A question we often get is, “what do I need to think about when choosing a pool?”. As part of that discussion, margin always comes up. If you look at adapools.org or pooltool.io, you can quickly see that margins range from 0% as high as 10%+. What is not well understood is how this number actually impacts rewards for you, the delegator.
One of the reasons that many pools set their margin to 0% or 1% is simply to attract delegators. On the surface it appears that a 1% or 0% pool is very favorable for a delegator. However, this may not be the whole story. If it were, then everyone would be at 1% and there would be a race to the bottom.
Here we’ll illustrate how the margin actually affects your rewards. Since we are focusing on margin, we will use a simple assumption of 5.5% total annual ROA for a pool. For a detailed analysis of the rewards equation see here.
In our example, we’re using a total stake of 40M ADA and an average ROA (return on ADA) of 5.5%. Also, we’ve set the fixed fee to the minimum of 340 ADA per epoch. Here you can see the Margin set to 1%, 2% and 3%. For a 1% pool, the net rewards (i.e., the rewards to you, the delegator), is approximately 5.384% of your delegation. For a 2% pool, that number is about 5.329%, and for a 3% pool, it is about 5.275%. As you can see, the difference between a 1% and 2% pool is actually only about 0.05% difference in rewards to the delegator. Similarly, the difference between a 1% and 3% pool is actually only about 0.1% difference in rewards to the delegator.
The So What
As you can see, a change in margin translates to a very small impact to the delegator, but enables the pool operator to invest in infrastructure, security and the ability to support its delegators. In fact, a very low margin pool is likely either subsidizing their costs through alternate income, or simply putting the bare minimum time and effort in managing their pool. There is nothing wrong with these cases, but it may influence the way delegators choose their pools.