Thoughts and considerations on the parameter changes as discussed in the Community SPO Call hosted by IOG on March 3rd in their Discord channel.
Disclaimer: All the writings herafter are to the best of my knowledge in no way permanent or even officially verified. I’m attempting to give a view of some of the issues and a response to them from our point of view. Please take this as such and feel welcome to reply, discuss or contest the ideas put forward here.
Summary
Over a year ago IOG has announced the change of a few of the main parameters of the protocol that in a great way define how the economics of running a pool turn out. Tonight, they announced what one year of contemplation and research has brought them and they share some considerations with us, the community. We will briefly touch upon the basics of each of the parameters and how they function now, their proposed change and short vs. longterm possible outcomes.
K = 500 will go to K = 750
What this effectiveiy mean is that the protocol will “desire” more pools to be functional, and increasing this number allows for a more wider spread allocation of stake, when functioning optimally. Practically this means that any given pool can now hold (total stake / k=500 ≈ 64 million ADA per pool, and this will now be approximately 45 million. So on the short term pools above that saturation level will either be compelled to refer delegators to other pools, or on the long term be incentivised to ask their delegators to move to their second, third or fourth pool. Obviously an undesired outcome. However this is supposedly discouraged by the next parameter change.
Minimal Fixed fee of 340 ADA will drop to 30 ADA per non-zero Block Epoch.
The Minimal Fixed Fee used to be a parameter set at 340 ADA when the price of ADA was still low. This forced SPO’s to take a cut in order to prevent the ‘gaming of the system’ where fees could temporarily be lowered or switched off to outcompete others for a majority of the active stake. When considered, not solely a bad argument, however since many price adjustments and changes to the requirements of the hardware the appreciation of the ADA price has helped loads of SPO’s cover costs, make a few bucks and donate to charities alike. Coupled with the rising costs and requirements for proper redundancies, failovers and infrastructure in general, this seemed like a very weird and sudden change, making the business model suddenly a lot less profitable while keeping the demands on the hardware the same (or even increase them in the near future) Alternatively, the minimal fixed fee at 340 ADA with current prices mean a sizable cunk of rewards for compensation of the running costs. But this is also one of the reasons its profitable to spin up multiple pools (especially if no additional hardware is required as servers generally have abundant resources) and reap those rewards multiple times. This is largely due to the parameter ‘a0’ wich dictates in part the influence that pledge has on rewards. In the long run, it will be harder to make running more pools profitable, especially as harware requirements increase with the scaling of the network.
What does this mean for Stayk Pool? and $STAYK?
While we appreciate the efforts of IOG to include us in the processes of many changes and developments, we and many with us feel that this adjustment was sprung up on us without it having a proper dicussion among the ones running the nodes (us SPO’s) and that isnt a development of chain of actions that a proper DevOps structure normally has. I sincerely hope there will be enthusiastic discussions amoun SPO’s and IOG and their Dev teams to come up with tweaks and adjustments that both reach their intended goal without diverting from the current course. In terms of the saturation limit, we are not really affected as our current live stake is under 1 million ADA so there is plenty of room should stake start moving around as a a consequence of the K adjustment. As far as the Min Fixed fee goes, this is our main source of funding for the $STAYK Treasury, and we as a team have been contemplating our promise regarding the backed value of $STAYK so our delegators wont lose out on the extra rewards for their loyalty. We run the hardware in such a way that we can optimize for performance and have been built futureproof and longterm. This has not changed, and will not change in the foreseeable future (Rate our setup 😉)
Should everyone be an SPO?
We do not believe it is the case in any free market system that rewards for labor or services should be fixed or guaranteed. the SPO ecosystem is extremely saturated with many (mostly qualified) entities but are battling for a limited amount of delegators, arguable not enough to saturate K pools. The changing landscape surrounding DeFi and liquidity provision further exacerbates this problem. To circle back to the question of this section, Should everyone be an SPO? In short, we’d have to say ‘No’. However we do feel that everyone should be able to be one, and see if they can manage to deploy the hardware, security, redundancy and failovers at a price covered by the rewards the protocol delivers. This will ultimately and inadvertantly lead to a negative feedbackloop of pools shutting down > increasing the succes of those remaining > create a shortage of space > incentivise new pools starting etc. As described in the research papers this is nash equilibrium, however the honest actors and rational behavior that is assumed along with it is far from the reality of delegators behavior and projects that are in development.
TL;DR
The proposed changing of the K value from 500 to 750 and the Fixed Fee from 340 ADA to a mere 30 ADA will make running a pool significantly less profitable and might cut down the amount of pools down to an unwanted level, or weaken broadscale infrastructure in an attempt to stay above a break-even point of running a pool as a business. This in addition to the realistic chances that the desired effects of the changes might negatively impact hose who already struggle. Added benefits are that pools of lower stakesize now take less of the rewards so for delegators of smaller pools such as ours rewards will increase. At Stayk Pool we pledge to make sure the continuation of the increasing value of $STAYK will be guaranteed for the foreseeable future!
Thanks for reading, we hope to engage in meaningfull discussion with anyone in the ecosystem.
Bas @basbeheer
*Edited for adherance to Chatham House Rules