Delegating Stake in Concordium

Concordium

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Concordium

5 min readJan 14, 2022

Understanding how delegation works on Concordium

Introduction

On the Concordium blockchain, we call the people running the protocol that generates blocks “bakers” — and the action of creating blocks is baking. Bakers are rewarded for every block that they create by being paid some of the token native to the Concordium blockchain, namely the CCD (ConCorDium). Because Concordium runs a so-called “proof-of-stake” protocol, each baker needs some initial capital (the stake) to bake, and the probability of being selected to create the next block is proportional to each baker’s stake. So the payment may be seen as an interest on the baker’s capital.

Not everyone with CCD will have the resources needed to run a baker. So to enable these to also earn interest, Concordium is introducing a delegation mechanism. Any party with CCD may delegate some of their capital to a baker. This increases the baker’s chance of baking the next block and getting rewards, which are then shared with the delegators. This is a non-custodial solution in the sense that when a party delegates an amount of CCD to a baker, it is the right to stake with this amount, which is transferred to the baker, not the actual CCDs.

Pools & Rewards

More specifically, a baker opens a pool, and other CCD holders delegate some stake to this pool. The probability that the baker running the pool is chosen to bake the next block is then proportional to the total stake in the pool. Rewards are then distributed to everyone in the pool proportionally to their stake, and a commission is paid to the baker by all delegators. For example, suppose that a pool has 10’000 CCD, suppose that in a 24h period this pool gets 30 CCD as reward, and suppose that the commission of the baker is 10%. Then a party with 1’000 CCD in the pool will receive a share of 3 CCD. If this party is a delegator, 0.3 CCD are paid as a commission to the baker and the other 2.7 CCD are kept.

Bounding the Size of Pools

Concordium will impose two caps on the amount of stake in a single pool. The first bounds the size of a pool with respect to the total amount of CCD in circulation, e.g., a pool cannot have more than, say, 5% of all the CCD. This limit ensures that the pools remain distributed and prevents the crash of one baker from affecting the whole system. A party with lots of capital can run multiple bakers to avoid this cap. This would increase decentralization and is thus compatible with the goals.

The second bound is on the amount of stake in a pool with respect to the stake of the baker, e.g., the total stake of a pool can be at most 3 times the stake of the baker. This bound is for security reasons, as it prevents a party with a small stake from controlling a too large part of the system. Every player’s power is thus still proportional to their own stake, which is crucial for cryptographic security to hold.

We note that these two caps are soft caps in the sense that a pool can have more stake than allowed, but then at most the cap value will be taken into account in the consensus algorithm and when distributing rewards. This means that a pool violating this bound will gradually receive less rewards per CCD in the pool as the size of the pool continues to increase.

Pool Reliability

The rewards earned by a pool will depend greatly on the reliability of the baker. If they miss a slot where they were chosen to bake, if they go offline, or if they do not follow the protocol and get jailed, then less rewards will be distributed to the entire pool. To help a delegator choose the best pool possible, we will provide hard statistics about the performance of the different pools, the reliability of the baker and the size of the pool.

At least initially, we will not allow bakers to choose the commission values themselves, but instead we will have a fixed commission value that is the same for all pools. This is to favor healthy competition between pools based on the quality of their baking, and not have some dishonest parties try to increase their control over the system by setting commissions to 0 and attracting more delegators.

The Lock-Up Pool

For CCD holders who do not want to regularly check the performance of their pool, but just want a safe way of earning interest, we offer a low-risk low-reward alternative, the L-pool (Lock-up pool). This pool is not associated with a specific baker; it can be thought of as distributing its capital equally amongst all pools. It is thus not affected by a poor performance of a single baker. But the parameters are set in such a way that a party delegating to the L-pool earns less interest than by delegating to a reliable baker.

Time & Cool Downs

Changes to the pools will be performed every 24 hours. So opening a pool, increasing the stake, moving the stake between pools or between the L-pool and a baking pool will all take place at the end of a day. Rewards gathered over a 24h period will also be distributed once a day at the same time. But decreasing the stake (whether for delegators or bakers) is subject to a cool down period, i.e., once the order has been passed the cool down period starts, and the party will retrieve their stake when it is over. During the cool down, the stake is still invested in the pool and earns rewards as before.

In Summary

To earn interest a CCD holder can either delegate to the L-pool, to a baking pool or start their own baker. Baking oneself is the most challenging, as it requires resources to take part in the protocol, but it also provides the most rewards. Delegating to the L-pool provides the least rewards and requires the least actions from the investor. Delegating to a baking pool is somewhere between the two both in terms of rewards and work, as it is recommended for a delegator to regularly check the performance of their pool’s baker, and change pool if it underperforms.