Stake Pool Costs And Rewards
The Cardano Shelley incentivized testnet was launched on 13 December 2019. As a pool operator, we naturally observe closely how the various components and participants of this complex system behave and react.
We noticed something unexpected when we saw the delegations of ADA holders to IOHK pools.
IOHK has a great interest in making the initial phase (bootstrap) as safe as possible, and with its large pools plays an important role in this. Gradually, the block generation is decentralized to many pools then.
There are 4 IOHK pools available which differ in the registered values 8, 10, 12 and 14%.
Interestingly, the 14% pool received the most delegations so far:
IOHK 8% 215 IOHK 10% 274 IOHK 12% 103 IOHK 14% 303
So it might be a good idea to explain the rewards structure of Ouroboros and Jormungandr in a blog post, focusing mainly on the criteria that affect the payment to the delegates.
Cardano Staking rewards explained
For each epoch – which lasts 24 hours – a certain amount is available from the reward pot. From this amount, a share (e.g. 10%) goes to the Treasury, from which future projects for further development are to be financed.
The rest is distributed to all stake pools. The larger the stake pool is, the more often it was selected by the Ouroboros protocol to create blocks in the epoch. In the best case, the pool-node was always ready, because the operators of the pool ensured safe and reliable operation (staff, connectivity, servers, monitoring, security, redundancy, …).
In this case, the pool will receive the maximum possible share of rewards. If, on the other hand, the pool has only created half of the blocks, there will be fewer rewards available.
Now it is the turn of the pool operator. He has made a business calculation and registered his pool with corresponding cost and profit margin values. He has three parameters for this:
A fixed ADA value that is deducted from the total pool return. This can be 0 or 1000 ADA, for example.
Here the pool operator specifies a share of the total amount that he will keep for himself before it is paid out to his delegators. This can be 0, 7 or 14 percent, for example.
Here the pool operator can optionally enter that he will never take more than e.g. 1000 ADA as profit margin.
Stake Delegation rewards
What remains after this expense compensation goes as rewards to the delegates.
And therefore this high number of delegations to the IOHK Pool with 14% cost explanation seems to us to be an indication that there is a frequent misunderstanding here.
We do not believe that all these 303 delegates have the desire to pay IOHK as much as possible to run the pools, but that they probably expect an increase in the value of their ADA delegation of 14%. That is not the case!
However, it may not be a good idea to choose the cheapest ( low cost ) provider, and here is why:
Why you don’t earn twice as much with a 2% pool as with a 4% pool
So let’s try to look at the rewards after deducting the pool costs to understand what really happens.
If one pool charges 2% and another 4% as margin costs, then 98% or 96% remains for the delegators.
For example, if someone receives 100 ADA reward for their delegation to the 2% pool, by delegating to the 4% pool he would receive about 98 ADA.
For the pool operator, however, it makes a big difference whether he gets 50 or 100 ADA for the operation because this allows high-quality support and guidance.
A 0% pool is either someone who likes to work for free, or then in the course of epochs will probably also try to operate as little effort as possible.
But what happens if a pool gets stuck and is not noticed until the next morning?
As mentioned above, a pool and its delegators are entitled to maximum returns in proportion to the staked amount. However, this becomes correspondingly less if only a part of the blocks is produced.
A pool that has invested in a stable system and ongoing monitoring can react quickly in an emergency before the next block appointment is due.
We at CLIO1 have that because our team can look back on 20 years of experience in the Internet service business:
Each step in the above graph represents a CLIO1-produced Block in the growing epoch 4 (red area) The spike in the middle happened due to an unexpected event and was solved before the next block production was scheduled.
A failure of 8 hours would the yield of the pool by around 33% because he will miss his schedules to produce blocks for the Cardano system.
The pool operator will still deduct his fixed and relative cost and distribute the rest of the 66% to his delegators. So you can see that this is a completely different ratio, and that it is probably a good decision to leave a fair share to the pool operator.