You want to run your own Stakepool - Thas what you need to know!

Running a Cardano stake pool got a very lucrative business as the price increased rapidly over the last months. For this reason many new pools are popping up every day. Currently there are around 3.000 pools in a network which currently defines a number of desired pools of 500 only. The number of desired pools will increase in the future to 1.000 probably later this year. This means that it will be hard to survive for a new pool in this highly competitive market. Reason enough to think about a proper concept before jumping into the cold water.

Goal and Target Audience

This guide gives you an overview about what you should consider before running a Cardano stake pool. If you are planning to run your own stake pool you should have a clear expectation about what it means to setup, operate and market a stake pool. The main purpose of this article is to let you know everything relevant at the beginning and get into your own journey well informed to avoid wasting time and resource with an unrealistic idea in mind.

Motivation

I started this journey myself in February 2021 and felt like it is just worth a try to run a stake pool. Chance versus Risk seemed for me to be in a good ratio based on some basic profitability calculation and my expectation about required efforts to run a pool.

My hoped effect of this article is to reduce the number of new stake pools which just stumble into the topic and having those who still decide running their own pool being already prepared on what to expect leading to a higher stability with less fluctuation of stake pools on the long term.

Pre-Knowledge and most important Terms

I’m not explaining DPOS (Distributed Proof of stake) here in detail.
The most important Terms for Cardano Staking which I use across this article are:

Block A list of transactions which is signed/validated as a whole by a stake pool.
There are 21.600 Blocks every Epoch
Epoch 5 days. This is the base timeframe for calculating Rewards
Rewards Consist of Transaction fees and a Treasure which is used to pay stake pool operators as well as Delegators
Stake Pool Operator  Runs a server which validates Blocks
Delegator Someone who hold ADA in his wallet and delegates it to a stake pool
Disclaimer
  • This article is not meant to be technically 100% correct nor detailed.
  • It’s kept simple in many aspects and focusses on the relevant outcomes.
  • All of course just my opinion. No legal claim on any calculation examples.
  • The author is operating a stakepool. I'm sharing my point of view here trying to be as objective as possible.

So let’s dig into the typical first questions you might want to ask

Question #1 – What can I earn running a Stake pool?

Rewards for the operator are calculated in the following way:

  • For every block which is validated by your pool roughly 850 ADA of rewards are generated.
  • Rewards in Cardano are calculated in the timeframe of an epoch, which equals 5 days.
  • From the epoch rewards your fixed Income of typically 340 ADA is going to you as the operator.
  • From the remaining ADA a margin of typically 1-3% also goes to the operator.
  • The rest is distributed to the delegators based on their currently active stake.
  • In an example of 340 ADA fixed and 1% margin this sums up to a monthly (6 epochs) income between 200 ADA (100k active stake) to 4800 ADA (60 mio active stake). Detailed calculation is found in the Google Sheet - Stakepool Profitability Calculation
Sounds good on the first look, but how high is the chance to be selected for validating a block?
  • The chance is based on the active stake which is delegated to your stake pool.
  • You need an active stake of 1mio ADA to mint 1 block on average per epoch.
  • If you e.g. just have an active stake of 100k ADA you will on average generate one block every 10 epochs (= 50 days).
  • The following Google Sheet gives you an overview about expected Incomes from an operator perspective in line 35 (Avg. Operator Income – Per Month in ADA). Google Sheet - Stakepool Profitability Calculation
Ok, now the challenge:
  • So in theory all of that is not a problem. It just takes longer with a low stake but then the rewards will be high, isn’t it?
  • Well, yes and no. If your pool would not cost you anything it would be right. 2 things need to be considered here:
  • First, you need to pay the cost for running the pool (See Question #2)
  • Second, you will have troubles find delegators if your pool is not generating MULTIPLE Blocks per epoch (See Question #4).
  • The math behind this is simple. Your operator fixed cost of 340 ADA is subtracted from the total rewards. If you have one block in an epoch this eats 43% (340/850) of the rewards. Delegators can expect an average ROA (Annual return of ADA) of 3,3%. Bigger pools with a high saturation and therefore more blocks generate an average ROA of 5,5% for their delegators.
  • The critical point of being able to provide attractive Rates is somewhere around 4mio ADA with an expected ROA of 5%.
  • The above mentioned Google sheet also shows which average ROA is generated for your delegators with different Active Stake Levels: Google Sheet - Stakepool Profitability Calculation

Question #2 – What does it cost to run a stake pool?

Hardware

  • You’ll need at least 3 servers. 2 Relays and one validator.
  • Each of them equipped with at least 2-4 Cores and 8-16GB RAM
  • System Requirements can be found here: Cardano Node 1.26.2 - Release Notes
  • There might be additional cost for Snapshots and Backups, Traffic.
Ops Tools
  • You’ll require some kind of monitoring. Also running a log server is a good idea. Website
  • You’ll need a domain and some hosting behind it.
  • There might be cost related tools which you use to create your logos and visual content of the website.
Time invest
  • This may vary greatly and consist of
  • Operational Tasks: Keep the servers running, upgrading, security checks, potential hardware upgrade later wards.
  • Marketing Efforts: Create content for your website and keep it up to date, Get active on Twitter, Reddit, YouTube, Telegram, ADApools.org and Pooltool.io to attract delegators and keep them informed
  • Communication: Questions of your delegators may arise and need to be answered.
Sample Calculation:
  • Servers: 100€ / Month
  • Domain and Website: 100€ / Year
  • So beside of your time invest a minimum operation could cost around 1300€ per Year excluding time and marketing cost.
  • In the above scenario (340 fixed, 1% margin) you would need an active delegation of 55k ADA to cover your cost. Current ADA price is 1 ADA = 1€. But this calculation ignores potential marketing, offer/promotional and time invest. Also you need to consider that you could actually earn around 5-5.5% on your pledge if you do not use it for a pool but simply stake it to an existing pool.
  • This sound really good, but remember why should one stake with you if you cannot provide the returns which a big pool is able to pay? So even finding this low amount of delegation is a big hurdle, especially now where ~3.000 pools are out there already where only 500 are wanted by the network.

Question #3 – What do I need for running a stake pool

Some starting capital

  • For paying the above mentioned for some time in advance
  • For providing some pledge to you pool. Pledge is an important metric which influences potential Rewards. Currently a 1mio ADA pledge generates a 0,04% better ROA compared to a zero Pledge pool (e.g. 5,04% instead of 5%). So the impact is not that big from this perspective, but on the other hand Pledge is used in the ranking formula of the different comparison tools. So being on low pledge makes you less visible.
Technical Skills
  • Administration and Operations Skills. Development Skills are also helpful.
  • Know about key security concepts and risk mitigation strategies
Marketing Skills
  • Be able to find and attract delegators.
  • Having a social fellowship is helpful.
  • Communication, SEO, Running Marketing Campaigns
  • Or let’s state it simple: Nobody will find you by himself ;)
Patience
  • Delegators are not changing their pool every day, so you can’t expect that out of a sudden everyone will want to jump to your pool after launching it.
  • So it might take a long time to reach a solid level of active stake. This even is harder today than a few months ago because the ADA price increased heavily. This means new delegators today will simply bring much less ADA with them then a few months ago.
Of course not one single person needs to bring all the skills together. It's of course helpful to split responsibilities in a small team. Also from an operational perspective it makes sense to have multiple persons who are able to take a look on the server if something is not OK.

Question #4 – How can I reach the critical level of active Stake to make it self-sufficient?

For sure this requires some strategy. As mentioned already nobody will wait for you pool. There are several strategies which may play a role in reaching self-sufficiency which I state to be around 4 mio. ADA active Stake. This is the point where your ROA is starting to get competitive. The main question to get to the point is: “Why should someone choose my pool?”

The answer to that question might be one or multiple of the following:

  • You have enough pledge yourself or together with friends. High Pledge is a good reason for a delegator to choose a pool because it indicated commitment and also improves the ROA. Unfortunately this is rather unrealistic with current prices for most of us.
  • Any specific USP (Unique Selling Point). This might be a specific target audience which you are focusing. Either regional or based on demographics of your target group or just a very specific audience like young gamers or private banking senior investors which wants to try out something new.
  • Or a special deal you are offering focusing on some special Rewards or Loyalty bonuses.
  • Or being part of an appliance which might be the starting point for research of a new delegator like Mission Driven Pools, Single Pool Operators, ..
Different strategies are required for the key milestones which you need to achieve

Minting your first block

  • Before you mint your first block the different pool comparison tools (adapools.org, pooltool.io) will list you as a 0% ROA Pool before you minted a block.
  • Nobody can be sure if your setup is working before that point
  • Therefore this is a key milestone. Some possible strategies:
  • Just have enough ADA yourself. If you have 50k ADA it takes on average 100 days.
  • Special entrance offers. If seen different approaches here which either focus on paying some bonus for everyone who helped you mint the first block ore sharing Operators rewards in different ways.
  • Know a lot of people and convince them that your pool is the best. To be successful with that you either need trust or some USP
  • Be part of a Pool Circulation strategy like www.f2lb.org/. The principle is that Pool operators are adding circling their stake to every participant until the first block is minted.

IOHK and Cardano Foundation Delegations
  • There is a 3mio ADA delegation strategy of IOHK which supports 100 Pools by delegating 3mio ADA to them. Details here: IOHK Community Stake Pool Delegation
  • Additionally there is a Cardano foundation delegation strategy which supports a list of 44 Pools with 15 mio. ADA. Preconditions for this include a first block, 25k ADA pledge and low cost (340 ADA fix, 1-5% margin), being a single pool operator. Cardano Foundation announces its delegation methodology - English / News and Announcements - Cardano Forum
  • The good thing about those strategies is that they make Operators also consider aspects which are important for Cardano, like e.g. presence in underrepresented regions to support decentralization. On the other side you need luck to be selected in a scenario where you anyways depending on luck very much for being selected to mint a block.
Continuously attract new delegators
  • Your USP
  • But the best USP does not help if nobody finds you.
  • So you need to be visible for you target audience (see Marketing)
  • Educating Delegators: I think it’s also important to educate delegators that delegating to the biggest pools is not always the best to the network. Single Pool Operators should be favored to support decentralization. Pools which do good marketing and spread the idea of Cardano will lead to more public awareness around Cardano and may influence the demand for Cardano which may improve the price positively. Maybe this is much a bigger potential for a delegator compared to the delegation rewards. All of this is good in a world where every person on the world is acting in a well-informed way and valuates sustainability over quick rewards. But imaging you wants to delegate your fresh purchased ADA in your wallet. You just see the Pool Name, Size, ROA, Cost and Pledge. These are the facts which lead delegators to their decision. Only a few one will get on the website and check the mission all the other details.
Keep your existing delegators
  • Make sure your servers are high available. Missing a block could detract delegators very easily and also reduces your operator incomes directly.
  • Make sure you answer questions in a timely manner.

Final Considerations

Let's walk through the key points for a final check before getting into the recommended next steps.

Legal and Tax related considerations
  • This is very country specific. Some countries require you to run a legal business for operating a stake pool. This could have an impact on tax calculation compared to just owning and staking crypto.
Technical Considerations
  • Hosting Provider offering high availability, upgrading possibility
  • Security and Hardening considerations
Target Audience, Name, Branding, Website
  • Get clear about your target audience and USP you want to offer
  • Ticker Name. Make sure it does not exist before start your branding.
  • Create a Logo. Select a web template
  • Setup a legal disclaimer and privacy policy, especially if you include tracking technologies or any kind of marketing pixels or cookies.
Finally awareness of the main challenge
  • Nobody will want to stake with you before you are big.

Please be aware that the profitability is highly depending on network parameters which may change over time. E.g. the minimum fee of 340 is in my opinion likely to change because 340€ (1 ADA = 1 EUR) / 5days is more than the hardware really cost. So the current defined value is already in-adequate because the parameter is meant to make sure nobody is running a pool without being able to pay the infrastructure.

Next Steps

If you are comfortable with all mentioned above I recommend you to walk through the following steps:

  • Check the legal pre-requisites in your country
  • Prepare your concept / USP
  • Create the Website
  • Setup the stake pool. I'd recommend to start on testnet using the manual installation, then through the Stakepool School which includes also some important theory information and finally go for one of the more script related approaches like Coincashew Guide or Guild Operator Tools approach. This way you get a good understanding about the functionality. Get a feeling about which approach works best for you and go for it then on to mainnet.
  • Find delegators or make them find you ;)
Finally I want to wish you good luck. if you have any further questions please reach out by mail or telegram.

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