Cardano ₳da Holders Strategy: How to choose stakepools
In this article, we will discuss about which strategy should be considered by ada holders who do not have the skill or will to run a stakepool. We will explore the different options to benefit the most from their willingness to help securing and developing the network through either Staking and/or Pledging to stakepool(s).
To better understand what incentives and how the Cardano protocol uses them to secure the network, please have a look on our former article.
Incentives for people securing the network — Passive rewards for ada holders
To operate and secure its network, the Cardano blockchain uses “Proof-of-stake” in which the block validator and producer is randomly chosen by the blockchain algorithm depending on some criteria.
To become a validator, a block producing node must lock a certain amount of ada into the network as stake (which can be seen as a security deposit). If a node is chosen to validate the next block, it will verify the validity of all the transactions to be added in the new block.
If everything checks out, the node signs off on the block and adds it to the blockchain; it has produced a new block. As a reward the node receives an incentive in ada.
The size of the stake determines the chances of a validator to be chosen to mint the next block. The more tokens you have staked in the network (up to a certain saturation point) the more chances to produce a new block.
In order to be competitive and bring the most utility to the network, block producing nodes need to run the protocol and mint blocks 24/7.
But not every ada holder will be able to continuously run a block producing node that is well-connected to the rest of the network just to have the chance to produce new blocks on very rare occasions.
Cardano solves this by introducing the concept of “delegation”. This mechanism allows all ada holders to participate in the protocol, regardless of their technical skills and the amount of ada that they hold, delegating their right to produce block on their behalf to another entity.
Those entity, called “stakepools”, are reliable block-producing nodes that hold the combined stake of the group of delegators in a single entity.
Effectively running the protocol has a cost (reliable servers with highest up-time, electricity, operator work hours, etc.). Stakepool operators, that bring utility and security to the network minting blocks, are rewarded through incentives (in form of ada) that come from the transaction fees and monetary expansion.
After each epoch, rewards are distributed directly by the protocol among all stakeholders (depending on the size of their stakes) who have delegated to a stakepool.
That is how ada holders will benefit from participating to the network; delegating their ada to a efficient and reliable stakepool and receive rewards in return.
In the next sections, we are going to discuss how to select a stakepool regarding its technical performances but also what is its utility to the network and to the overall Cardano community.
What is pool desirability?
Delegators can freely choose which stakepool they want to trust to produce blocks on their behalf. Thus, delegators can directly increase or decrease the chance of a stakepool to produce block and earn rewards.
Delegators want to find their best interest, so they are motivated to choose and delegate to a stakepool that performs well and provide them with the best possible rewards.
Stakepool must then act in the best interest of the network. delegators are expected to receive rewards so they will be guarantors of the honest behavior of stakepool operators.
A tricky issue for an ada holders will be to determine to which stakepool(s) (we will explore later the possibility the delegating ada to several stakepools) he should delegate to in order to reach his target in terms of rewards.
To ease this process, IOHK engineers and community members have developed tools to assess stakepools performance helping to sort them out.
The most important sorting option is a metric called “desirability” in which all the registered pools will be ranked by potential rewards that a pool will pay to delegators.
A pool’s rank is determined by ordering pools in a decreasing order of desirability. The most desirable pool will be ranked #1, the second most desirable will be ranked #2, and so on.
For each stakepool, desirability considers:
- reliability (actual number of blocks produced compare to the number it was expected to produce),
- pool costs,
- profit margin,
- level of saturation,
- pledge.
As we said, reliable pools must be online 24/7 providing an up-time of almost 100% to create all blocks they are supposed to. To recognize their work, stakepool operators can declare operational costs when registering their stakepool(s):
- Pool costs for running the infrastructure per epoch (expressed in ada),
- Profit margin (by percentage) which is an incentive to keep the infrastructure reliable up-to-date and secure.
Pool operators can change their costs and profit margin at any time. The new values are valid when the next epoch starts, and delegators will be notified by their wallet.
The “saturation” parameter has been set to prevent ending up with only a few big stakepools holding most of the network consensus preventing to reach Cardano main goal; Decentralization. Stakepool will reach saturation when a certain amount of ada staked is reached. It then starts receiving less block assignments from the network and proportionally their rewards.
That means no matter how big a stakepool is once it reaches saturation it will lose desirability for new people and drop down in the wallet listing; you don’t want to delegate to saturated pools or close to saturation otherwise you will “lose” rewards.
The pledge represents the personal stake of the pool operator (or from his partners) that he defines when registering his pool. It represents the operator risks taken tending to prove his real involvement in the ecosystem; if the pool does not run perfectly he would also lose rewards not only his delegators’.
There is no minimum but when the pledge is larger everyone in the pool gets slightly more reward and therefore this will impact desirability.
For example if we want to compare two stakepools with the same costs, margin fees and an equivalent level of saturation, if one has a pledge of 100 000 ada and one has a pledge of 200 000 ada the one with the higher pledge will be ranked higher because users will get slightly more rewards from this pool.
A last important point to understand is that desirability is not measured by the Cardano protocol but is calculated by the wallet you are using, either Daedalus (developed by IOHK) or Yoroi (developed by Emurgo). It is the responsibility of the wallet developers to implement this metric, so we would like to advise delegators to proceed to some research on the stakepools they are going to select.
What strategy for a win-win situation (helping to secure the network while earning rewards)?
Once the mainnet is launched, most pool operators will strive to attract delegators to generate rewards. So logically, a pool with a low pledge will declare low costs and margin to increase their desirability and chance of being profitable. This is a fair competition, but we must be careful not “to race to the bottom” in terms of performance.
In order to correctly run a stakepool and bring security and utility to the Cardano network following IOHK recommendations, a stakepool operator needs to run 1 block producing node and (at least) 2 relay nodes on 3 different servers. This does not come at a cheap price.
One could run his 3 nodes on a single AWS server, but it would not bring any decentralization to the network; this should not be promoted!
We need to keep in mind that a proof-of-stake protocol is not a wealth generator per se. People participating to the network, stakepool operators and delegators, are rewarded for their good behaviors within the ecosystem.
The overall objective of staking in a PoS protocol is to provide security to the network. The more stakepools is online and producing blocks, the more secure the network becomes.
Another important criterion to take into account is the social impact a stakepool can have on community and beyond. Do not forget that the Cardano blockchain will increase its utility and profitability by reaching mass adoption. This can only be done by having persons developing the community all over the world.
This is the main purpose behind Proof of Africa. Delegating a part of their ada to such pools would probably not bring the most rewards but will have a meaningful impact representing Africa in the Cardano ecosystem.
This initiative is positioned to contribute to the adoption of Cardano in Africa and deeply believe that it will allow African countries to not only diversify their economies but also help the continent to increase its innovation and investment attractiveness.
So, we urge you not to delegate only regarding the rewards you can gather but also regarding the ethical and technical impacts of the different stakepools you are going to delegate to.
Conclusion — Strategy
Delegators have a crucial role and impact in the network since they can affect the number of blocks produced by a stakepool.
From their choice to whom they are going to delegate will depend the reliability and robustness of the Cardano network.
To maintain a healthy emulation between the different stakepool operators, an interesting idea could be for delegators to divide their staked ada and to distribute it to different pools.
This will have several notable advantages:
- Mitigate their risk of delegating to a non-efficient pool,
- Create a healthy competition between operators; delegators are not “lazy”, operators need to provide them with the best possible service,
- Contribute to the decentralization of the network,
- Contribute to stakepools which are not the most profitable, but which bring added value to the Cardano community.
Delegators are one of the Cardano ecosystem cornerstones, they have a real impact can promote the stakepools they want, not only the most desirable ones.
Delegators need to think on the long run, we all need to create the most robust, reliable and developed network worldwide.
