Rewards distribution formula proposal

I’m a pool owner and I would like to share this proposal with the community, to start a discussion before the review that IOHK will do in Q3 of the rewards formula.

The goal of this proposal is to incentive the decentralization, resilience and independence of the Cardano network. To do this we need stake pools with a good pledge, good size and solid ownership. Also there should be a way for new pools to be able to compete with the existing, on fair playing field.

The reward distribution is a good way to drive people in choosing the right pools, but now we see basically all pools give the same rewards regardless of the committed pledge. The only parameter driving the returns is the size of the pool, the bigger, the better.

So how can we modify the existing formula to achieve the above stated goal?

  • Consider a minimum pledge factor
  • Consider a maximum leverage factor
  • Keep the current saturation limit

So how does it look like?

r/cardano - Rewards distribution formula proposal

How does the proposed formula compare with the current one?

I ran run some simulations considering 0% margin fee and 340ADA fixed. Other protocol parameters like they are now (expansion factor, treasury, etc…). 32B circulating, 23B in stake, 13B in reserve.

Pmin = 25000ADA

Pminexp = 0.5

Levmax = 20

Levexp = 0.15

r/cardano - Rewards distribution formula proposal

r/cardano - Rewards distribution formula proposal

r/cardano - Rewards distribution formula proposal

r/cardano - Rewards distribution formula proposal

r/cardano - Rewards distribution formula proposal

r/cardano - Rewards distribution formula proposal

Basically every pool has an optimal rewards based on the leverage, the ratio between stake and pledge. Big pools with no pledge will need to put some real money into the pledge or they will stop getting rewards (i.e. Binance & C.). This ensures that sybil attacks are minimized by the high pledge that every pool will need to maintain in relation to the stake. Also for small pools there is a path to growth, if they commit to increase the pledge along the way. Even a 25k pledge pool has decent APY up to 5-10M in stake.

You can read the pdf version of this document here.

For fun I did some sims on real pool data, to compare how the proposal would affect them.

I took the first 5 ranked pools from adapools, plus 1PCT, Binance and my own pool, just to show that I did not draft the formula to suit my personal interests.

Ticker Stake (M) Pledge APY new APY old
THOR 51 1000000 6.14% 5.45%
ALPS 51 150000 4.6% 5.43%
ROCKY 51 150000 4.6% 5.43%
KIWI 48 500000 5.57% 5.44%
CRDNS 49 500000 5.56% 5.44%
1PCT 56 50000 3.85% 5.43%
BNP 65 2 0% 5.35%
IPIB 0.05 15000 3.18% 3.14%

Now the fun part: what do you think?

10 Likes

great post! hope pledge will take into account soon…

1 Like

Assuming the calculations are right then, wow @IPIB_Pool I am really impressed by this. I have been thinking about what would be a good mix of parameters but after reading your post, I can’t find anything really I don’t like.

My summarized take of your approach is this: every decently pledged pool can get good rewards for their delegators as long as their pledge is not to over leveraged compared to the stake. Great! This way you can start small, but then you can’t have a too big a pool. As you grow you should increase your pledge to sustain the growth.

I would really like to hear what other don’t like about this approach.

PS: this will also hamper big pools creating new pools when they are saturated. Well they can but then they also need the relatively higher pledge.

2 Likes

That’s the idea. I think we need committed SPOs that can start without being overly penalized by big pools, like now, and if they want to grow they just need to put all the rewards they get back into the pledge.
Tomorrow I’ll share the excel sheet so that anyone can play with the numbers, but I need to clean it up a little bit.

2 Likes

Could you please create a spreadsheet so that people like me could test various scenarios and understand the formulas better.

Tomorrow. I need to clean it up a little and make it readable. :grinning:

The criticism I can think of, after letting this sink in a bit more, would be that smart and valuable SPO’s that can add value to the community, but whom don’t have enough pledge will be penalized. What do you think about that argument @IPIB_Pool ?

I think it is a bigger problem that large part of the delegation concentrated to only a few pool operators… because of the easiness of starting a new pool. so pools with low pledge would be penalized but at least the the network would be more decentralized…

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I think that SPOs with good ideas and intentions will be pushed toward integration and partnerships. With the proposal you don’t need 100k ADA in pledge to be profitable, 15k-25k are enough to start.
What I see now that I don’t like is that most of the new pools have less that 1000ADA in pledge.

2 Likes

I’ll wait for the excel, but for now it looks unfair against big zero pledged pools.
The pledge was meant to give delegators confidence the SPO has motivation to run the pool properly. If the spo can persuade delegators despite 0 pledge, be it so. Lets not punish them for being successfull.
On the sidenote. Binance is being mentioned for their 0 pledge as a thorn in the ass by many folks here. They commit themselves to higher Roi to their customers regardless of slot lottery luck or technical issues they may encounter.
Lets face the facts, their skin in the game is bigger than anyone elses around.

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For Binance it’s very easy to fix, they just need to put 1M in pledge on each pool and they’ll be fine, even better than now. I don’t think they have scarcity of ADA…

2 Likes

I think the approach would really help to motive SPOs to re-invest earnings into pledge.
This is a good thing because it also stabilizes the market since there is more ADA locked in the end.
Of course any change is affecting some individuals more than other. So for those who are successful with low pledge at the moment it’s hard to now bring lots of pledge. On the other hand they also have their according earnings and maybe some of them need to increase margin to make sure they get enough to grow their pledge. This again helps the smaller pools to compensate the bad rewards situation based on the high share of fixed cost, at least marginally.

Would be an interesting calculation re-investing of operator earnings allows to stay stable in terms of APY and which margin is required to be sustainable.

3 Likes

Righ, Binance will be easy to fix it. Actually it doesn’t really matter to them because they are decoupling the native earnings on chain from the rewards they are actually paying out.

But one critical thing here is that binance acutally can decide themselves if they use the Exchanges User’s ADA as delegated stake or as pledge because they are in control of it. So they could also just 100% pledge the pools which would not allow anyone to compete with them in your scenario.

Actually I don’t know why Binance does not have at least half of their pools running as private with 100% pledge. They are losing about 1.5% in APY because of that. A fully saturated pool with 100% pledge yields over 7% with the current formula.

1 Like

I don’t think this proposal is about binance. if we zoom out we have these groups:

  1. pools with less than 25k pledge
  2. pools with 25-100k pledge
  3. pools with more than 100k pledge

For all 3 groups there is this subset that will apply:
a) pool has little or no delegators
b) pool has some delegators
c) pool has lots of delegators.

So in general and in total there are 9 types. Would be nice to make a matrix showing the advantages and disadvantages of all nine compared with current model.

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As promised here’s the spreadsheet to play with the numbers. You need to save the file and change the extension to .xlsx, because the platform would not allow direct excel file uploads.

CardanoRewardsSim.pdf (34.3 KB)

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@ IPIB_Pool
Are you aware of these posts?

I would be interested to know what you think about them. Also I will have to dig deeper to fully understand your proposal.

2 Likes

Ok so I think I’ve understood your proposal.

I think I goes in the right direction, same direction than what I proposed: imposing a pledge ratio (or leverage as you call it) rather than an absolute pledge value, to stay competitive. Although you still propose a factor that tends to impose a minimum pledge value in absolute. Not sure why, the value Pmin should not be too high for this formula to make sense.

Overall I think your proposal would be way better than the current one.

Although this formula sounds to me a bit complicated in its current form, in comparison to the formula that I proposed, I would be happy to find out with you, what are the differences and advantages of each one of these formulas.

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I think that the minimum pledge factor could be effectively eliminated if the leverage cutoff if steep enough. So the formula is further simplified and probably easily accepted. In the spreadsheet you just need to set pledge_min to 1.

I was not aware of the first post in the CIP sub. What I think of that one: I don’t like it because the rewards will be based solely on pledge (absolute pledge, not leverage). This means that basically it would not be possible for a small pool to grow. There are pools with 1M in pledge, they’ll get all rewards. I think the formula is overly simplified.
The second proposal is about lowering the threshold to mint a block. I think it would increase the proliferation of even more small pools. The driver should be the rewards percentage. If we adopt a formula that will lower the rewards of highly leveraged pools, a lot of stake will move to better leveraged one, including small pools, that will start getting blocks.