Stakepool Profitability Calculation

Hi Community!

I tried to do some calculation examples to get an objecte view on potential incomes which may be generated from operating a Stake Pool. I wanted to find out the required size to make a pool:

  • Cost Covering
  • Attractive for delegators (Continuous Reward, High ROA)

I considered the following parameters in my calculation:

  • Avg Blocks / Epoch = 21.600 (including central calculated blocks)
  • Avg Reward / Block = 1300 ADA
  • Total Staked ADA currently = 22.3 bn ADA
  • Centralization Factor = 22%
  • All of the mentioned Variables may change over time

The calculation Example used 340 ADA fixed cost and 1% Margin.

Key findings:

  • Below 1mio ADA the ROA stays stable, but the frequency of payout is not acceptable below 500k (e.g. 2 months at a 100k pool)
  • Pools > 1mio ADA will improve ROA because the fixed fee is shared across a bigger list of delegators
  • Interesting here: I assumed very small pools will even have worse ROA. This is not the case because there will be many Epochs were not even 1 block is minted, therefore also no fixed cost is taken from the Rewards.

I hope this helps the one or the other to get right on income expectations :wink:
Especially the effect on small pools which just are starting is interesting to me because I also initially ran into some wrong assumtions in my initial calculations. The key point here is that there is no income at all if no block is minted throughout the whole epoch. At a 100k pool there is currently a chance of 7,5% to achieve 1 block. So in 92,5% of epochs you will not get any Reward at all.

Find the calculation results attached

Let me know if you find any mistakes!

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And maybe a hint for everybody thinking about starting to get an SPO.
Take a close look on TAX considerations before deciding to run a pool. In many contries you this is minded as running a business. This is connected with TAX on the earnings, but also maybe connected with TAX on the value increase of the Owned ADA (e.g. the 1 year limit to sell without TAX, in Austria is not applying if the ADA is owned by a company, meaning you will have to pay TAX for the value increase)
→ Not sure about other countries… but this could be a blocker for some of us.

The biggest problem with all these calculations is ignoring the probability of receiving rewards from the created block, which is not 100%. Thus, you can create one block per epoch for a month and have zero rewards and your ROA will be 0%.

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You mean in the case of a battle? I do not think that this would change the overall chance to make the block. Sometimes you win, sometimes you loose, but this should average out in the end. So the change on the long run still is (Active Stake / Total Staked) → Do you agree on that?

Or did you mean something different?

Yes, I’m talking about the battle of slots, it does not affect the chance to create a block, but it does affect the chance of getting rewards.

I think your consideration is inclued in the calculation already. Assuming that 10.000 Blocks are generated.
Based on the Leaders Election maybe there are blocks awarded to multiple Pools. E.g. 20.000 assignments (meaning every blocks is on avg assigned to 2 Pools).

While many battles will lead to loosers and winners, still there will be 10.000 Blocks generated and 10.000 rewards being payed out which is the basis of may calculation.

This makes sense when we talk about the system’s profitability. When we focus on the profitability of one pool, reality becomes different.

Just recognized that I missed one aspect. The Pledge Influence Factor which is described here: Pledging and Rewards — Cardano Documentation 1.0.0 documentation

Rewards Calculation Formula

It seems to me the current a0 (coming from the protocol.json) is 0.3
OK, so i need to reduce the “Rewards generated” by the Pledge Influcence Factor.

How to do that? How is the pledge influence factor now calculated?
Does this mean a max degration of 30% if there is 0 Pledge?
Or mathematically correct: With 0 Pledge I get 1/1.3 of the rewards?

Also I missed to include Tau. 5% Treasure Tax Fee.
Will update the calculations later today and share it here again!
Also will incorporate the formula here to take care on Pledge Ratio: https://www.reddit.com/r/cardano/comments/hnm3l6/shelley_incentive_parameters_what_you_need_to/

Most jurisdictions where ADA is considered property (almost everywhere), will try to tax the income component and the capital gains component. Thus, if you are running a pool, you want to make zero profit (income-expenses = zero). NOT TAX ADVICE :slight_smile:

Hi Frank!
Tau is not a Tax to the financial system of your country.
Tau is a Cardano internal Tax which is taken into Cardano reserves.

“tau=5% → the treasury tax rate. It reduces total rewards, redirecting them to a treasury account for later use.”

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So Tau is easy to apply. But I’m really struggling with the Pledge Factor Calculation.
Hope someone can assist with that:

I’m taking the following formula:
Rewards Calculation Formula

My main question now is:
Is the formula used to (A) influence the chance to be selected for a block or (B) manipulate the rewards payed out for a minted block.

Assuming it is B for now, as the formula uses R being the Total Rewards for the eopich.
This means the chance to be elected for a block is not influenced. OK.

Then simply restating the formula (with a 0.3 Pledge influence factor):
Formula reshaped

Where z = 1/350 and Stake and Reward are Percentages of Total Supply (not saying Total Staked!).
What is strange now:

  • If I just look on the left side of the formula. It takes the Stake Percentate of Total Supply which is a very low value and multiplies it with the reward. What is the expected outcome of this? It will result in a very low number, so cannot reflect the corrected reward.
  • The first part of the right side is similar beside of the additional calculation (Stake-pledge, …). Unfortunately this is not giving any senseful results to me which would make sense to be added to the left hand side of the formula

Has anyone tried to apply this formula already? Where is my logical fault here?

Hey,
I was commenting on this from your earlier post:

Blockquote

his is connected with TAX on the earnings, but also maybe connected with TAX on the value increase of the Owned ADA (e.g. the 1 year limit to sell without TAX, in Austria is not applying if the ADA is owned by a company, meaning you will have to pay TAX for the value increase)
→ Not sure about other countries… but this could be a blocker for some of us.

Blockquote

Maybe lets keep the country-specific ministry of finance driven TAX out of consideration for now. Sorry, i know i raised the topic myself as a hint initially ;).
But I’d like to focus on the rewards calculation in ADA now.

Can someone help me with applying the Cardano Rewards Formula?
The order I use at the moment is:

  1. Calculate Chance to mint a block / multiple blocks
  2. Calculate Rewards (currently based on the assumption of statically being 1200 ADA)
  3. UNCLEAR: Correct the regards according to Pledge Factor
  4. Remove 5% Cardano Tax
  5. Remove Operator Cost
  6. Remove Margin
  7. The rest is Payed out to Delegators

After reviewing the Reddit Post again I think that the Pledge Factor is not as important as I thought it might be.
Link: https://www.reddit.com/r/cardano/comments/hnm3l6/shelley_incentive_parameters_what_you_need_to/

Based on this a Pledge of 1M is providing a 0.04% better ROS (being 3% higher) compared to a zero Pledged Pool.
Means: A pool with 0 Pledge and 1% margin is equal with a Pool with 1M Pledge and 4% Margin

The much bigger impact is the Pool Saturation, because in a low Saturated Pool the Operator Cost is eating a higher portion than in a high Saturated pool where the Operator Cost is splitted to many delegators. Good rates are achieved with over 10M active stake. Still 10M has a 11% higher rate compared to a 3M active stake pool (5,46 vs 4,89).

As a final conclusion my best guess for the expected return is shown below.
Note: I updated the expected Rewards per Block to 1100 ADA to end up with realistic ROA Numbers.

What is the minimum pledge/stake I need to do as a stake pool operator starting out to achieve a good return ? I don’t have much to start.

“a Pledge of 1M is providing a 0.04% better ROS (being 3% higher)”.
Looking at the reddit article the difference of 1 Percent return for the delegators is reached at roughly 300k pledge. So everything below it is not making a huge difference…

I beliefe most of the new pools have this problem since the price of ADA increased so heavily.
Anyways I think the maths is one thing. The psychology from a delegator perspective is a different one. A pool with 200k pledge seems to be more trustable… So hard to start I know. I’m also just starting and hoping :wink:

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What do you recommend Zwirny, 10K pledge is probably the most I can do, and I Would need a friends help as I have less than 5K<

Must be a good friend with a lot of trust.
But acutally I do not think there is a real difference between 5k and 10k from both a Rewards and also Psychological perspective.

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im almost completed my pool setup. so i am still learning about pledge/ and finalizing the pool.