If you own some ADA and want to earn interest from it you can delegate to a stake pool. The mechanism of staking is very simple in Cardano. It’s just about selecting a pool and waiting for the rewards. No need to transfer your ADA, no locking of ADA, just allowing a pool to make more out of your ADA by delegating to it. But there are 3000 pools out there. So which one to choose?
Wallets are trying to help you with this decision by ranking the pools. Those mechanisms are primarily oriented on the expected Returns which a pool is expected to generate. This is an important factor of course being the main reason for staking but there are some other aspects which are important.
- The author is operating a stakepool.
- Anyways I give a full picture of relevant aspects including those few :) which are not speaking for my pool.
- I'm sharing my point of view in a transparent and as objective as possible way.
#1 No Multi Pool Operators
One single person can theoretically run an unlimited amount of stake pools. This also applies to exchanges. Running multiple pools is avoiding decentralization. Much stake will be in the hands of few persons. Thus limiting the variety of technical setups, marketing approaches, geographical locations, supported missions and so on.
#2 No Exchanges
Staking on an exchange is similar to stake with a multi pool Operator. Many delegators are using exchanges because of the simplicity. You just don’t need to send your ADA to your own wallet. Also some exchanges are temporarily offering higher returns than the network is providing. I mind this as an accelerator to get attention for Cardano. Anyways long term holders should consider moving into an own wallet because there they are not depending on a centralized exchange which is typically not providing any kind of deposit insurance.
After filtering out exchanges and SPOs there is still a huge list of pools available. To further filter down you can include aspects to identify the most profitable pool or the pools which are bringing most value to Cardano, thus stabilizing the project and by that also positively impacting the valuation of ADA coins on the long term.
Selection based on your preferences
#3 Generate the highest returns
Of course you are staking to get returns, so optimizing for returns is a natural thing. But should returns be measured in ADA or in your FIAT currency? ADA returns will be high if selecting a pool with a big active stake, more details below. FIAT returns are including price changes of ADA which are driven by news and community efforts to make the project a success. The second aspect is covered in the next section. But for now let’s focus on the ADA based returns:
Rewards in Cardano are calculated by a rewards formula. This formula defines the rewards of a pool for one epoch (5 days). To keep it simple we can say that those rewards are around 800 ADA per generated block. To generate 1 block on average the pool requires 1mio ADA active stake. All returns of the pool are then reduced by a fixed operator fee (typically 340 ADA) and a margin (typically 1-3%). The rest is distributed to the delegators based on the active stake.
The following aspects are influencing the rewards directly:
- A pool which has a high saturation (but is not fully saturated already) generates higher returns.
The reason for that are the currently inadequately high fixed fees of 340 ADA which are eating into your rewards. If there were no fixed fees at all there would not be a difference in terms of average returns between a big and a small pool. Note: While avg. return is the same the frequency/stability of returns is higher on a large pool
- A low fixed operator fee of 340 ADA. This is the minimum possible value currently.
- A low margin.
Because it is like a Tax which is taken away from your operator.
I expect the minimum fixed fee to be decreased soon allowing smaller operators to be competitive. Currently there are some workaround for the mentioned challenges to still allow making a small pool a good decision. Take a look on our pool at the end of the page if interested in more details.
Beside of those primary rewards calculation influences there are some other aspects which are influencing rewards:
- Pool loosing blocks, also refereed as bad Pool Performance. This could happen because of misconfiguration or downtime of the servers. Both are topics which are hard to validate for you so it’s a matter of trust. Most operators are providing information about their operator experience and technical details about the server configuration. In my opinion this is all OK but does not really help you because it is rather a matter of trust and commitment. To gain trust you can take a look if the operator is communicating in a transparent way, has a proper Legal Notice on the page to know who is behind the Pool. Also being active for long time is a good signal. All of this is showing commitment.
- Pledge. A high pledge influences the Rewards formula in a positive way. From a calculation perspective a 1 mio. pledged pool is generating a 0,04% better ROA compared to a zero pledge pool. This may change in the future.
#4 Supporting the Cardano Project, it’s network and the world
After thinking about the optimal pool for rewards there are a lot of other aspects which are in very important as well and on a long term perspective may be the differentiators for a successful Cardano project and therefore a higher ADA price as well.
- Purpose of the pool: There are many pools which are driven by a mission. Check out the Mission-Driven Pools Website https://missiondrivenpools.org/. Those pools are donating parts of their income to a good purpose and by that putting a bright shine on Cardano’s mission to make the world better for all of us.
- Best for the network: Being a stable and high available pool. Running not in one of the big cloud providers but rather in a decentral location. All of that is hard to prove but is technically important for the overall network health.
- Best for the environment: Using eco-friendly energy.
- Community: Being part of the ecosystem is generating awareness and important use cases for Cardano. Active contributors, and if it is only sharing news or marketing information is helping to get more people interested.
Finally there is a lot of trust involved and it is simply not possible to compare all operators to find the best fit for you. To be efficient in the selection process I’d recommend to:
- Filter out the multi-pool operators and fully saturated pools
- Filter for Mission Driven Pools if this is important to you
- Select one which you feel comfortable with in terms of key beliefs, team and communication. You should have some trust in the operator to be reliable and “good for Cardano”