Staking Pool Operators - Stop calling it percentage of return

Okay, for all you pool operators out there, this is for you:

tl;dr

  • Stop calling Cardano’s PoS, a percentage of return as if it is a dividend on a bond or something, it’s not.

Don’t understand that one line, then listen to Charles painfully explain in the video below why PoS is work:

October 17, 2018 - Surprise AMA from Charles 52:07

Q: Will Cardano make the staking process understandable for normal people?

A: There is a lot of misconceptions about staking, about what it is, I hear, what is my percentage of return as if it is a dividend on a bond or something, it’s not.

So, in the beginning, there was mining, what was mining? I will start off with a common reference strength, you start off with this notion, in the beginning, let’s have a puzzle contest and whoever finds the puzzle has the right to move to the next state of the system and decide what that next state looks like bounded by a collection of common rules. That is all it is, its a contest, Bob does his work and Alice does hers and eventually, somebody figures it out, and says, I won the right to advance the network and when I do I get paid to do that. It’s a contest, win the contest you get the right to do something and only if you do that thing, you make that block, you actually get paid.

That is the important point of mining, Cardano’s proof-of-stake is no different in that respect, it is a contest and the contest collects a group of winners, instead of saying to win that contest you are going to have to burn more electricity than the entire country of Ecuador or Ireland, we can do away with all that nonsense and elect people proportionally to their stake. It still means that when you win you have to do something or you have to give that right to do something to somebody else and only if you do it or somebody else does it will you get paid.

This is not how dividends work, not how interest works, those are do nothing and because your capital is at risk you get paid a profit for that. Cardano’s proof-of-stake is just saying, we have to pick a leader and the people we pick probably should be the people who have the highest vesting and the best interest in the long-term success of the system. This is not the case with mining, especially when you have competitive proof-of-work protocol, later on we could change parameters, we’ve come up with some metric, call it gamma, and gamma is designed in such a way that says you are a good citizen of Cardano and gamma will bias your chance of winning, positively or negatively, based upon whether you are a good citizen or not, we could certainly explore that in next generations of proof-of-stake, already some on the engineering side have thought about such notions, and you could move from how much stake you have to a freer chance of winning.

Winning means nothing if you do nothing you still have to do something, at the moment you make a block. What does making a block mean? You soak up all those transactions in a mempool, you put them in a certain way, making sure they are right, run the verify programs, and then you put them all in attaching that block to the prior block and you are done. Then and only then do you get paid, in Cardano’s case you have to wait for the epoch to end, now later versions of the protocol may include a large collection of other services that if you don’t do those things you get paid less or in some cases get paid nothing or contingencies that you get elected multiple times and have to show up all the time or you forfeit all your winnings.

So, that is an important distinction and is something that for some reason somewhere along the way people have just been unable to understand, there is no difference in the proof-of-stake system to the proof-of-work system in terms of ‘returns.’ It is a parameter that you set in the system but the concept is still the same, you are paid to do something, you are not paid for just sitting on your ass and having money.

So in terms of what percentage should you be paid that is a parameter of the system and you have to be pretty careful with that. We published a paper recently, Reward Sharing Schemes for Stake Pools and that paper covers economic incentives, and that paper is in tuned to how should you structure incentives in a way to create a collection of stake pools, and we discovered in that paper that we think our system can sustain a total of over a thousand stake pools assuming that most people would be rational just to simply delegate, some people will want to run their own pool or staking operation.

So I would encourage people to read that paper. The final parameterization will be set as we get a little bit closer to launching Shelley but is probably going to be around five-percent inflation per year, but there are a lot of factors, the number of transactions we have fit into profit, there is also the concept of the treasury system when the treasury system comes out the percentage of reward will be allocated to the treasury and these things are discussed in the paper and literature we have, in particular Lars Brünjes has been working on.


This made me smile:

Then and only then do you get paid, in Cardano’s case you have to wait for the epic to end, now later versions of the protocol may include a large collection of other services that if you don’t do those things you get paid less or in some cases get paid nothing or contingencies that you get elected multiple times and have to show up all the time or you forfeit all your winnings.

I’m hoping those generous collections of other services, come sooner rather than later. As for me, I’m not going to wait for Cardano pools/edge servers I will be running Solid alongside Cardanos PoS.

I hope all of Cardano pool operators follow suit and deploy services that deserve a chance at widespread adaption.

Thanks for reading to the bottom of this post, now let’s go and make the status quo irrelevant.

15 Likes

I enjoyed that elaboration also!
I also applaud your idea of hosting solid servers in conjunction with Cardano staking. That is something I hope to emulate. I actually brought it up at our meet up yesterday (gave you the credit for the idea of course).

4 Likes

And I must give Tim Berners-Lee all the credit, for it was his post One Small Step for the Web… that made it even more evident that tomorrow has come today, Cardano & Solid are natural together.

2 Likes

@Jotunn Excellent post

Just want to bring your attention to a couple things - not that I want to be nit-picky, because it is really helpful to transcribe like this. Text becomes searchable - videos are not.

  • In “in Cardano’s case you have to wait for the epic to end” I think you meant “epoch” not “epic”

  • In “You soak up all those transactions in a meme pool” I know you meant “mempool” not “meme pool”

I miss @maki.mukai’s transcripts for the new AMAs, I am sure everyone in the forum does.

4 Likes

Great post, @Jotunn!

Note, that realistic expectation is for the “reserve decrease” to be at 5%, not the inflation itself. The way it’s described here: https://staking.cardano.org

5% reserve decrease gives 2.23% inflation first year, and 2.07% second year. You can play withe the “Year” value here and see how stuff changes: https://antipalos.github.io/cardano-calculator/

5% inflation seems way too high. And inflation can’t be static, it supposed to be decreasing over time. The hope is that it was just a very simplified note about inflation from CH :slight_smile:

5 Likes

As I understood the staking docs inflation is not the only source of staking rewards. The transaction fees are also included, correct?

This is good education for people who are thinking that the staking rewards will give them 8 or 9 percent ADA per annum. :smiley:

I was watching a video yesterday of a review of Yoroi wallet in which the hosts mentioned 9% in staking rewards :joy:

Yes, and fees are actually may (and should) be the main source of rewards. Meaning that you can get pretty high staking rewards, BUT only as a consequence of the platform becoming very popular and adopted, and NOT as a consequence of printing coins out of air.

For example, Cardano protocol supports up to ~230 TPS at the moment, but currently only something like 0.03 TPS (15K tx per epoch) are actually used. So you can open https://antipalos.github.io/cardano-calculator/ and change the 15000 tx per epoch number to, for example, 90 million, to see what rewards will be when system gets popular.

And now imagine Hydra and sharding. People love to talk about thousands of TPS for some reason, but they also don’t think about consequences of those TPS.

1 Like

250 TPS is just for SL.

Now speaking of CL and the several side chains in it I am guessing the blocks will be generated in parallel in each slot. The protocol serves all the chains alike.

Does that mean if those chains had the same max transaction size and max block size they would have same TPS?

Hmmm, at Firefox the result doesn’t update, while at Internet Explorer I even cannot see the table or the swiper. Maybe some kind of firewall effekt?

Seems true :frowning_face: Most probably it just that I didn’t test it for various browsers, as it’s not a commercial product. Will try to find time to fix it, tho. Or happily accept contributions :wink:

Thank you for the report, tho!

What kind of browser do you use? At home I can try different browsers at a different computer.

Well, I could make you some coffee while you are programming, would that be fine? My computer skills are rather limited…

1 Like

I mostly use chromium based Yandex browser, so it works almost as Chrome. Gotta add other options for test :frowning:

:grin: Thank you! Just meant to write this in case someone else finds this invitation :slight_smile: I have looked at some quick debugging in FF, and it seems like a not-to-big problem, so I will try to fix it soon. Haven’t even looked into IE yet tho :sob:

1 Like

Thanks @vantuz-subhuman

It was, you can tell in the way he laid the groundwork for the question asked before proceeding to his answer.


@canopus, I’m highlighting this line again as it is quite telling of where Cardano will be heading.

I just checked at home: It works fine with Chrome but not with Firefox. So it’s not a firewall problem but different behaviour of browsers. Good to know. Very interesting to play around with the different values! Thanks for your work!

If you are a regular staker the activity is neutral. You are not getting “paid” anything.

The payment keeps your value (approximately) in-line with an inflating money supply. If you don’t stake your value shrinks.

Even if you do stake, your value will shrink a little, because staking “rewards” are less than the inflation, the difference between the two, is the payment to pool operators / cost of solo staking.

While your “value” (portion ownership) in the money supply will be slightly diluted, you would expect it to increase relative to fiat, because of the value added by the staking operation on the network.

1 Like

True enough, I wish Charles would have added in staking also helps to secure the network, perhaps next time he will.

Call it whatever you want, it is still a percentage of return. Just instead of being a being a percent return on investment (ROI) it is a percent return on work.

Please don’t call it whatever you want, if you do you are mudding the water.

1 Like

I need an animated graphic as my brain is small.

1 Like