthly compounding. Given the typical yields in Cardano’s DeFi ecosystem, this would be feasible but might require careful selection of strategies.
2) The benefits of introducing a maximum cap in the size of the recipient Stake Pools would be similar to those described above for point 1. Further, it would minimize the risk of embarrassing repetitions of unintentional oversaturation and provide struggling Pools with the profitability mark that allows them to compete with larger operations.
3) Adding transparency to the selection Process for Delegation would strengthen CF’s own claims of inclusivity and Community engagement. The benefits of this transcend the Delegation program: Stake Pool Operators are a vital part of the Community and some are very vocal. Having even just a few Stake Pool Operators scream unfairness every round of delegation is not healthy for CF’s credibility as a beacon to which the Cardano Community looks for many adoption and political matters.
The current criteria for delegation are not clearly defined or quantifiable, leaving room for subjective interpretation. Further, shortlisting and inclusion/exclusion of Pools goes completely unexplained, leading to perceptions of favoritism or bias. Also notable, is the absence of active mechanisms for gathering or incorporating feedback from the broader Community or Pool Operators regarding the delegation strategy.
CF could improve transparency by making scoring and evaluation metrics publicly available and providing detailed rationales for Pool selections or exclusions. Additionally, CF could release periodic reports that detail the impact of the delegation strategy, such as metrics on increased adoption, development activities, or network decentralisation. Gathering input from the Community through fora or surveys could further enhance alignment with stakeholders’ priorities, and a weighted voting mechanism could be introduced to complement the existing selection process. Promoting diversity by actively targeting Pools in underrepresented regions or run by smaller operators would also support decentralisation and inclusivity. Dynamic monitoring tools should be used to prevent over-concentration in specific Pools, and CF could commit to an annual review of their delegation strategy to evaluate its effectiveness, incorporating data and feedback from the previous period. By implementing these improvements, CF could build greater trust within the Community and better align its delegation practices with its stated goals of ecosystem growth and decentralization.
4) Pools previously awarded CF Delegation should have to wait 12 months before being eligible again. Rotating delegation to new pools every year, would allow more pools to benefit from the attractiveness provided by CF delegation. Further, this rotation would reinforce CF’s claim of supporting current efforts building on Cardano: Cardano, like the rest of the industry, is a very fast-evolving space, in which contributors and builders change and grow (or shrink). Delegating to Pools supporting the latest and best efforts to grow Cardano, should be one of CF’s priorities.
Further, rotating the delegation regularly, would encourage CF to monitor the Pools they delegate to. Although it has been said that this happens [1], there are some valid reasons to doubt the thoroughness of this monitoring. There are Pools which have received delegation that failed to deliver rewards (despite the delegation) for not having met their pledge or having configuration issues. It is not our intention to single out any specific Operator, but data are on-chain and visible to everyone. We think Pools that receive CF delegation should have a spotless record when it comes to Pool maintenance, and that rotating delegation to new Pools every 12 months would encourage a more thorough assessment of those that do not.
Further thoughts:
We think that CF should re-introduce the requirement of being a Single Pool Operator in order to receive delegation. This was already the case before October 2023 and re-introducing it would negate any possibility of application by High-Leverage Pool-Splitters, known to be adversarial to decentralisation [11,12]. We acknowledge the important contributions made by some entities and individuals who run multiple Pools. Some of these contributions to the Cardano Ecosystem go way beyond the responsibilities intrinsic to the role of Stake Pool Operator and go back many years, enduring through less-than-favorable bear-market conditions that might have deterred less motivated individuals or entities.
However, high-leverage split-pools such as those operated by Centralized Exchanges do not participate in Governance or make any significant contributions to the Ecosystem. We are not suggesting that CF is presently considering delegating to any of these Pools, but the removal of the “Single Pool Operator” requirement for delegation by CF, makes it theoretically possible. We do not think that having Binance receive CF delegation would be a desirable outcome, even if they miraculously started contributing to Cardano’s Ecosystem growth.
By removing the “Single Pool Operator” requirement for delegation, CF makes it look like decentralization has taken a role of secondary importance compared to rewarding Builders and Contributors. We argue that decentralization of block production, and perhaps even more importantly, diversity of actors, should remain at the forefront of our aims as an Ecosystem. This becomes even more paramount in the era of Governance and at a time when Cardano is finally and rightfully being recognized as one of the Blockchains with the strongest Community and scientific foundations in the industry.
Further, as any Pool Operator in the System would be able to attest to, running a Pool on Cardano, albeit profitable in some cases and market conditions, does not give you enough extra funding to independently develop new solutions and contributions to the Ecosystem. This is why we have Catalyst, and other funding opportunities for people who wish to build on Cardano. If CF truly wishes to support Builders and Contributors, they should set up competitive funding opportunities that have nothing to do with delegating to Pools.
While Builders are important, they only make up a part of the entire Cardano Ecosystem. Now that the 2025 budget is in queue and funding will also be available through Intersect, Builders have this as an option for funding as well. The Cardano Ecosystem as a whole should be represented in the selection process, and there are many Operators who are contributing in their own ways besides building tools. Everyone who is contributing to Cardano deserves a fair shot at a CF delegation and to pitch their achievements in a CF application process.
CF could use the application process to narrow down Pools which qualify for delegation based on CF requirements. Random numbers could then be assigned to each shortlisted Pool and block hashes used publicly to select Pools randomly. This would remove all bias and has successfully been done before during the TeddySwap FISO [13].
We hope that this Governance Info Action will spark some productive debate in the Cardano Community regarding the changes to CF’s Delegation Strategy proposed herein.
Respectfully,
RABIT, ECP et al.
RABIT (@rabbitholepools) / https://x.com/rabbitholepools
EarnCoinPool (@earncoinpool) / https://x.com/earncoinpool
Call to Action:
Please Read, Like and Comment on our proposal posted on Gov.tools
https://gov.tools/proposal_discussion/68
Acknowledgments:
We would like to thank SPOs and other entities who have volunteered their time to provide feedback and shape this document in its present form. We will not name them, in order to respect their right to privacy, but their input has been of great help. Thank you, you know who you are.