Impact of SPOs Operating Multiple Unsaturated Pools and Upcoming Changes in the Cardano Ecosystem

Episode by Peter Bui on May 15th, 2023

The Cardano ecosystem, a public, permissionless blockchain, has been witnessing a surge in discussions and debates revolving around stake pool operations and the mechanisms that govern the network. One such topic that has garnered significant attention is the operation of multiple unsaturated pools by Stake Pool Operators (SPOs).

Understanding the Role of SPOs and the Mechanism of Multiple Unsaturated Pools

SPOs play a crucial role in the Cardano network as they manage the nodes that approve transactions and add them to the blockchain. The pools they operate can be thought of as the collective power of several Cardano holders (delegators) who’ve entrusted their ADA tokens to the SPO for staking, thereby participating in the network’s proof-of-stake consensus mechanism.

Traditionally, an SPO operates a single saturated pool, which is a pool that has gathered enough stake (ADA tokens) to maximize the chance of being selected to add a block to the blockchain, thereby earning rewards for the delegators. However, some SPOs have adopted the strategy of operating multiple unsaturated pools, which individually have less stake but together might accumulate more than a single saturated pool.

The driving force behind this strategy is the minimum pool cost (minPoolCost), a fee of 340 ADA that SPOs must meet for each epoch (a five-day period). By operating multiple unsaturated pools, SPOs can collect more minPoolCost fees each epoch. While this might seem beneficial for the SPOs, the implications for the delegators can be substantial.

Implications for Delegators

The minPoolCost fee is divided among the delegators in a pool. Hence, running multiple unsaturated pools increases the total minPoolCost, which could reduce the rewards for each delegator. Conversely, if the SPO operates a single pool with a higher delegation, the share of the minPoolCost fee paid by each delegator would be lower, potentially resulting in higher rewards.

However, a deeper understanding of the implications requires considering the ‘k’ parameter. In Cardano’s ecosystem, ‘k’ is the desired number of stake pools, currently set at 500. The network encourages decentralization by automatically reducing a pool’s rewards when stake delegation to that pool exceeds a certain amount (the saturation point), determined by the ‘k’ parameter.

Therefore, operating multiple unsaturated pools could also be seen as a strategy to circumvent this mechanism, allowing SPOs to accumulate more stake (and hence more rewards) without exceeding the saturation point. However, it’s important to note that such a strategy could lead to centralization, contradicting the very ethos of Cardano’s ecosystem.

Cardano’s Upcoming Changes

To address these concerns, the Cardano Foundation has initiated a poll experiment to encourage community participation in its governance system. The aim is to decide the future direction of two key parameters: minPoolCost and ‘k’. The options on the table are:

  1. Keep ‘k’ at 500 and minPoolCost at 340 ADA.
  2. Keep ‘k’ at 500 and halve minPoolCost to 170 ADA.
  3. Increase ‘k’ to 1000 and keep minPoolCost at 340 ADA.
  4. Increase ‘k’ to 1000 and halve minPoolCost to 170 ADA.
  5. Abstain from the vote.
  6. None of the above.

The vote will allow the community to express their stance on these critical issues that directly affect the network’s decentralization. Following the vote, there will be a two-epoch period for delegators to re-evaluate their stake delegations based on the outcome and the voting behaviour of their respective SPOs.

At present, Cardano boasts over 3000 active stake pools, all of which contribute to running the decentralized Cardano blockchain. This number far exceeds the current ‘k’ value of 500, underlining the fact that the Cardano ecosystem is already highly decentralized. However, the operation of multiple unsaturated pools by some SPOs may be skewing this decentralization, giving those SPOs a larger share of the network’s control and rewards.

Potential Impact of Changes

If the vote results in an increase in ‘k’ and/or a reduction in minPoolCost, the impact on the ecosystem could be significant. A higher ‘k’ would mean a lower saturation point for stake pools, discouraging the operation of multiple unsaturated pools by reducing the rewards for over-saturated SPOs. Meanwhile, a lower minPoolCost would reduce the fees collected by SPOs, making the operation of multiple unsaturated pools less lucrative.

These changes could lead to a more equitable distribution of control and rewards in the Cardano ecosystem, reinforcing its decentralization. However, they could also pose challenges for SPOs, who would need to attract more delegators to stay profitable. Moreover, lower fees could also reduce the incentive for SPOs to maintain and improve their pools, potentially affecting the network’s performance and security.

Looking Ahead

In conclusion, the upcoming changes in the Cardano ecosystem, guided by the community’s votes, could have a profound impact on the operation of stake pools and the distribution of rewards among delegators. They reflect Cardano’s commitment to fostering a truly decentralized network, where decisions are made collectively by the community.

However, they also highlight the challenges inherent in balancing the interests of different stakeholders in a decentralized ecosystem. As the Cardano Foundation rightly points out, this experiment is just an initial step meant to assess possibilities. As we move forward, multiple aspects will require careful consideration, including which questions to pose and how to do so.

The Foundation is hopeful that the insights from the poll will inform more robust mechanisms for governance participation, promoting a more informed and active participation in Cardano’s journey towards becoming a self-sustaining, genuinely decentralized network. In the end, the voices of all, SPOs, delegators, and other stakeholders, will be instrumental in shaping the future of the Cardano ecosystem.

The Delegation Dilemma: Power to the People

The current situation presents an important decision-making scenario for ADA holders as well. If they believe their SPO is voting in favor of their own interests rather than the broader goal of decentralization, they have the power to re-delegate their ADA to another stake pool. This power of delegation is a critical tool that can be leveraged by the community to ensure the integrity and decentralization of the Cardano network.

However, it’s essential to note that re-delegation is not a decision to be taken lightly. In an ecosystem with over 3000 active stake pools, the choice of where to delegate one’s stake can be overwhelming. It requires a careful assessment of the performance, reliability, and integrity of different stake pools, as well as a consideration of their voting behavior and stance on key issues.

The Role of the Cardano Foundation

In this context, the role of the Cardano Foundation and other governing bodies is vital. By facilitating these important discussions and decisions, they ensure that the community remains informed and engaged. Their commitment to transparency is evident in the way they’ve made the voting behavior of each SPO publicly available. This allows ADA holders to make informed decisions about where to delegate their stake based on the actions and attitudes of their SPOs.

Furthermore, the Cardano Foundation is also taking steps to encourage active participation from all members of the Cardano ecosystem. By extending the voting period and giving stakeholders ample time to consider the implications of the vote, they’re making sure that everyone has a chance to have their say in the future of the network.

Conclusion: The Future is Decentralized

The upcoming changes and their potential implications underscore the dynamic and evolving nature of the Cardano ecosystem. As we look towards the future, the importance of active, informed participation from all stakeholders cannot be overstated. The power to shape the future of the network truly lies in the hands of its users.

As the Cardano network continues to evolve, one thing is certain: the future is decentralized. The power to shape that future, however, lies not just in the hands of a few, but in the collective will of the entire Cardano community. Through active participation and informed decision-making, the community has the opportunity to shape a decentralized future that balances the interests of all stakeholders, promotes equitable rewards, and maintains the integrity of the Cardano network. In this journey towards true decentralization, every voice counts, and every vote matters.

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