The Myth of Decentralization in Cardano: Why Small Stake Pool Operators Can't Survive

The Myth of Decentralization in Cardano: Why Small Stake Pool Operators Can’t Survive

As a Cardano Stake Pool Operator (SPO) for over 4 years, having minted more than 200 blocks with near-perfect uptime across four nodes, I’ve seen first hand how the promise of decentralization within Cardano is fundamentally flawed. The system, as it stands, is skewed heavily in favor of early starters, multi-pool operators, large established pools, and influencers who have the power to attract delegators at scale. For the rest of us - especially small or new pools - the playing field is anything but level.

The Imbalance: Large Pools Dominate
Once you break into the ranks of the large pools or manage multiple pools, it’s game over for everyone else. Stake rarely moves. Instead, it gravitates toward these well-established pools for one simple reason: they offer higher rewards. This is because of the current reward system, where the more blocks a pool mints, the smaller the impact of the 170 ADA minimum pool fee becomes. In small pools like mine, that 170 ADA fee significantly reduces the rewards delegators receive, making my pool - no matter how reliable or well - run - less attractive compared to a large pool.

Larger pools mint multiple blocks per epoch, allowing them to distribute rewards more evenly across delegators. When a pool mints 10 blocks in an epoch, they generate over 4,000 ADA in rewards, but the 170 ADA fee takes a much smaller proportion of that. In contrast, if a small pool mints just one block, the 170 ADA fee bites off a huge chunk of what goes to delegators. The result? Large pools become more attractive purely due to size, not performance or contribution to decentralization.

Gimmicks Don’t Work
For small pools, the only options to attract delegators are short-term gimmicks: giveaways, tokens, or sharing the pool fee with delegators. These tactics may work temporarily, but delegators inevitably leave once the giveaways stop, returning to the larger pools where they feel they’ll earn more reliable rewards.

With this system, there’s nothing meaningful a small or new pool can do to differentiate itself from the competition. It’s an uphill battle where the odds are stacked against you, and it’s leading to the centralization of stake into fewer, more dominant pools.

A Broken Reward System
The biggest flaw in the system is the minimum pool fee of 170 ADA. This is devastating for smaller pools. In my experience, and as the numbers show, this fee makes it nearly impossible for small pools to offer competitive rewards to their delegators. The Cardano network needs to rethink how it compensates small pools. One solution could be to separate the pool margin from the block reward itself. Instead, the pool fee could come from the treasury or a network subsidy, so delegators aren’t penalized for supporting smaller, more decentralized pools.

We recognize that such a solution may incentivize operators to run multiple pools just to siphon off the pool fees, but a hybrid system that prevents this kind of abuse could be considered. There must be a way to balance fair compensation for small pools while maintaining decentralization and preventing larger operators from exploiting the system.

Decentralization is a Myth
The reality is that Cardano’s decentralization is more myth than fact. Over 1,000 pools have never minted a single block, and thousands more have retired because they simply couldn’t compete. In addition to this only 4.96% of pools have minted over 10,000 blocks. The result is clear: a network where the vast majority of stake resides in a small number of large pools, controlled by those who either had an early start, managed to operate multiple pools, or had the influence to gather mass delegations.

As a small pool operator, you would have more success opening a coffee shop between Starbucks and Costa than breaking into Cardano’s reward system. The current design means that once a pool reaches a critical mass, it becomes exponentially harder for new or smaller pools to gain any traction and compete. This is a centralization of stake and influence - the very thing Cardano was built to avoid.

Time for a Change
For Cardano to live up to its promise of true decentralization, the community and the developers need to rethink the reward system. By finding a fairer way to compensate small pools - perhaps through treasury funding or rethinking the fee structure—delegators could be encouraged to support decentralization without sacrificing their rewards. Until then, decentralization on Cardano will remain a myth, with only a handful of pools controlling the majority of the network’s stake.

Let’s Be Honest About k
One final point: the parameter k is currently set to 500, which means the network is optimized for about 500 stake pools. So, let’s stop pretending that Cardano wants more than 500 active validators. The reality is, if you’re running a pool outside of these top 500, you’re essentially doing it as a hobby. While there are technically over 3,000 stake pools in operation, most are simply unable to mint blocks or attract delegators due to the way the system is designed.

The truth is, Cardano’s reward mechanism doesn’t support real decentralization. Instead, it ensures that the top 500 pools thrive while everyone else struggles to survive. If that’s the goal, let’s just be honest about it instead of pretending otherwise.

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I agree with most of your post. But I had to cut out a bit to correct this statement:

If you read the Ouroboros papers, this is exactly what the design is seeking to achieve. The design intends for the reward mechanism to incentivise the stake in the system to shift in order to achieve this target number (K) of pools which are evenly saturated.

In other words, the K parameter has two objectives:

  • To ensure there is at least this minimum number of pools. IE: minimum number of pools >= K.
  • To push towards this being the optimal number of pools. IE: maximum pools is not too much more than K (with all being mostly saturated).

However there were a few problems the architects didn’t consider:

  • The designers did not envision, and did not model for, multi-pool operators. Multi-pool operation bypasses the minimum policy objective of what the K parameter was seeking to achieve in terms of unique individual operators. With multi-pool operation you can have only a few, or even just one individual operating all K pools.

  • The designer assumed that stake would remain active. The security of the system is based upon active participation where stakers will move their stake if a pool operates badly or changes its fees. They didn’t think about the problem of “sticky stake” which provides a windfall of extra income for OG incumbents, and provides them a “get out of jail free card” since they can act maliciously with less fear of reprisal.

  • They envisioned a world where new pool operators could fairly compete with incumbents. However, as you point out, the minPoolFee is a barrier to fair competition enforced by the protocol. New entrants are not on equal footing with incumbents due to this mandated minPoolFee, and this economic disadvantage is further exacerbated by the OG pools having tons of sticky stake that can’t, and won’t, move no matter how they set their fees.

    If they are a multi-pool operator they have even more power because they can spin up additional pools with lower fees and leave their OG pools with higher fees to cross-subsidise expenses. The sticky stake can’t and won’t move, so the operator can just charge high fees on the old pool and low fees on the new pool. Their new pool can out-compete your new pool with lower fees but it doesn’t hurt them economically nearly as much as it hurts you.

    But it gets worse: The multi-pool operator can even go on social media and say that they are the good guy here because they are trying to retire their old pool and this is why they are charging higher fees on it. They are “trying to get stake to move and be more balanced”. Have you noticed that some multi-pool operators charge different fees on different pools?

For those single pool operators interested in fair competition here are some changes that would help:

  1. Un-recognise sticky stake after a certain period of time - perhaps 12 months.

    IE: Change the delegation mechanism so that each delegation has an expiry of 12 months. After that time, users will need to re-delegate or re-confirm their current delegation. IE: Prove they are still alive and can control their keys. After all, the security of Cardano is based upon an assumption that stakers are active participants and they are partnering with their stake pool operator. And, stakers get paid rewards for their ACTIVE participation. Sticky stake is doing no such thing and should not be rewarded when it is not active. Furthermore, if we stopped paying rewards to the inactive participants then this would result in more rewards being available to be paid to the active participants. I don’t think it is too much to expect a confirm delegation transaction once a year to prove you are still alive and are able to point your stake key somewhere.

  2. Give stake pool operators the option of choosing a minPoolPercentage instead of a fixed minPoolFee.

    At least that would level the playing field for new entrants in terms of not disincentivising stakers due to reduced rewards.

    But note: This would in effect disable one of the policy objectives of the K parameter - that of seeking to push Cardano towards having K saturated pools through disincentivising tiny pools.

    But then again so does the advent of Multi-pool operation bypass policy objectives of K. So, quid pro quo.

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The decentralization is fine, although new and smaller pools don’t have a hope. That doesn’t mean the decentralization is bad. There are much bigger problems affecting all cryptos.

For example, you cant even get crypto without an exchange. That’s centralization.

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You can sell your goods / services for crypto.

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Technically this is an “exchange” but without the centralisation you are talking about:

There used to be more P2P services like this, as far as I’ve seen. LocalBitcoins went out of business in 2023 and AgoraDesk is almost finished winding down now. Their reasons cited for closing (always “market conditions”) imply that there could be more if & when the crypto market recovers.

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Would an increase of the K parameter to 1000 or 2000 be a remedy for this issue? In the past I had considered many times running my own Staking Pool but since I know I wouldn’t collect millions of delegated ada, I didn’t do it… :frowning:

I am very much in favor of this idea… It’s not a lot to ask once in a year that you are “alive” and an active participant in our ecosystem…

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The problem is that so many people have confused staking with lending their money to a bank. Ada holders are not lending out their Ada when they stake. In fact they are retaining total custody of their Ada and can freely spend it at will. Staking rewards are not interest payments but rather rewards for actively participating to influence the block production.

An assumption in the Ouroboros protocol is that honest stakers will shift their stake away from malicious pool operators and thereby limit their ability to make blocks.

Stakers that can’t shift their stake because they are dead or lost their keys are not providing any security or censorship resistance to Cardano. They are not actively influencing the block production and therefore should not receive rewards.

In fact sticky, or inactive, stake makes Cardano less anti-fragile because it allows pool operators with lots of it to act with relative impunity.

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You are absolutely right!
The problem of not active participation in our ecosystem (by a large population %) is beyond obvious. We now see it in governance too… Less than 1 billion of ADA has been delegated and it’s something that takes only 2 minutes to do.

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I thought I might be derailing this thread by taking it down the pathway of the “sticky stake” issue, so I posted this as a new topic:

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