Can we distribute ADA more effectively?
I’m a stakepool operator. It’s not a business, it’s a hobby. I’m a retired Scientist and Teacher. I’ve followed Cardano since late 2017 and became interested in running a pool in 2019 but actually did something about when I realised the network I’d been hoping for for so long was starting in mid 2020.
I’ve been watching trends in the community and amongst Stakepool Operators for many months now. My pool operating costs are usually covered by the pool rewards and now I am about to receive some IOG funding as a “seed”, that’s baked in, at least for a few months.
I’ve become a bit concerned that there are some big winners in the way that ADA is distributed and that it doesn’t really have a mechanism to get to where it’s needed.
Where’s this ADA coming from? Where’s it going right now? Where IS it needed?
Let’s take a look….
The Stakepool Ecosystem
What are stakepools and why are they there?
The Cardano network consists of a network of “nodes”, computers keeping multiple copies of the blockchain. Some of these nodes are “block-producers” and they write data into blocks to be stored on-chain. These blocks become immutable after a few more blocks are added further on in the chain , so they are the permanent record of transactions in ADA the cryptocurrency of the Cardano Ouroboros blockchain. Stakepools pay to operate and maintain these computers, usually 2 or more “relay” nodes and always 1 “block producing” node.
The more nodes that make up the network the more copies of the blockchain and the harder it is for a “bad-actor” to compromise the network. The Cardano network is one of the most decentralised networks of any cryptocurrency and arguably, that makes it one of, if not the the most secure and resistant to attack.
Why do Stakepools pay to run the nodes?
The Stakepool Operators pay for the upkeep and maintenance of nodes out of their own pockets and perhaps more importantly time. This is in return incentivised by the pool being rewarded with ADA from an existing supply of ADA that is currently not circulating. It’s a small inflation in the number of ADA circulating and is from a fixed supply. Similar to Bitcoin this approximately halves every 4–5 years.
Every 5 days, at the end of an EPOCH (21600 blocks) a fixed amount of this ADA is released through emission from a Reserve  based on how many blocks each stakepool made. The number of blocks made approximates to the ADA “delegated” by ADA holders into the pools. So the upshot is that ADA delegators receive around a 5% p.a. Award of the ADA Staked. There is a mechanism by which a part of the awarded ADA to each pool is given to the stakepool operator first, to cover their minimum costs. Then a margin % is given to the stakepool operator from the remaining ADA with the balance going to the delegators. Competition is quite tough so many pools set this margin at 0–2% whilst some claim to offer a more “professional” service and charge often much more, 2.5–5% is not unusual.
Who benefits from the ADA released?
The delegators get approximately 5% per year, the size of pools delegated ADA and margin fees have little effect once the pool around 3M ADA is delegated. Pools smaller than this are likely to struggle for financial stability in the long term and may end up closing, which would reduce the network decentralisation. A pool is saturated if it has 64M ADA delegated.
Some operators choose to run many pools, each with the maximum ADA that the protocol delivers rewards for. They are run as profit making businesses than with any philanthropic or philosophical aim.
Some, even with only 4–6 saturated pools are profiting by upwards of $35000 a month at current ADA prices of $0.35. To me this feels somewhat outside the spirit of a decentralised cryptocurrency that is there to help the unbanked and benefit the whole of humanity.
Could that benefit be used better elsewhere?
Obviously I think it could be and I’ll explore this in Part 2: Where do we want to be?