Pool Wars I – Why you should delegate to a small pool

If you are new to Cardano you may not be aware of the important role small stake pools play in the Cardano ecosystem. If you’re not sure what a stake pool is, I recommend reading my previous post, Staking – Simply Explained.

Proof-Of-Stake networks rely on pool operators to keep the system running and it is important that no one entity dominates the pool landscape. A pool that has more influence could skew potentially skew on-chain voting in their favor, or if it became very big, launch a 51% attack.

Right now there is nothing to dis-incentivize a pool operator setting up as many pools as they like. So it they max out their first one, they’ll create a second, and if that gets saturated they’ll create a third and so on. Whilst there’s nothing wrong with that per se, there is a risk that over time it squeezes out competition and that the blockchain becomes increasingly less decentralized over time. This is turn makes the blockchain less secure either through influencing on-chain governance, or in the worst case conducting a 51% attack on the network.

The chart below shows which entities have the most number of pools, with Binance leading the way with 2.34% or 63 out of 2,695 pools belonging to them.

When we look the amount of Ada this represents the differences are more stark – Binance controls 12.45% of all Ada that is being staked.

Binance is a bit of special case. The way they have set up their staking, means they actually have full control over your Ada, as opposed to you having it in your wallet. This means that technically Binance can use your voting power when it comes to on-chain governance matters, something that will become more important in the future.

Small single pool operators, such as Robot Pool are therefore critical to maintaining a healthy balance of power in the Cardano universe.

However small pools face an uphill battle to attract delegators. Indeed before I became a small pool operator myself I was totally oblivious to how hard it is for small pools to survive and didn’t even know how to go about selecting a small pool to delegate to (I mistakenly thought selecting anything from the top 20-100 in Daedalus would be enough). I will cover small stake pools more in my next post, including how to find one to delegate to, but the thing to say is that I regard small stake pools as pools with less than 5m Ada delegated (some would say I’m being too generous there and should say <2m).

Pool Metrics

Part of the reason Binance are so successful is that they can afford to offer higher returns if you hand over your Ada for them to stake (note: Staking with Binance is not available to Binance.US customers). Returns range from 5% – 17% depending on how many days you locked up your staking with them. There is a limit on the maximum amount of Ada that can be staked by an individual, but I got conflicting answers of 300 Ada and 500k Ada when I asked non-US based Redditors to check for me (if someone can give me a definitive answer I’ll update the post).

Either way, given that most normal Cardano stakepools can offer ~5% return, it is obviously very hard to compete against Binance. I’m not sure how they can afford to give such rates but I’m guessing they rely on people forgetting to re-delegate their Ada after the term is up. For example, remembering to re-stake every 15 days. With a regular stake pool you just set it and forget it.

One other thing to bear in mind is that by handing over your Ada to Binance, you are making it available for them to sell to others. Obviously you will still get the Ada that’s owed to you when the lockup period is up but it is not reducing the circulating supply of Ada in the same way as you taking it off the exchange and into your own wallet would. Why is this important? Because the lower the circulating supply, the higher the Ada price can go. Therefore in purely short-term monetary terms, it benefits the price to remove as much Ada from the exchanges as possible.

Now, putting Binance and it’s non-kosher staking setup aside, most other pools offer you roughly the same amount of rewards.

The chart below shows the amount of Ada staked vs. the overall return for each pool. I’ve limited it to pools that have 15m Ada or more in order to focus on the mature pools that have been around for a while (AdaPools – if you’re reading this, would be great to have a chart that lets you plot ROA by # number of Epochs a pool has existed).

What we can see is that most pools offer around a 5% return in the long run, with the the margin % being the only real factor that determines whether its above or below this. Sure there are some outliers, but these tend to be pools that have not been around as long and will eventually converge to 5%.

In other words, regardless of the size of the pool, regardless of whether its only been around for 5 epochs or 500 epochs, your returns over the course of a year would be roughly the same if both pools offer the same margin %.

What you will find, is that smaller pools have a lower probability of winning blocks, but you get a bigger slice of the reward when they do win, due to the fact there are fewer fellow delegators for you to share it with.

In the next post I will cover in detail, what metrics look like for small pools and how to go about finding a small stake pool to delegate to.

If you liked this content, please consider staking to ROBOT stake pool (https://www.robotpool.io/) . We are a new pool and need more delegations to continue to be able to produce informative articles on all things Cardano. Also consider subscribing to the blog to stay up to date on all the latest articles as they are published!