A provocative statement: @Cardano-Foundation With current ADA price levels, your delegation methodology creates a strong incentive against co-operation. As a result, we have 2000+ pools that are nearly useless to delegators.
How so?
ADA holders can co-operate to contribute to the PoS system in one of two ways:
- Delegate to someone else’s stake pool
- Combine their ADA to fund a pledge and jointly run a pool
Both approaches can result in pools having enough funds (delegations+pledge) to mint blocks more or less regularly, at least once every other epoch.
In practice we see a lot of (1) and very little of (2). Instead, there are hundreds or even thousands of pools with very little pledge and only a few delegators, even though these pools can’t generate consistent rewards for their owners. This means that there are many, many SPOs with not enough funds to regularly mint blocks who nevertheless choose to neither delegate nor pool their money with others in order to fund an attractive pool.
In other words, even small ADA holders deem it more attractive to become solo pool owners than to cooperate in one of the ways mentioned above.
Indeed, the current delegation programs by @Cardano-Foundation and IOG strongly incentivise such behaviour and I wonder if this is by intention and if not, how we could improve upon the program.
An illustrative example: Suppose I own 25’000 ADA. By delegating, I can expect to receive 1’250 ADA per year if the average RoS is 4.5%.
If I create my own pool instead and put the money as pledge, I would expect to mint a block every 40 epochs on average. One single block reward amounts to currently ~700 ADA, so the expected annual return would be about the same as with delegation.
So why bother with running a pool? Because I also would be able to participate in a lottery for which the ticket costs nothing and the chances of winning are substantial. The @Cardano-Foundation delegation program is such a lottery. Suppose there are 1’000 eligible pools, 50 of which are chosen every three months to get a 15M delegation, so the chance for a pool to win the lottery is a whopping 20% every year.
How much is the prize? Well, for a pool with 1% margin the expected value would be 20% * 15M * 4.5% * 1% = 1’350 ADA.
This means that, thanks to the CF delegation program only, running a pool can yield more than twice as much per year for an investment of 25’000 ADA than by just delegating the same amount.
Not only that, a pool with 15M stake will advance in the rankings and attract more delegators than a small pool, increasing the profits even more.
I argue that this is the main reason why there are 2000 out of 2600 pools with 100k pledge or less. Does that pose a problem to the stability of the network? I’m not competent to judge that. However, what I can say with confidence is that running a lottery and handing out free tickets is probably not the best use of @Cardano-Foundation’s resources.
So, assuming the Foundation agrees with my reasoning, what can be done about it if the goal remains to promote a healthy, diverse SPO community from which nobody is excluded because they can’t afford a high pledge?
One option would be for the CF to delegate pledge instead of stake. Instead of being delegator, the Foundation would become temporary co-owner of the pool and be entitled to the full pool reward times their proportion of the total pledge. An SPO using this instrument would thus have to pay a price in terms of a portion of the pool rewards.
Example1: SPO pledges 25’000, CF pledges 15’000’000. Then, CF would be entitled to 99.8% of the pool rewards.
Example 2: SPO pledges 1’000’000 , CF pledges 1’000’000. In this case the rewards would be shared evenly between the two.
A variant of this could be for the CF to set a policy that they would pledge a maximum of, say, 75% of the total. So, if someone runs a pool with only 25’000, the CF could add another 75’000 to that pledge, but not more. This would encourage SPOs to cooperate by pooling their pledge in order to get more external pledge from the CF.
Some SPOs might object and say “But what about my costs? I have to do marketing”, to which I would respond that no, you don’t. Money spent on pool marketing is wasted money. Any pool with sufficient pledge and reasonable fees will attract delegators. You only need marketing if you wish to set your pool apart from countless other, equally unattractive pools. If you cooperate with others, however, everybody would win.