Cardano stake pool [CRAB] update: 0 ADA pool pledge

2020-09-03 · computing

As those who have been closely following the Cardano community will know, there has recently been a lot of dissatisfaction amongst small stake pool operators, such as myself, regarding the extremely low projected profitability of running a small pool, a disconnect between what was understood prior to Shelley mainnet launch and what has in fact happened, and the lack of disincentive by the equations for running multiple large stake pools. One of the practical effects of the current situation has been that, contrary to what was expected, pool pledge appears to be having only a negligible effect, and this and other factors have led me to decide to reduce CRAB’s pool pledge to 0 ADA, for the time being.

pledge benefit

Cardano Node #1518 proposes a better equation for using the pool pledge to influence the rewards. This was followed up by CIPs #12, requesting review of a possible solution. Whilst I haven’t read through or analysed those precise proposals in detail, it and various related modelling done by others have showed the negligible effect of pool pledge in the current environment.

running multiple pools is more profitable that just a single one

Running multiple pools is more profitable than just a single one -> this does not lead to true decentralization! is a discussion on the forums about how, in contrast to what was intended with the equations analysed prior to Shelley launch, operators of multiple pools are not sufficiently disincentivised, not only giving large stake pools a big advantage in gaining yet more stake, but also going against the design principles of decentralisation and resistance to Sybil attacks.

I replied on that thread at length, but a brief summary of my concerns and dissatisfaction is:

  • CRAB gained 3 blocks in Epoch 213 (payouts expected within the next few days), and that was very lucky, but running a sustainable stake pool shouldn’t be based on luck
  • despite this luck, many delegators have left the pool regardless
  • running a successful stake pool appears to be more dependent on being a successful marketer than having the skills or investing the time and money to make a high-quality, reliable, secure one
  • I didn’t expect to make an immediate profit, but it has to make good business sense
  • I feel in some way that the state of affairs in operating a stake pool has been missold to me, even if unintentionally
  • I’m not sure I would have done so much work, including open-sourcing some of it, had I realised how things would be
  • I don’t blame those running multiple stake pools—I myself might in the current climate, if CRAB grew that large—but as I understood it, one of the strengths of Cardano would be that people could act in their best financial interest, and that the equations would ensure that this was also in alignment with the network’s

small pools are dying

Small pools are dying…what do you think? is a discussion on the forums about how the current state of affairs is not decentralisation, even with 24% decentralised setting (now 26%), and that the current equations are based on there being just 150 stake pools. In fact, there are currently 1043 stake pools showing in Daedalus, and many pools have gained no blocks. Statistically, CRAB was very likely to be in the same position, and it’s pure luck that it’s not (I mistrust pure luck as a solid decision-making basis, even if the luck benefits me!). This turned into a longer discussion about whether people should be patient and wait (as some stake pool operators and ambassadors think), or whether in fact things aren’t aligned fairly and as advertised, which might well push many pool operators out early (which is what I and various others think).

I replied on that thread at length, but a brief summary is:

  • I’m actively considering how much longer I’ll want to stick around running CRAB stake pool in the current environment
  • CRAB is currently far from profitable, considering not only rewards, but infrastructure and weeks of full-time work (significant costs)
  • I’m very supportive of the technology behind Cardano, and agree with many (although not all) of the goals, and think it and ADA will be around for some time to come
  • but such support is very different to it making good business sense to operate a stake pool
  • in contrast to what I’d understood, having an experienced devops/programmer/architect with all the ‘required experience’ checkboxes ticked, and considering significant pledge (measuring in the thousands of Euros), doesn’t actually appear to count for much in practice
  • I see pools with even 1 or 2 orders of magnitude higher stake than CRAB, still standing little chance of breaking into the top-heavy market
  • that market is dominated by numerous behemoth IOG pools present right from launch (which I certainly wasn’t expecting in transitioning to a ‘decentralised’ era)
  • now there are numerous others pools seemingly with a single operator, too

what to do?

With such new software, it is natural that there would be a period of adjustment and improvements. I take great faith in the academic origins of Cardano, since ultimately, the hard work in writing and proving mathematical papers has already been done, and it might just be a case of tweaking some parameters in order to make the whole system much more desirable and fair. As such, I’m prepared to wait it out for a bit, and give the dust some chance to settle; however, that won’t be the waiting for months or even half a year that some others have suggested. There remains, however, the question of pool pledge—which is a significant amount, currently at 50K ADA (~ 4502 EUR). Not only does having such lock me firmly into any temporary crash in the market (since reducing such requires a couple of weeks’ notice), but also it prevents me from securing my ADA as strongly as I would like. There are no spending passwords or encrypted layers over the top of stake pool private keys (other than what I add myself), and it isn’t possible to use a hardware wallet like Trezor or Ledger whilst operating a stake pool.

The value of pool pledge, of course, is in any algorithmic adjustment (discussed above), and in perception encouraging others to delegate (vs pure marketing or ROI). Given that there are pools which are profitable with far less pool pledge, or even zero pledge, and that I’ve already set CRAB to 0% pool margin (so, no pool operator tax) and the minimum 340 ADA pool cost (which only gets paid if enough blocks are made), I’ve decided for the meantime to reduce the pool pledge of CRAB to 0 ADA. This will also be a useful test of the theory that most people are delegating without even looking into which stake pool they use, and that ultimately marketing and simple ROI is vastly outweighing any financial commitment from the pool operator. I’ll continue to run the pool and pay the significant infrastructure and maintenance costs for the time being, and if delegated stake increases significantly or the equations change, reassess the pool pledge again at a future date. It’s also worth noting that I have, and likely will maintain, significant ADA not currently included in the pool pledge, but delegated to the stake pool. Thus, I do still very much have ‘skin in the game’.