I'll start by explaining why I believe Cardano is one of the frontrunners in the crypto-space.
Bitcoin started it all. So it deserves respect. But as with all technology, it became obsolete in no time. The main thing I believe keeping it afloat is its name.
Its network is sufficiently large enough to be secure. But it processes a pathetic 6-8 transactions per second. And it uses as much electricity as a small nation. It's a dinosaur. But it was a good start.
With the Bitcoin Lightning network, it could theoretically scale to tens of thousands of transactions per second. But it's an unproven approach with serious holes. There are better ways.
Cardano currently processes around 300 transactions per second. But after its Hydra upgrade, it may be capable of even 1m transactions per second. This is ample for a global financial system, with all the bells and whistles like smart contracts.
However, it may not be sufficient if the "Internet Of Things" becomes as big as some expect. I'm talking about electrical appliances like your toaster or fridge being connected to the Internet.
Don't get me wrong. The "Internet Of Things" will no doubt play a part in the future. But I can't imagine the majority of people being compelled to link their toaster to the Internet. It just isn't needed. It's overboard. And if we as a society go that far, it'll be a dystopian nightmare. Count me out. It would be against everything cryptocurrency stands for.
Cardano uses the Ouroboros protocol. It's a Proof of Stake algorithm. If you understand Cardano's whitepaper, you'll understand it's as secure as anything can be.
While nothing is 100% secure, it doesn't realistically need to be. I mean even with Bitcoin, someone could theoretically guess your seed phrase. So it's not 100% secure either. When I say "secure", I mean within reason. Basically for you to lose your funds with a well-designed blockchain algorithm, it would take some rather long odds.
If you half-know your stuff, you'd say Cardano has been slow to develop, and behind the pace.
But if you really know your stuff, you'd say their design-work came before the code. And now that the framework is complete, the coding has steamed forward. If you've been keeping an eye on the amount of code they've written, you'll see they're miles ahead of most projects.
While it has borrowed some concepts from other projects, it has been designed and coded from the ground up.
There's more. And while no doubt other projects will also last into the future, I believe Cardano will certainly be at the forefront.
Bitcoin is "decentralized", right? Yes, but not very well. The reality is the entire Bitcoin network is run by a few different mining pools, as per the chart below:
So an uncomfortable portion of the Bitcoin network is run by the same pools. This means if some of these pools colluded, they could totally fork-up things. I know they probably won't. Because it would then crash Bitcoin's price. But we don't want it to be realistically achievable.
I mean let's say super-wealthy Wall Street bankers felt threatened by Bitcoin. So they funded the running of mining pools, purely to attack the network with something like a double-spend. Why would they do this? Perhaps to discredit Bitcoin. It's possible. After all, they'd have trillions at stake in fiat currencies. And they're in it for the long-game. Anyway, my point is that with proper decentralization, a rigged system should not realistically be possible.
Now consider Cardano's stake pool decentralization:
The left chart shows excellent decentralization. But the right image is much more important, because the larger green area shows operators with ONE POOL ONLY. The other groups have multiple pools, so realistically should only count as one pool. Because there isn't much point to multiple pools if they're run by the same people.
Cardano is addressing this issue, although in my view not adequately yet. They initially cut the maximum stake for each pool. But this only resulted in larger pools splitting into many. It's more of a hack than a permanent solution. Still, the decentralization is much better than Bitcoin, and Cardano is still rolling out updates.
Firstly I'll disclose I own various coins. This includes a truckload of ADA, because I believe in Cardano. Again although there are many promising blockchain projects, I believe Cardano is overall best. They first got my attention because Charles Hoskinson said the "right" things. Whereas representatives of other projects tended to say things that either weren't accurate, or made it clear they were more interested in profit - rather than how the technology can improve our quality of life.
So their philosophy led me to learn how their technology worked, and their direction. I'm more a "fundamentals investor", although profit is not my primary aim. I'm more interested in freedom. I believe day-traders are like a cancer for cryptocurrencies. When I invest in crypto, I look at the realistic long-term value of technology. And that's where I feel Cardano has other companies beaten. Although it shouldn't be a "competition". In a perfect world, each crypto company should openly collaborate.
Ultimately Cardano is a group I believe in. There are others too, but I'm allowed to have favorites. I believe in their philosophy, their leadership, and technology. Charles needs to get more sun though. All us tech geeks should. I'm not so sure Colorado is warm and sunny.
Anyway, although there are staking coins with higher returns than Cardano, I believe the longer-term returns of Cardano will be higher - or at the very least more secure. And don't take this as investment advice. It is just my personal opinion from observation and research.
Let's assume I mean the "most profitable" stake pool. Firstly, there are many variables, so the "most profitable" stake pool will change from time to time. Here's what determines a stake pool's returns:
If the stake pool's servers aren't online when they're scheduled to mint a block, you'll miss out on rewards. One way to see if a pool has missed blocks by checking their Ophaned blocks on https://pooltool.io/
There are two types of fees. First, the "fixed fee" is a pool's reward for every 5 days. The lowest it can be is 340 ADA. Also, there's the pool's "margin". The lowest possible margin is 0%.
So ideally choose a pool with the lowest possible fees. There are a few pools that offer this, in order to attract delegators. But be careful of them increasing their fees later, without you knowing.
WARNING: Don't base your decision entirely on low fees. Mission-critical hosting is expensive, so low-fee pools are probably on budget servers that will miss blocks, and lose you rewards. Server uptime is as important as low fees.
The amount of ADA that can be staked to any pool is limited. When the maximum is reached, the pool is considered "saturated". From this point, delegators receive lower rewards. This encourages delegators to stake with other pools, to promote decentralization. So avoid stake pools that are overly popular.
WARNING: I've seen pools at around 95% saturation that seemed stable. Then suddenly they become 105% saturated. If that happens and you don't change pools in time, you lose rewards. It shows not everyone understands what saturation means, because they still delegate to saturated pools!
Cardano was designed to favor less-saturated pools to enhance decentralization. But optimal rewards occur with pools that are neither near-saturated, or brand new. The "sweet spot" is somewhere in the middle (around 80-90% saturated).
Most pools are run for profit. But some invest back into the Cardano ecosystem, or donate to charity. Especially if you'd like to see Cardano grow, give preference to pools that invest in Cardano projects. There are also a few pools that donate to all kinds of other worthy causes.
A stake pool's pledge is basically the amount of ADA they lock to their stake pool. It's important because if they pledge a large amount, and make mistakes, then they'll lose significant funds. I suggest focusing on pools pledging over ₳500,000 (ADA), so the stake pool operator risks substantial money if they make mistakes.
Put a high pledge together with a single stake pool operator, and you've got a stake pool with operators who do everything possible to maximize both yours and their rewards.
It's not ideal to have one group of people running multiple pools. Although it's not uncommon, and not presently a problem unless they run 5 or more stake pools.
It's nice when stake pool operators keep you informed. It isn't essential, but it gives you peace of mind that they're doing their job.
If your pool fails to mint a block, you lose rewards. This can happen if the server experiences downtime. It's nearly impossible to keep a server online 100% of the time, so every pool will miss some blocks. But if a pool's servers are poorly managed, they'll have more downtime than usual.
Few pools provide any guarantee that they wont miss blocks. Mostly because they can't control the Internet. But some pools compensate delegators if blocks are missed.
Again the overall best stake pool will change. There currently are only a few pools with 0% fee, and perfect performance history. But only two of them donate back to Cardano projects. These are CNODE and FUND pools.
Details of these pools and a few others with low fees are listed below:
Fixed Fee: ₳340
Charity stake pool operator: YES
Performance guarantee: YES
Fixed Fee: ₳340
Charity stake pool operator: YES
Performance guarantee: YES
They run two pools which both donate to charity explained at https://www.cardanode.io/fund
This one is much less saturated at the time of writing, so is the better option if you stake a large amount.
Fixed Fee: ₳340
Charity stake pool operator: NO
Performance guarantee: NO
If you staked ₳100,000 with a 0% margin, you can expect annual rewards of around ₳5,000. But if the pool had a 2.5% margin, you'd expect ₳4,875. So it's not a big difference, but still significant.
However, there are some pools with even 15% fees. A pool with a 15% margin would pay you only ₳4,250. That's a difference of ₳750 per year.
Look at it this way: the margin fee is the stake pool's cut of your rewards.
It doesn't mean pools with 0% margin are best. Because if the pool is poorly managed and misses blocks, low fees are pointless.
Anything more than 2.5% is excessive. Although 0% fee is "suspiciously low" for new pools, because they may be using cheap hosting. Or they may just be trying to get new delegators. If you're moving to a pool with lower fees, first check if they're missing blocks.
No. A "high saturation" pool only means rewards will be more predictable. But "low-saturation" pools still average the same rewards (assuming they have the same fees).
Thinking low saturation pools are less profitable is a common misunderstanding. Let's consider some example pools below. We'll assume you stake the same amount of ADA in each pool:
POOL 1 (high saturation, low fee)
Average rewards: ₳10,000
POOL 2 (low saturation, low fee)
Average rewards: ₳10,000
POOL 3 (high saturation, high fee)
Average rewards: ₳9,500
POOL 4 (low saturation, high fee)
Average rewards: ₳9,500
So low-saturation pools have more "erratic" rewards. But the average rewards are still the same. Cardano was designed this way, to encourage delegation to less-saturated pools.
Another thing to keep in mind is you only get rewards if your pool mints a block. So if a pool has virtually no other delegators, and a very low pledge, the probability of it minting a block in an epoch is very small. This means it might not mint a block for years. Although when it finally does mint a block, the rewards can be enormous. The average rewards will still be the same as other pools (in the long-term).
It's fine to delegate to new pools. But if a pool is brand new and unsaturated, I suggest only delegating to it if:
This is because there are many new pools with a low pledge, that become abandoned. If you delegate to abandoned pools, then you'll never get rewards.
Ultimately, low-saturation pools have a lower "ranking", mostly because of fewer delegators. But to maximize your rewards, the most important factors are "low fees and high uptime".
Again the metrics change from time to time. You should keep an eye on:
Pool saturation: When pools become saturated, mostly new delegators stop joining. So the rate at which the pool grows will slow. This is how Cardano was designed, to encourage decentralization. But if a pool becomes saturated, you must move to another pool to maximize your rewards. A comfortable level of saturation is around 95%. This better ensures predictable rewards, without being a large risk of full saturation.
Missed blocks: If a stake pool isn't run well, it will miss blocks, and you'll lose rewards. The pool's public metrics show missed blocks but you need to understand what you're looking at. This is one of the most overlooked metrics because many delegators tend to look only at low fees. It's like paying for budget web hosting, without considering server reliability.
Fee changes: Too often fees change without warning. I've seen pools go from a 0% to 5% without any notice to delegators. Stake pool operators should keep you informed well before they make any changes.
Disclaimer: All opinions in this article belong to the author alone. Nothing in this article constitutes professional investment advice. And past performance should not be an indicator of future performance. Please do your own thorough research before making any investment decisions.
Get rid of the "fixed fee". It was probably designed to keep stake pools from going broke, because of some pools using cheap and unreliable servers. So I understand the need to not incentivize unreliable servers. But now Cardano is big enough for stake pools to survive on the margin fees alone. Instead of a minimum fixed fee, a minimum margin fee might be better.
The fixed fee also makes it harder for new stake pools to get delegators. This is because the fixed fee is paid from delegator profits. If there aren't many delegators, the few delegators pay higher fees. For a pool to really "take off" with lots of new delegators, it must pass a threshold which is too difficult for new pools. This is bad for decentralization if you want thousands of stake pools. But if you're only looking for 500-1000 active pools, then existing algorithms work well.
A potential problem with not having a fixed fee is new SPOs might go broke paying for hosting, before they get enough delegators. Either way, so far the decentralization algorithms are working well for the size of the network. Changes may be needed later, depending on the optimal amount of stake pools.
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