How to Choose a Cardano Stakepool?
So you have read our introduction blog on ‘What is Staking’ and now you are keen to look deeper into Staking on Cardano and are perhaps looking to delegate your recently purchased ADA to a stakepool, to earn a passive income and participate in securing and decentralizing the network. To delegate your ADA to a stakepool, we recommend installing official Cardano Wallets such as, Daedalus or Yoroi. But as you enter the delegation center on either wallet to begin staking, you are presented with a series of pool metrics and fees. How do you know what all these mean and are there others factors to be aware of?
The best way to choose a Cardano Stakepool is to find a pool that provides a long-term ROS of 5 – 5.5%, and where the pool that provides extra value to both you and the Cardano ecosystem. Bonus points if you delegate to a small pool that only operates a single pool.
Stakepool metrics and data are typically the first place to start when deciding which stakepool to delegate to and there are some key takeaways for each metric. Daedalus and Yoroi present similar metrics. There are websites developed by some Stakepool operators (SPOs) and other Cardano Devs that show a more comprehensive record of pool performances and live data on the blockchain.
Both websites we recommend to use to easily track pool data and performance (Adapools) and delegator activity (Poolpm).
Estimated ROA / ROS
This is typically the key metric for most delegators. They want to see evidence of pool performance to date and how much ‘Return on ADA /Stake’ the pool has rewarded its delegators so far. Start here. As mentioned in our ‘What is Staking’ blog, each performing pool over time should provide around 5% ‘Return of ADA’ annually, paid out incrementally every 5 days.
A pool with around 5% ROS indicates a solid and reliable pool. You could just select a pool with a similar ROS and get back to your daily life. And you probably will receive your due staking rewards in most cases. But there are other factors to consider…
Pool Sizes and Saturation Limit
There are a range of pool sizes with varying ADA staked in them. You may notice on ADApools for example, the largest pools have around $61m staked in them. This is not a coincidence.
The Ouroboros protocol attempts to enforce decentralization by capping rewards at a specific limit to prevent pools from growing too large. The current cap or ‘saturation limit’ is $64 million.
What this means is that if a pool has over $64 milion active stake, rewards for its delegators will begin to diminish.
For future reference, we would classify pool sizes into:
Small pools: 0 – 3 million staked
Medium pools: 3 -20 million staked
Large Pools: 20 – 64million staked
Oversaturated Pools: 64million plus
This is not a formal classification, just our interpretation of pool sizes. In the future, the saturation limit will be reduced to $32million, with the intention that some delegators will have to move from oversaturated pools to smaller pools to maintain full rewards, thus incentivizing decentralization and mitigating the risk of monopoly pools emerging. This is called the K parameter. There is no official confirmation of when this will happen.
Another related key point here that some delegators prefer when selecting a pool that it offers consistent rewards every epoch. As you now know, blocks are assigned to pools via a lottery system so block production is not guaranteed every epoch.
But on the balance of probabilities, what size of a pool makes blocks regularly and thus provides consistent rewards for delegators? Currently, a pool with 1.1 million ADA staked is estimated on average to produce 1 block per epoch.
Approximately, a pool with around 3 million ADA in its pool should produce at least one block consistently and would be considered very unlucky to not do so in a given epoch. More on ‘Luck Performance’ below.
If your pool is approaching $64m in active stake, consider moving to a smaller pool to avoid your rewards being affected. Track your pools size and try to stay informed of when the K Parameter will change and the Saturation limit will reduce to 32million.
How are Stakepool fees applied?
SPOs set their own fees to cover running costs, time associated with node maintenance, marketing and ultimately to make a profit. SPOs are the admins of the network and play a key role in operating reliable and secure nodes. They also help delegators create wallets to begin staking, answer their questions and generally promote and enable the mass adoption of Cardano, among a range of other value propositions. More on that below.
There are two staking fees that each pool sets and advertises. It is important to note the fees are subtracted from the ‘Pool rewards’ each epoch. Delegators do not pay these directly which is a common misconception.
Each pool sets its own fixed fee amount. Currently the minimum allowed by the protocol is 340ada. In practice, nearly all pools apply this amount for the fixed fee.
Margin fee (%):
This is a variable percentage fee. After the fixed fee is subtracted, the rewards percentage fee is deducted. Typically this ranges from 0% – 5%.
Let’s break down a typical scenario for a medium-sized pool with 9 million ADA staked, a 340 fixed fee and a 3% Margin fee applied and see how the staking fees are applied to pool rewards. This value is dynamic, but according to BFADA data the network currently rewards 750ADA per block produced by a stakepool. A pool with 9 million staked would average 10 blocks per epoch roughly. Therefore, this pool would receive (750×10) 7500ADA on average each epoch.
In such a case, 7500 is the total pool rewards.
To calculate the delegators rewards, the stakepool fees are deducted from the pool rewards.
7500 (Total Pool rewards)
– 340 (Fixed Fee)
– 225 (Margin fee 3% ; 7500×0.03 = 225)
6935 (Total Delegator Rewards)
In this case, 6935ada is distributed to the pool delegators based proportionally on the amount of their stake. In the very unlikely case, the pool consisted of 100 delegators with equal stake (100k), they would each receive 69.35ada each. In practice, every pool will have a different amount of delegators with a wide range of ADA staked.
If you use our Staking Rewards Calculator on our website, you can see that this example is accurate.
A note here on the margin fee and a misconception of its affect. If you circle back and try this scenario with 1% or 5% margin fee, you may understand that it will have some but perhaps less than perceived impact on your staking rewards (approx 68ada vs 71ada respectively). However, the difference between a 1% and 5% fee for an SPO would be substantial and may greatly contribute to their ability to create content for the pool and provide extra value to their delegators and the Cardano community.
340 fixed fee is a minimum but also the standard amount. Small 1% differences in Margin fee wont greatly affect your staking rewards, but greatly benefit the SPO. For higher range Margin fee, perhaps investigate what extra value the SPO is offering its pool delegators and the Cardano community.
Is Pledge important when choosing a Cardano Stakepool?
The pledge represents the stake of the pool operator. While there is no minimum pledge, some delegators prefer pools with a large pledge. A pool’s pledge amount is to indicate its commitment to the operation of their pool and their ‘skin in the game’.
A SPO with 1 million pledge is very unlikely to operate its node poorly and miss out on the fees but also their own staking rewards as these would be substantial.
The pledge amount is not ‘locked up’ per say, but if a SPO wanted to reduce or change its pledge, they would have to go through the process of re-registering their Stakepool certificate. It is intended to be a long term commitment. Pledge amounts can range from 1k to 5m ADA.
As you have seen above with pool size, a pool with 3m pledge or effective stake would provide regular rewards. However, pools with smaller pledges should not be discounted as there are some very competent SPOs with great missions and/or are providing great content that have small pledges. It’s a personal preference of the delegator.
Currently Ouroboros does take into account the influence of pledge amount when assigning blocks in its lottery algorithm. This is referred to as ‘A0’ or the ‘Pledge factor’. However our understanding is that the pledge factor has very limited affects on block assignment currently. So it does not play a significant role in staking rewards. Recent blogs from IOHK have implied that the influence of the pledge factor may be increased in time.
You should consider the pledge amount when choosing a pool, but perhaps don’t discount pools with small pledges. Try to stay informed if the pledge factor changes.
Does Luck play a role in Staking?
A key metric to understand when choosing a stakepool is “Luck”. It shows the amount of blocks a pool is actually assigned to mint per epoch in relation to what the theoretical statistical chance would be according to the pool’s size. As described already, pools with 3m ADA will make blocks consistently and therefore provide delegators with regular rewards, as they have an statistical average of 3 blocks per epoch.
If a pool is theoretically expected to mint 3 blocks but is assigned 6 blocks then this pool’s luck for that epoch is 200% and you will receive approximately double rewards. If the pool gets only 2 blocks, then this epoch’s ‘luck performance’ is 66%. This factor can not be influenced by the operator and can also not be predicted. Its a lottery.
Similarly, small pools may get “lucky” on their first few epochs and get selected for many more slots than average. They will appear to pay out a much higher ROS than other pools.
Ouroborus is designed to balance out in terms of ‘Luck’ over a long period of time to an average of 100% for every performing pool.
A caveat here is that if a pool is consistently underproducing blocks according to their epoch estimate, then perhaps there is an issue with their system infrastructure and their node is often offline at key times. Check out the website of the operator and see what kind of infrastructure is being used. A reliable and consistently available internet connection is of utmost importance. Availability and low-latency far outweigh a high-speed connection that has irregular moments of disconnection. If you cannot find this information on your SPOs website or social channels, consider getting in touch with the SPO through social channels.
A solid infrastructure setup would include a block producing node, at least two relay node, a backup node and a geodiverse location of cloud servers and/or physical servers.
- Large pools will tend to pay out more consistent rewards, as there is lower variance in the number of blocks they validate each epoch.
- Small pools will have much more variation in the amount of blocks they produce per epoch, and so the rewards will vary significantly.
- Lucky and unlucky streaks occur. So don’t jump to conclusions if your pool underperforms in a few epochs. ‘Luck’ and rewards will balance over time.
- If a pool is constantly underperforming for a large multiple of epochs in terms of block production, their node may be offline at the time of assignment. Get in touch with the SPO regarding their system infrastructure. Being able to communicate with them is important.
Another process to be aware of when delegating to a stakepool, is the ‘Delegation Cycle’. As described in our ‘What is Staking’ blog, time in Cardano is split into Epoch and Slots. To be technical for a moment, a Cardano epoch currently includes 432,000 slots of 1 second, which equates to 5 days. The Cardano protocol takes a stake distribution snapshot at the beginning of every epoch, so every 5 days.
When delegating your ADA for the first time, please be aware of which epoch you delegated in the cycle. Use the reference websites again here such as adapools.io to confirm the current epoch and the amount of days left to the next snapshot:
The Cardano Delegation cycle
To provide an example if delegating to BFADA in Epoch 280, the following would occur:
- You delegate at the start of Epoch 280 to BFADA pool
- Stake snapshot happens at the start of Epoch 281.
- During Epoch 281 your stake is live, but not active with BFADA.
- In Epoch 282, your delegation is now active with BFADA.
- In Epoch 282, BFADA produces one or more blocks.
- In Epoch 283 the rewards are calculated.
- In the boundary between epoch 283 and 284, your staking rewards are delivered to your account. (or at the start of Epoch 284).
It takes two Epochs (or Epoch boundaries) for your stake to be active and another two for your rewards to be deposited to your wallet. New delegators become concerned if they don’t receive any rewards after a few days, and often re-delegate to a different pool unnecessarily. Be aware of the cycle in case you do actually switch to another pool in the future so you are aware of the when you start receiving rewards from your new pool.
With your first delegation, best case scenario, you delegate on the last day of an Epoch, you will receive your first rewards in 15 days. If you were to delegate on the first day of an Epoch, it will take 20 days to receive rewards.
Think of Epochs as a continuous full working week with a payday at the end. No weekends for Stakepools!
Many Stakepools offer more than just staking rewards. Many provide open lines of communication and support online through their social media accounts and telegram or Facebook groups, where they regularly update their delegators on pool performance and help them with any staking queries. Others offer NFTs as extra rewards, create community websites, create educational content about Cardano promoting its technology and societal benefits. While some pools have a specific mission or charitable cause where they donate a percentage of their staking rewards to. This is in stark contrast to staking on exchanges like Binance, who run dozens of pools which offer none of the above and actually hurt the security and decentralization of the Cardano network. More on the difference between staking on Exchanges vs Stakepools coming soon.
Hopefully, you should now see that choosing a pool to delegate to isn’t just a clear case of selecting pools with the most ADA delegated to them. Instead I hope that you understand different profiles of pool sizes and the different variation of staking rewards they provide, but that in the long term, all finely run pools will provide a similar 5 – 5.5% ROS. Stakepools fees can also vary and need to be understood particularly as luck can play a pivotal role in the short term. Beyond metrics and fees, Stakepool operators are working hard to attract your delegation by providing a range of different value propositions beyond staking rewards to you and to Cardano itself, which is worth investigating further to see who or what resonates with you when deciding to choose a stakepool.