It's Hot Outside. Let's Build A Pool. How?

Beginner's Guide to Cardano Stake Pool Operation

Congratulations. You wish to be a part of the network more than just meet the token ADA. Where to start?

Step 1: Commitment.

Ask yourself if you have time and commitment that it takes to keep a stake pool operational. Regular maintenance and up-keeping is to be required. This may be additional work load atop of whatever you have been doing already. Hence, if you have available time to dedicate your resources to the stake pool project - this may be a good opportunity for you. 

Step 2: Technicals

Running a stake pool does require some understanding of the inner works of networks and computers. If you lack technical knowledge required, you may need to team up with someone who does. Otherwise, it may take a very long time to learn and implement all the steps required to run a stake pool. 

Outside of the above two steps - there aren't any other obvious bottlenecks to your aspirations to become a stake pool operator. However, there are few things one should consider in order to improve their odds of being competitive. As a pool operator you have an opportunity to showcase your commitment to the potential stake pool members by laying down a pool pledge 

Q: What is a pool pledge

A: Pledge is something that each stake pool owner/operator is required to commit to the stake pool. These are essentially their private resources and are locked in that respective pool. In the simplest terms, it proves how much 'skin' each operator/owner has in their pool. However, not every low pledge automatically means a dishonest pool operator. Since there is no minimum pledge requirement, it allows for anyone with smaller resources to also participate in the securing of the network. Hence, even if you don't have large resources to lock up a sizeable pledge, you still may offer other services that would be deemed attractive.

Worth noting, that higher pledge amounts are favoured by the algorithm in the lottery of awards. Pools with higher pledges are slightly more likely to produce/mint new blocks and hence produce better rewards for their delegators. This is primarily designed to motive owners to pledge more in lesser amount of pools and thus curtailing efforts of centralisation. It also helps mitigate possibility of Sybil attacks. In such instances, an attacker seeks to take control of the majority of the network by creating many pools with a very low cost. 

Q: Can I add or decrease the pledge in the pool?

A: Yes, you can. You will need to post a new certificate. However, any such changes to the pool will be communicated to all stakeholders with a notification. This can trigger a re-delegation and hence loosing part or all of your stake that people entrusted with you. Thread lightly. 

 

Q: What are stake pool metadata?

A: Your stake pool registration includes string of data which is used to identify your pool on the network. You will need to choose your ticker consisting of 3-5 characters. This is especially important for your in wallet display mechanism. You then can choose your name with maximum length of 50 characters. A short description worth 255 characters. Lastly, your URL aka website where your stake pool information can be showcased. Thus, you need to think about all these prior submitting your pool registration certificate. All the metadata is UTF8 encoded, max 512 bytes.

Q: How does in wallet ranking work?

A: This depends on multitude of factors. What your costs are (fixed and margin), pool performance (uptime, production of blocks, reliability), owner's pledge and overall amount of stake delegated to the pool from other users. The in-wallet ranking mechanism will then prioritise pools that have low costs, work reliably, are active and most importantly haven't reached saturation. This data is cross-referenced from the most recent pool registration certificate. 

Q: What is pool saturation?

A: This is a threshold of stake amount committed to the pool beyond which the rewards do not increase proportionally. Meaning, any additional stake in that saturated pool does not increase its chances for higher rewards anymore. This way, network prevents from accumulation of all stake in a minimum number of pools. It promotes decentralisation by motivating creation of multiple pools instead of few. The level of saturation is not constant. It depends on the total number of available pools in the system. More pools there are, lower saturation level is required. 

Q: What if I had a bad day and my pool wasn't functioning well. Will I be penalised for ever?

A: Not necessarily. Pool performance as captured by the wallet ranking system is designed to reflect moving average. Thus, if you do experience a hick up, it isn't the end of the world. However, ultimately, it may hurt you if other pools manage to avoid such instances better than yourself. Best advice, do your best work to minimise risks of operational outbreaks to keep the moving average as high as possible. 

Q: Can I open multiple pools?

A: Yes, you can. This may be a perfectly reasonable course of action if you already have an existing and successful pool running. However, until your original pool doesn't reach saturation level, it isn't really worth the trouble. Only when your pool has attracted 'too much' of staked ADA, it makes sense to open secondary pool. Mind you, that one has to commit new pledge for this new pool and hence further investment on your part would be required.

Q: Can I have an investor or multiple owners?

A: Yes, you can. Pool operator and pool owner(s) may not necessarily be the same person. You can, in fact, have multiple pool owners in place. This is generally secured by pools ability to register multiple pledge addresses belongings to several people at once in their certificate. However, there needs to be a sustained level of trust amongst the individuals involved to ensure no malicious intents arise.

Q: Can I run a private pool?

A: Yes you can. The network doesn't require for your stake to be delegated to other pools, you can delegate to your own pool as well. All the rewards in such a pool are going to be posted to the pool owner instead. You will, however, now show up in the wallet rankings either. You also don't have to provide metadata for private pool registration.

Q: How are rewards calculated?

A: It is quite sophisticated based on everything we have chatted about. However, simple answer would be playing around in a Shelly staking calculator. You can find the link to it here: Shelley Calculator

Q: What is a fixed fee?

A: That is the amount that you set as an operator per epoch. Epoch is 120 hours or 5 days long. The absolute minimum set by the network is 340 ADA per epoch. There is no maximum. 

Q: What is a pool margin?

A: That is the % of rewards that you would be taking in from all the rewards awarded to your pool. If you charge 1% to yourself, 99% will go and be proportionally split amongst all your pool stakeholders. The higher the pool margin, the greater potential earnings pool has. There is a catch. These higher pool margins can also work against you in wallet rankings and desirability of people to choose your pool to stake with. You need to be competitive and think about what your approach is.

Q: What is a treasury rate?

A: Portion of rewards that goes to the treasury account. This treasury account is then used to find variety of projects on which the Cardano community votes on. Inside calculator it is already set at 5%. 

Q: What is an expansion rate?

A: Every epoch, total ADA in circulation will be increase by this rate by adding new ADA to the rewards. You don't have to worry about massive devaluation of your tokens in the future. Overtime, this rate actually decreases exponentially. The rate also depends on how many blocks are produced during each epoch. In the future, reward source would shift towards transaction fees and appreciation of ADA value. Inside calculator it is already set at 0.22%.

Q: Where can I find more information about the technicalities of stake pool operation.

A: We recommend starting your exploration on official Cardano themed portals. Look up groups on Telegram, Discord, Youtube, and Twitter. Please, remember, verify all information before commitment. We don't assume responsibility for information as it may be quickly outdates or unavailable. Some of these you may find below:

Cardano Official Telegram Group: https://t.me/Cardano

Cardano Shelley & StakePool Best Practice Workgroup: https://t.me/CardanoStakePoolWorkgroup

Cardano Testnets: https://testnets.cardano.org/en/

Cardano Forum Updates: https://forum.cardano.org/c/announcements/13

Cardano Code Updates: https://cardanoupdates.com/

Cardano Stake Pool Set-up Info (official): 

https://docs.cardano.org/en/latest/getting-started/stake-pool-operators/index.html

Cardano Node 1.18.0 (Stake Pool) installation guide (Haskell TestNet and MainNet) for dummies (unofficial):

https://cardano-node-installation.stakepool247.eu/

How To Build a Cardano Pool (unofficial): 

https://www.coincashew.com/coins/overview-ada/guide-how-to-build-a-haskell-stakepool-node#8-register-your-stake-address

Big Pey YouTube Tutorials (hats down most helpful videos):

https://www.youtube.com/channel/UC07M2zYAvMgzrIrCSeoRhNA

Cardano Blockchain Explorer: 

https://explorer.cardano.org/en

Stake Pool Explorer Websites:

https://pooltool.io/

https://adapools.org/

https://adastat.net/

Q: I have another question, can you help?

A: Absolutely, reach out to us via hello (at) cryptofay (dot) io and let's see what we can do. We are all young community and are constantly learning from one another. We get better together.

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He couldn't see himself doing it.