many months ago, when I read a lot about Cardano’s design, the formulas, incentive system and how Cardano wants to accomplish true decentralization, I believed that especially the following two pool parameters will accomplish this:
- k = sets the number of desired pools
- a0 = motivates a single pool owner to use all his pledge for just 1 pool in order to increase the pool’s ROS
Nowadays, young Cardano mainnet is converging towards a few people controlling most of the stake.
It appears that a0 is set to the wrong value (0.3), because currently it does not motivate pool operators to dedicate all their pledge to as few pools as possible, as pooltool.io clearly shows:
(pool clusters sorted for active stake as of September 1st, 2020)
I will pick two different pool (cluster) to illustrate the problem.
First, let’s take a closer look at the very prominent 1PCT pools, operated by 1 anonymous guy, no twitter channel, no Telegram, no nothing - just claiming highest rewards, lowest fees (see website). From all the operators, his/her pools are currently receiving a very high income (see column Epoch Pool Fees, ignore IOG, ZZZ, LEO, etc.) of about 10.300 ADA every 5 days. 1PCT actual pledge is in total 1.2 Mio ADA (for all 11 pools). So for every ADA he pledged, he receives 0,8583 % ADA (only fees!) per epoch. Per year, this accumulates to about 62,6 %. In addition, his pledge counts as stake. For that 1PCT receives an additional 5.69 % per year.
For 1PCT, pool income per year could be about 68,3% of total pledge which would be 819.480 ADA or $98.337 (with 1 ADA = $0,12). So, if the 1PCT owner keeps most of his earned ADA, his ADA will double in less than 1,5 years, allowing him to control even more pools.
Disclaimer: I picked 1PCT as example, because they control largest part of active stake (except for IOHK) of all multi-pool owner. However, I could have picked any other multi-pool owner to prove my point. For example, EMUR* is even more extreme than 1PCT when it comes to gaining pool fees vs. actual pledge. The 4 EMUR pools only have a total actual pledge of 21k ADA, but stil are offering a ROA of 5.55% to delegates and have pool income of 15.200 ADA per epch.
Now, I am comparing 1PCT to ATADA.
I chose ATADA because they have a Telegram channel, offer great support and most importantly operate only 1 pool with a very high actual pledge of 3.4 Mio ADA - which is 5th place in this “Top 30” active stake table. You will find the pool at the bottom of the list, because the list is sorted for active stake. What makes them different to the 1PCT* pools? Clearly the pool income. This pool collects 2.300 ADA as fees per epoch. So for every ADA pledged, the pool receives 0,0676% ADA as fees per epoch. Per year, this accumulates to about 4,93 %. For the staking, ATADA receives an additional 5.66 % per year.
For ATADA, pool income per year could be about 10,6% of total pledge which would be 360.340 ADA or $43.240. Clearly, it will not allow the owners to double their pool number in less than 1,5 years.
Please excuse me for this long post, but stay with me for the conclusion.
In essence that shows that income per pledged ADA is ~6 times higher for 1PCT than for ATADA. Therefore pool owners are currently clearly incentivized to spread their pledge across multiple pools. If it stays like this, than we will have 20 “1PCT” pools in only 1 year from now - and I am not kidding.
This is not what Cardano needs! Cardano prospers from distributed ownership.
What is the issue?
In my opinion parameter k is working and can be raised later, but a0 currently is not doing it’s job. One of the purposes of a0 was to increase the ROA for a pool that has a higher pledge than a lower pledged pool. This is currently not the case as this forum post confirms as well.
The impact of a0 on a pools ROA is too weak, because it makes no difference for a new delegate if he gets 5.69% or 5.66% per year. If pool A (ATADA) has a pledge that is ~30x higher than pool B (1PCT0) than this should have a substantial impact on ROA - like 1% or 2% - similar as saturation does. Even if ATADA would lower their fee from now 2% to 1% it would not cause their pools ROA to increase to make a difference.
— My clear request to the Cardano design team —
Please find an effective way to financially discourage pool owners from spreading their pledge across multiple pools.
— To all multi pool delegates —
Consider changing your delegation to properly pledged smaller pools that offer additional benefits and not just ROA. This way you will support decentralization. When delegating to a smaller pool, ROA for you will be of a similar magnitude (~5.6%) as now.
— To my fellow pool owners / community members —
I am looking forward to your thoughts / constructive feedback. It’s clear that my post will not be liked by 1PCT pool or other pool owners that run multiple pools. On the other hand I believe those operators are very clever guys, they understand the math and found a way to exploit the system, which hopefully will no longer be the case in the future.
This is no advertising for ATADA - I merely picked them as a positive pool owner example. I am not a delegate of ATADA nor do I know the team behind ATADA personally.