Pool Wars II – How to delegate to a small pool

Small pools vs. Binance

This is part II of my previous blog post on why you should pick a small pool to delegate to. If you haven’t already, I suggest giving it a read. Since that time I’ve had two months of learning what it’s like to be a small pool operator, to the point that I will have to do a part III documenting it.

But for now here is a post on how to go about deciding on a small pool to stake to.

What can I expect my reward to be if I stake to a small pool?

There’s constant back and forth within the Reddit community (example) on this and I haven’t yet come across a conclusive answer on this.

Update: I finally got to the bottom of whether small pools have a lower ROA, and it looks like they do. See this discussion. It looks like smaller pools will offer you 1-2% less than staking with pools that have 10m+ Ada staked. Note that after 10m the ROA levels off. ROBOT has 1.m Ada. I have checked PoolTools.io and it does show us as having a 3% ROA, vs 5% for larger pools, so the theory does seem to hold up. I will discuss the implications of this in the next and final article of this series.

The bigger temptation you will find are exchanges like Binance, offering you 8% + if you stake with them for a fixed period of time. These however require you to remember to continually re-stake your pool at the end of the period and can raise the raise rates on you drastically when you are not in a locked period, so definitely check the small print.

Aside from monetary factors, also consider the fact you’ll be helping keep Cardano decentralized if you delegate to a small pool. You can also currently delegate to more than one pool if you create a separate Cardano wallet and divide your Ada up.

How to pick a small pool

To be honest – from a Cardano decentralization point of view it doesn’t matter what pool you choose, as long as its not in the list of top pools I mentioned in my prior post. The steps below however are how I would pick a pool now that I appreciate how hard it is for small pool operators to succeed.

We will be using the adapools website. For those of you that use Yoroi, this site also drives the pool rankings you see in that.

Steps

  1. Go to adapools.org and click Advanced filtering
  1. Enter the parameters shown in the image below. I will explain my choice for each one further below, which you can tweak:
Adapools Advanced Filter
  1. Live Stake: This is how much Ada has already been delegated to a pool. I considered anything less than 5m Ada to be small. Robot Pool for example has 1.2m at the time of writing, and there are plenty of other pools even less than that. The 1 to 2m Ada mark is generally recognized as being the threshold at which a pool can just about survive (i.e. have a decent chance of minting a block on each epoch), so you may want to set this filter even lower than 5m.
  2. Min Pledge: This is how much of their own Ada a Stake Pool Operator has put into setting up the pool. While it doesn’t matter too much it’s good to know your pool operator has got some skin in the game, so I went for 50k Ada minimum. Edit: It was mentioned to me (and rightly) that pledge is one of the ways the Cardano network stays secure. So the higher the pledge the better for network security even if it makes no difference to the ROA.
  3. Max Fixed Cost: This is maximum fixed fee a pool operator can charge. Most charge 340 or 345, so I thought I’d go with 350 for this filter. I’d only really be concerned if a pool operator was charging 500 Ada or more as they’d have to be offering a pretty low margin to make up for it.
  4. Max Margin: This is the variable fee — the % of profit that the pool operator keeps instead of giving it out to the delegators, so the lower the better for you (and worse for the SPO). I chose a max margin of 2% as the 0-2% range seems to be what a lot of new pools opt for.
  5. Min ROA: This is an indication of how the pool has been performing over time. A low ROA means one of two things – the pool hasn’t been around long enough for it to get to a high ROA, or the pool has been offline some of the time when it should have been minting. This second scenario is the big red flag for a pool. I set this parameter to 3%. My rational is that any pool that has minted a couple of blocks should have a ROA of ~3%.

Benchmark: ROBOT has been around 3 months now and our lifetime ROA is now 4.25% and the last 30 days ROA it’s 5.46%. Overall I expect us to settle at just above the 5% mark.

Adapools – we will get to this view further below
  1. Solo OPS: I ticked this box to exclude any new pools that have been created that are actually part of the a big pool operator that we discussed in my prior post.
  2. Hide saturated after march: Given that I am filtering for 5m or less in the live stake section I didn’t feel the need to tick this. The pools we are looking at will be unsaturated.

Ok now hit submit and you will get a long list of small pool operators to pick from. The next and final step would be to do some basic due diligence on the pool which I will cover in the next.

Performing basic due diligence

Once you have selected a stake pool it’s worth doing basic checks to make sure the pool seems to be functioning properly.

Adapools provides some helpful metrics to aid you.

The first thing I’d be looking at is when the pool was registered, and what their lifetime rewards are. If a pool has been around for 6 months and is not close to 5% lifetime ROA (based on what we’ve been seeing from running ROBOT for 3 months), then it would raise questions in my mind as to whether the pool operator has been maintaining 100% uptime.

The last step I would do is to look for a stake pool URL or Twitter link and click on that to see what the pool is about. A lot of small pool operators donate money to charity or otherwise contributes to society (referred to as mission driven pools) so you may wish to find one that donates to something you are interested in. Extra points if they try to prove they are donating on their website (e.g. by posting receipts).

But it’s also perfectly fine to pick a non-mission driven pool. For Cardano to succeed and stay decentralized it’s important that its economically viable for small pool operators to succeed, so whether they have 0% or 3% margin, or are mission driven or non-mission driven … it’s all good. Delegate to whomever you feel like and for whatever reason you feel like.

Other tips

Keep update to date – It’s worth checking on the pool you are delegating on a regular basis on Adapools, to see how they are doing.

If your pool has a Twitter feed, then subscribe to it. It’s a great way to keep up to date on any news.

Watch out – some pool operators may offer a 0% margin for a fixed time then suddenly raise the margin incredibly high. It’s worth checking your pools metrics on Adapools on a monthly basis just to see how they are doing

Don’t panic if you go a few periods without any rewards. Remember smaller pools will go some periods without a reward, but when they do mint a block you get a greater amount. The ROA metrics mentioned should tell you all you need to know, but you can also find your pool in Adapools then click on the Rewards tabs to see , epoch by epoch (remember an epoch is 5 days long), how many blocks they won.

The rewards tab in Adapools – third column shows # of blocks produced vs. the expected based on the pools stats

If you liked this post … Normally this is where I’d tell you to stake with ROBOT. However given this post is all about finding a small pool to delegate to, I suggest following the steps above and seeing what pools you find, and if you happen to settle on Robot then we’d be delighted to hear from you on Twitter .

Published by ReddSpark

Follow me on Twitter: https://twitter.com/Reddspark1

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