Cardano Staking’s 2% Paradox

In the first of a two-part presentation published November 10 on the Cardano Community YouTube channel, researchers Manvir Schneider and Juan Ignacio Beccuti Vázquez shared preliminary findings on Cardano’s staking incentives. Using data from epoch 644, they estimated that about one in five active pools in their sample generated enough operator revenue to cover the model’s benchmark cost. Nearly half of the pools held up to 5 million ADA in total stake, and only 13 in that group cleared the benchmark.

How Delegators Earn 2% While the Operator Falls Short

The researchers counted pools that had produced at least one block in the three months before the snapshot. They used a benchmark operating cost of about 740 ADA per epoch, based on an assumed ADA price of $0.15 and an estimate for hardware, software, computing resources, and labor. The break-even point varies with each operator’s expenses and the price of ADA.

One modeled pool had 20 million ADA in total stake, including 100,000 ADA pledged by its operator. The operator received a fixed fee of 170 ADA from the pool’s rewards, a 5% margin on the amount left after the fee, and a share of rewards on their own stake. Delegators earned about 2% annually under those assumptions, while the operator’s revenue fell short of the benchmark.

At the same fee and margin, the pool would have needed about 37 million ADA in total stake to break even. Raising the margin to 10% lowered that threshold to about 19 million ADA. Alternatively, with stake held at 20 million ADA and the margin at 5%, the operator would have needed a fixed fee above 340 ADA per epoch. Either change would leave less for delegators at the same stake level. If delegators moved their ADA in response, the operator’s break-even calculation would change again.

A Lower Saturation Threshold Could Cut Returns in Large Pools

Cardano’s k parameter helps determine how much stake counts toward a pool’s base reward. In the researchers’ scenario, raising k from 500 to 1,000 lowered the saturation threshold from about 78 million to 39 million ADA. More than 200 pools in the snapshot would have exceeded the new threshold before any delegators moved.

For delegators in a modeled pool with 45 million ADA in stake, annual returns fell from about 2% to 1.74%. Stake above the threshold still shared in the payout, even though it no longer increased the pool’s base reward. When the researchers simulated redelegation based on expected returns, the median annual return recovered to about 1.8%, and more operators cleared the cost benchmark as smaller and midsize pools gained stake. That scenario assumed no new pools opened and no delegators left staking.

Operator Pledge Can Change Rewards at the Same Stake Level

A separate parameter, a₀, determines how much weight Cardano’s reward formula gives to ADA that operators pledge to their own pools. In the example presented, with a₀ set to 0.3, a saturated pool with no operator pledge had a base reward about 23% lower than a saturated pool whose operator pledge alone reached the saturation threshold.

Giving pledge more weight can make it less rewarding for an operator to spread the same capital across multiple pools. It can also make it harder for operators with less ADA of their own to compete for delegation, since any change in the pool’s reward affects what it can distribute to delegators.

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Only 24% of Tracked Pools Adopted the Previous Lower Fee

The researchers also modeled lowering Cardano’s minimum fixed fee, minPoolCost, from 170 to 75 ADA per epoch. They assumed every operator would cut their fee to the new minimum. Smaller pools saw the largest gains in delegator returns because the fixed fee takes a larger share of a smaller payout. The same cut reduced operator revenue, leaving fewer pools able to cover the benchmark cost.

Operators can keep charging above the protocol minimum. When Cardano previously lowered the floor from 340 to 170 ADA, about 24% of the pools tracked by the researchers had adopted the lower fee by epoch 500. Roughly one in three smaller pools made the cut, compared with about one in six to seven larger pools.