Finding That Balance
Exciting times – Cardano switched over to Shelley yesterday and within seconds, people were downloading and syncing their wallets to move their ADA over. Within minutes, staking pool operators were registering and making the pools available for us to delegate to.
This is an unprecedented event, bringing us one step closer to the vision of a truly decentralized value network upon which many projects will be based in the near future. Everyone involved is very excited about the possibilities, and involved because of the shared vision of a better global future. On the flip side, this is new to everyone making it very difficult to know what to expect.
One of the difficult decisions for staking pool operators is how to set the margin. Like most tough decisions, there’s no right answer and there are counter-balancing factors.
Similar to any other industry, pricing is often driven by the market and competitors. If everyone else is selling the same product as you, then the further beyond the average market price you set your product, the fewer customers you will have. There is complexity around marketing and brand affinity, but for the purposes of this case, the pressure of “everyone else’s price” will have a considerable impact on your price.
In this particular case, If the vast majority of staking pools set their margin at 8%, then you need to set your margin at the same or below or you will have much fewer people staking to your pool. The problem with that is that a staking pool will be assigned blocks if they have enough ADA staked to them. So, to be a staking pool that will be valuable to those who staked to it, we need to have enough people staking.
On the other side of the coin, the whole purpose of the margin is to provide a way for pool operators to cover the cost of running the pool. The tough part of that is at the moment is no one really knows how much it will cost to run the pool, let alone tune it for performance. Once the operators start optimizing the performance of their respective pools, they’ll have a better idea of the longer term cost of running the pool.
Here’s a video that touches on the subject (about the 5min mark):
We are anticipating that it will be beyond the 3%-5% margin that we are currently seeing among different pools. As a result, we will likely see low margins as pools are trying to set up a base of people to delegate their ADA to their pool. Then we’ll see an increase in the margins as pool operators get a better handle on the actual operating costs.
The key will be transparency and understanding around operating costs and how it relates to the margin. We endeavour to maintain this transparency throughout this wild journey, and be available to learn, and share what we learn as we go. This is a great community, and we’re confident that we can sort through these things together as we make the stability of the mainnet a reality.