As far as I have understood it, the transaction fees shall pay the rewards in the long run, when they are not significantly boosted by the reserve, anymore.
But then, for all users together (and, hence, for the average user) the rewards are approximately the same as the transaction fees they pay.
So, it will be a redistribution of ADA from users with less stake and more transaction activity to users with more stake and less transaction activity. If I’m doing a lot of things in the Cardano ecosystem and got in too late to even become close to a whale, I will probably pay much more in transaction fees than I can ever get back as rewards.
Is that rough calculation correct? Are people aware of it? Is it good or at least okay?
I don’t see it that way at all.
The main reason we have treasury in beginning is to incentives early adaption and use while network is being built.
The main benefactors of treasury are stake pools. This is even built into a system where it evens out the rewards for block production. This way stake pools owners have an incentive to spend their time and money on securing the network.
Delegators returns are also decent at the beginning (around 5%). However, that is to help delegation to steak pools not to incentives investment behavior. By distributing better then bank rewards to delegators on beginning you will help create a good base for support of the stake pools.
Current treasury emissions are set at 0.3% giving them a half life of about 5 years. This will give about 30-ish years of subsidized incentives for network participants to start engaging.
After incentive period you can expect MOST of the rewards that will be collected as transaction fees will go to stake pools, NOT delegators. In another words, being a stake pool operator will be better (return wise) then being a ADA whale.
By that time adaption should be good enough that people would want to be on Cardano network even if returns are zero. (I use dollars and internet even though I get 0% financial returns on those. )
Stake pools will have their own incentives to lure delegators. Like other tokens, NFTs and assets, or by being self incentivized like mission driven pools (such as charity pools or environmental pools). Stake pools will slow start becoming more competitive and will have to raise the margin % to be profitable. Delegators will delegate to support stake pool missions or to get other rewards issued by stake pools.
This 5% delegators benefit is (and should be) just an early adapter bonus. Healthy and stable stake pools is the goal, not healthy investment rewards. This is the way the system was designed (or gamed).
The purpose of Cardano is not to provide steady return on ADA. It is to build a platform and tools as well as support people that are maintaining it and building it to keep doing so.
The befeits for later stage adapter of Cardano should mostly come from layer 2 solutions. Cardano is here to enable and develop a system for the best layer 2. (Best as in most secure, decentralized and permissionless).
No. But to be fair most of people in crypto these days are investors and moonboys. They will mostly look for profit opportunities an they will judge any project by it profitability.
This is the only way that cypherpunk revolution can happen. Good incentives for early adaptors and system to keep those securing the network incentivized. (Well… the only way in representative democracy system implemented as delegation method in Cardano. They are many more ways to develop a project, but that is a completely different discussion).
I know people are impatient when it comes of what will vs. what is now. But most of those things people are looking should be coming in layer 2 (Like micro transactions, investments, daily use). Kind of the whole point of building layer 1.
I think Cardano fees and staking rewards will eventually go to a level where fees just cover costs. There is every reason to expect the free market to produce this result through competition just like it always does.
So what is the cost of staking and what is the cost of operating a stake pool including pledge?
Cost of staking:
Cardano needs to pay for its chain security by getting people to stake. The cost of this security is the cost of staking Ada. In other words, what is the opportunity cost, in real terms, to leave your Ada sitting with a stake pool. For example, if you can earn 5% yield in some DeFi contract then this risk / reward needs to be weighed against the risk / reward of “risk free” staking. In the end the market will price this.
However what is interesting is the fact that smart contracts can stake on Cardano. This greatly lowers the cost of staking since it removes much of the opportunity cost. Furthermore, the opportunity cost of staking will depend on what tools can be built to allow proper control of your Ada whilst in a smart contract. Eg. If tools can be built to allow voting your Ada whilst it is used as collateral for a loan. If such tools are not possible then this will slightly raise the cost of staking.
Cost of running a stake pool and cost of pledging:
Currently you don’t need any level pledge but you need to attract delegators by providing them with some goods or services or something. The actual cost of running the hardware and the system maintenance is minimal.
In the end, the market will decide the true cost of staking and competition will drive the staking rewards and transaction fees to this level.
I think fees and staking rewards will be very low eventually.
Layer 2 solutions will massively reduce fees so that users will pay little. Eventually, I don’t think there will be much wealth transfer resulting from fees and staking rewards.
When comparing with the current fiat system, we need to recognise the devaluation of the currency through inflation as a significant component of the “wealth transfer” you refer to.
Could be somehow okay with me. Getting money for nothing is strange, anyway.
But: The theory of using stake to secure against Sybil attacks and such somehow relies on incentives for delegators. If the incentives go down, won’t that be a risk that adversaries could get a lot of stake by small incentives and/or deceptions?
Okay. So, we will slowly fade out the staking yield as a point in favour of Cardano, since it will become less and less convincing, more and more irrelevant. It is already slowly happening, since the 5% yield are already more like 4%.
As in my answer to @Neo_Spank, I’d like to see the argument, how proof of stake as a protection against adversaries will still work out.
Hmm? The “devaluation” in fiat is most significant for people who hoard cash or deposits. That’s more or less exactly the other direction, which is not that bad.
You are correct. Thanks for pointing that out. I should be more precise with the language. Pot and treasury are different. Just for clarity I was referring to the ‘pot’ of unreleased ADA that has emissions of 0.3%
The incentives and rewards to delegate will become responsibility of stake pool operators. During development Cardano network is suppose to pass all of these responsibility to users. In this case stake pool operators will compete for delegators as @7.4d4 pointed out.
PoS to be viable has to have stake pool operators that are incentivized to run the network. That means fees will be mostly theirs to compete over. So stake pool operators need to incentivize delegators to let them be the ones to produce blocks and get those fees.
As for Sybil resistance, that part can be done by making scaling to multiple pools not viable, like introducing physical requirements to run a pool. That is part of a system design that Cardano development can have a large influence on. For example, adding captcha that has to be completed and signed by operator pledge wallet every epoch (minimal work for single pool operator, while it scales massively with in time required for 100 pool operator, etc…)
How much do you need to pay for network security in POW vs POS?
POW
In POW, the miners run the show and these miners have significant costs in electricity and depreciation. They need to earn this much from fees + new token issuance. In other words, the network needs to pay 100% of these cost or the miners will leave.
POS
In POS, a combination of the stake pool operators plus the delegators run the show since stake can come from pledge and delegation. The cost of running the equipment is almost nothing in electricity and depreciation.
For pool operators the cost of pledge is the cost of their capital since pledge is locked up. Although maybe there are ways this can be reduced through smart contract pledging so that you can still “use” your Ada for other things.
For delegators on Cardano, the cost of staking will be somewhat less than the cost of capital since there are ways that you can still use your Ada and continue to earn staking rewards.
The cost of capital is only around 3-5%.
Therefore the cost of network security for POS is at least 20 to 30 times lower than for POW.
In addition, POS has more options to address network security threats (eg. 51% attack) than for POW.
I was pointing out devaluation of currency in the fiat system because this needs to be taken into account when comparing yields. 4% yield in Ada is much higher than 4% yield in $US since the supply of $US is being increased much faster.
Cardano will need delegators. The large investors wont deposit funds with less than 4% returns unless ADA price is appreciating. Most retirement plans need 6%. Small pools will take most of the incentives from the delegators so that could stop the smaller pools as the investors/delegators leave for higher returns.
Those numbers reflect the fact that fiat is being debased.
If the debasement of the fiat is 5% per year then obviously earning 6% yield is getting you 1% ahead only.
If Ada is being debased at close to zero in the future then 1-2% yield is still 1-2% ahead.
The current yields on fiat are deeply negative with inflation in the order of 10% and nominal rates in the order of 2-3%. People are earning big negative returns.
If the delegator’s don’t get rewards, they will leave to a place they will get yield. Weather it is passive or active investing. IMO the small pools will probably not be able to stay competitive unless something changes.
Yes, and here we are back to comparing yields. And, when comparing, you still need to take into account the underlying debasement of the currency you are getting paid the yield in.
If you crunch the numbers on what large and multi-pool operators earn you will see that they are very profitable at current price of Ada and current fees.
Less than 0.3% goes out of the reserve each epoch because you have to adjust for amount of ADA staked (currently about 74%), amount of ADA not pledged and some other smaller factors (like less than 21,600 blocks minted in an epoch).
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I should be more precise with the language. Pot and treasury are different. Just for clarity I was referring to the ‘pot’ of unreleased ADA that has emissions of 0.3%