Rewards distribution formula proposal

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.


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.

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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.


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.

I don’t like it because the rewards will be based solely on pledge (absolute pledge, not leverage)

As you write it, I’m really not sure you undestood the formula I proposed.

What it does is set a maximum leverage (as you call it), that I noted b0, that when surpased prevents to get any more rewards, the same that that if your pool is too big in comparaison to k, you don’t get any more rewards.

Exemple: If I have 50K pledge and b0=20, I can get at most rewards for 1M total stake (delegated + pledge ). Any pledge above 1M is not taken into account for rewards. b0 really is a leverage factor.

I think our proposals are very similar (Pmin aside). The main difference between our proposals, is that I propose to set a solid leverage “requirement”, that acts as a limit. Pretty much the same way as k does. Where your propose to have a maybe more progressive impact on RoS when leverage becomes too big.

I really think it would be interesting to investigate what the differences are. I have the feeling that if Pmin=1 and Levexp=1 and Levmax=b0 our formulas might be identical or almost identical.

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I replied on the other thread.

I can confirm you that if Pmin=1 and Levexp=1 and Levmax=b0 our formulas are identical!

(The one that I proposed was writen f( σ,s ) = R*min(1/k,σ,b0*s) )

I’ll show it under, I’m happy to see that you came to a formula almost idendical that I did, at least in its simplest version.

If Pmin=1 your formula becomes:

f( σ,s ) = R*Levf*σ'= R* b0/max( σ/s,b0)* min( 1/k, σ)

Now let’s consider only a pool where σ<1/k for now. We have for these pools

f( σ,s ) = R*Levf*σ'= R* b0/max( σ/s,b0)* σ

Two cases:

1- If σ<=b0*s, then f( σ,s )= R*σ=R*min(1/k,σ,b0*s) (because 1/k>b0*s>σ)
2- if σ>b0*s, then f( σ,s )= R*(b0*s/σ)*σ = R*b0*s=R*min(1/k,σ,b0*s) (because 1/k>σ>b0*s)

In both cases your formula equals to min(1/k,σ,b0*s) if Pmin=1 and Levexp=1 and Levmax=b0

As I wrote in the other thread, I think that the exponential part should be present to avoid steep changes in behavior along the curve. But the concept is the same.

As I wrote in the other thread, I think that the exponential part should be present to avoid steep changes in behavior along the curve. But the concept is the same.

Ok I don’t say that the exponential factor should not be there. I should think about that. But I think that’s good to know that before we introduce it, we start from the same basis.


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Here’s a simplified version without the mininum pledge factor:
and some simulations along with it:

Here’s the shape of the leverage factor:

I want to start a pool and have been thinking why doesn’t system incentivize decentralization better? The other problem is the need for pools to be marketers for delegators. That should be not highly incentivized because that also goes against decentralization. How about we lower the Treasury percentage to provide a reward to a pool in case they don’t mint a block equal to 10% of a block mint reward. If I knew I was guaranteed to get a minimal return of 50ADA for example each epoch for maintaining a good pool, I think that is fair. It could be in addition to your proposal. Would incentivize more SPOs.

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I really like the formula and the thought given into this, I really hope it gains more traction and maybe for IOHK to seriously consider.

I think that Cardano has a thriving community with new people wanting to get into the space everyday. I can see how small pool operators slowly get pushed out due to the difficulty to attract delegators to the pool. Without finding blocks, it’s incrementing costs and the 17% (net cost) to delegate to pool scares away an average investor.

At the end of the day, the average investor wants to make money (not always, but most of the time). The average investing who delegates might not understand all the factors that come into play behind the scenes of staking. In the end, I believe that all of these factors combined makes it extremely difficult for small pools to operate, attract new delegators, or survive.


A big chunk of these 17% net costs will be removed when the fixed fees of 340ada is lowered.

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