Choosing a delegation pool according to our preferences, sovereignty, or profitability?
It is March 2022 and many exciting things have happened in the Cardano ecosystem to date, such as smart contracts, decentralized exchanges (DEXs), and tiered solutions for scalability.
Cardano takes things easy and moves slowly but surely. However, as its adoption advances, situations arise that could overshadow these advances.
One of the most important milestones was the launch of the DEX, among which SundaeSwap, MuesliSwap, AstroSwap, and Minswap stand out among others. Although Cardano complies with the philosophy of decentralization, with its consensus methodology via Proof of Stake (PoS) it is involved in a quasi-vicious circle of speculation in relation to the so-called “Multiple SPOs”, explained below.
What is an SPO?
A Stake Pool Operator (SPO) is an entity, company or person, which provides hardware, software, time and effort to collaborate with the network, serving as a node that verifies and validates transactions. To operate a pool, we need both a block producer node (Block Producer Node), one or more relay nodes (Relay Nodes) and a “cold” computer disconnected from the internet. These are also necessary to sign transactions, generate certificates and keep the essential information of the pool safe. .
The function of each of these nodes is specific, but it is worth pointing out that a large investment in hardware is not necessary, since 100 GB of storage and 12 GB of RAM for each node is, so far, enough. These nodes connect to each other, and the relays must be connected to the internet 24/7/365 to ensure high availability and thus build trust among potential delegators.
Stake pool operators, therefore, require an initial investment in hardware and periodically must cover fixed costs to ensure their operation and availability. On the other hand, in order to recover these payments, the network rewards operators whose pool has produced at least one block in an “epoch” (this is a period of 5 days). For each epoch with blocks produced, the pool receives a reward that consists of a fixed or variable amount in ADA according to the pool configuration and delegators with a percentage between approximately 4.5% and 5.5% per year. In other words, to recover at least the investment and costs, the pools need staking, that is, wallets delegated to these pools.
For a pool to produce a block it must have ADA in staking, and the more ADA it has delegates, the more likely it is to produce one or more blocks in an epoch, therefore operators will look for ways to attract delegators to ensure this return and resort advertising, broadcasting, marketing, etc.
To Decentralize or Not To Decentralize, That is the Question
Let us just imagine that we have a circuit: create a pool, spread it, get delegators, generate rewards, keep spreading, and get more delegators, and therefore more rewards. This mechanism encourages operators to want to operate more than one pool, as this will potentially generate huge income, Then, we compromise decentralization, since a new pool, with little staking, may not produce blocks. Consequently, it will not generate rewards, it will not attract delegators and their operator will eventually have to pull it out, as they cannot afford the operating costs, driving delegators into larger and more profitable pools.
So What Actions Could We Take?
Mainly studying the landscape, understanding the importance of small pools and their role in decentralization. This is not a wrong move, as there are people profiting from multiple pools, but those who act in pursuit of decentralization must be attentive to several things. In principle, it is essential to review regularly the status of the pool to which we are delegating, since it could saturate or be close to being withdrawn. In both cases, we will lose profitability; in the case of saturation, it will reduce, and in the case of a withdrawn pool, it will simply be zero.
On the other hand, it is also important to know which pools participate in ISPO (Initial Stake Pool Offering) to delegate to those that could reward with tokens from new platforms, as was the case with SundaeSwap and Minswap, among many others.
The so-called ISPO model is a fundraising model used and popularized by the Cardano ecosystem. While this methodology may be beneficial for delegators and platforms looking to raise funds, it may not be beneficial for the network as a whole as it centralizes staking power in those pools that have been selected for ISPOs.
In one case, the Twitter user @TITW_STAKEPOOL has criticized that “among some 23 pools they are minting 50% of the blocks in Cardano. Over time, the small pools will be pushed out by the multiple pools, increasing the degree of centralization,” he warns.
The abovementioned Twitter user added that, “The CardanoCommunity is getting into dangerous levels and I want to give a heads up, what is currently talked about in some circles, which the vast majority of cardano $ADA holders seem to be completely not aware of.”
IOHK’s Action: The Conclave Project
According to an analysis in Spanish by the Twitter user @CriptoRave, “The Conclave project allows the development of multipools that bring together their delegations to form a great voting power that allows them to jointly sign blocks.” He then adds that, “Conclave brings PoS a widely used technique in PoW mining (mining pools), where the problem is the same as the one raised here, with the difference that in PoW, the barrier to entry is the enormous initial expense necessary”. The analysis goes on in an extensive thread where this user also addresses the issue of decentralization.
To conclude, there is no good or bad side to this topic. It is a matter of choice. In Bitcoin and Ethereum, centralization can occur on the mining side, where mining power can be directed towards a chain fork as they threatened to do in Ethereum at some point (when they did not agree with a peculiar update), to demonstrate who holds the power. In Cardano, centralization would be subject to the choice of network users who have the right, and why not, the duty, to actively participate and select small pools to contribute to decentralization. In addition, thinking of not only cryptocurrencies but also of fiat money and its various investment models, this thought emerges, “The preference of an economic return over the sovereignty of our money is something that we have to question, whatever the technology or form of money that we choose to use.”
By Audy Castaneda
