Stakepool Highlights / Ensuring fair rewards
In this third article of our series we want to focus on our rewards approach. As it is not easy for small pools to attract delegation creative solutions are required here.
Articles in this series:
01 VITAL Introduction
02 Stakepools, the backbone of the Cardano Network
03 How we ensure fair rewards (this Article)
04 Decentralization took seriously
05 Environmental and Social Responsibility
06 Trust needs to be earned
How to ensure fair rewards?
Before answering the question let’s take a look at how Cardano Rewards are working.
Rewards are generated when a pool is producing blocks. On average every 20 seconds, a block is generated by one of the pools. Each block generates currently 680 ADA of rewards. How many blocks a single pool is assigned with depends on the active stake. On average there is 1 block assigned per 1M active stake of the pool.
Those generated rewards are used to pay Operator Rewards and Delegators Rewards in the following Way:
- Total rewards available (e.g. 6800 ADA if the pool generated 10 blocks)
- Fixed cost is removed from the Total rewards. The minimum fixed cost is defined to be 340 ADA. Those 340 ADA goes to the operator to pay fixed operating costs of the pool
- The remaining 6460 ADA is reduced by the margin fee. This can be defined by the operator. In our case, it’s 2 %. So 129,2 ADA go to the operator. The remaining 6330,8 ADA are distributed to the delegators.
In the above example, 6330 of 6800 total available rewards are distributed to delegators. This is 93,1%. On the other side, 6,9% are going to the operator, also referred to as the Pool Cost. The Pool Cost is the most effective way to compare pools when it comes to rewards as it gives you a combined view of Fixed and Margin costs.
In the above sample, I assumed a pool generated 10 blocks. But many of the small pools are generating much fewer blocks. In this scenario, the cost is increasing dramatically. Doing the same calculation with 1 block again.
- 680 ADA Total rewards
- 340 ADA fixed cost removed, 340 remaining for delegators
- 2% ADA margin cost removed, 333,2 ADA remaining for delegators
I this scenario the pool cost is 51%. This effectively reduces the potential ROA for the delegator.
So small pools provide smaller rewards?
Yes. Many small pools are claiming that all pools are generating the same rewards in the long term. While this applies to the Total generated rewards it does not apply to the delegator's rewards as they are reduced by the above-explained pool cost more heavily.
This challenge also applies to our pool as our native stake (if we calculate out the delegation from Cardano Foundation and IOG which will move away in January again) is below 1M. So we will not multiple blocks every epoch.
How is the VITAL Pool approaching this?
In our opinion, the 340 ADA minimum fee is far outdated. It comes from a time where the ADA price was much lower than now and needs to be changed in the future.
Until then we are paying back (manually distributing) 240 of the 340 ADA fixed fee. That way the remaining fixed cost is 100 ADA for the delegators.
Doing the same formula as above:
- 680 ADA income
- 580 ADA after 100 ADA fixed cost
- 568,4 ADA after 2% margin
The effective cost is still 16,4%. This is still more than the cost of a big pool. But in our opinion, it is a fair cost that allows us to keep the pool running in a responsible way and allows Delegators who really are interested in the values that our pool stands for is willing to contribute. When the pool grows later to maybe the cost will also decrease (e.g. 3.4% at 10 blocks, 2.3% when fully saturated).
In the next article, you will learn more about our understanding of decentralization which is one of those aspects. In terms of rewards, it is also important for us to make sure our delegators will never need to resign from rewards based on a failure in minting a block. We described our block insurance in the previous article.
