Attention all Cardano stake delegators — important change coming on December 1st.
IOHK has announced that the staking k-parameter will be changing to 500 on December 6th. In this article, we will explain the effect on stake pools and stake delegators and explore in more detail what it means for the network.
Let’s start with a summary of the actions needed from all stake delegators, please read at least the following 3 paragraphs if you own ADA.
The size of k-parameter directly affects the saturation level of stake pools. Saturation level represents the upper limit of the desired stake delegated to a pool. Any stake delegated to a pool above the saturation level will not produce any rewards and therefore decrease rewards of the whole pool. We will describe later in the article how this is calculated but for now, it is important to know that until now the saturation level was around 210 million ADA but will be lowered to 64 million in the epoch that is starting on 6th December 2020. In order to preserve your staking gains, make sure that the Live Stake of the pool that you are delegating to is below (or at least not much over) 64 million ADA before 21:44 UTC on 1st December 2020. (Why 1st December if the change is taking place on 6th December? Because your delegation change will take 1 epoch to kick in).
In order to promote this change to our users, we started to notify users who are delegating to pools that have currently more than 64 million ADA delegated to them. We are also showing the saturation % in your current pool details. Currently, all our main AdaLite pools ADLT, ADLT1 and ADLT2 are oversaturated. If you are delegating to these pools, please consider re-delegating immediately. We have set up new pools for this purpose (ADLT4 and ADLT5) and will be setting up more if necessary. If you have a significant amount of ADA (5 mil+), feel free to contact us for consultancy. If you, for some reason, don’t want to delegate with us, we recommend choosing one of the stake pools that are run by people who are contributing to the Cardano ecosystem (listed on this page).
Additionally, in order to support this change, we are expediting the delivery of some new AdaLite features. We will be releasing multi-account support allowing delegations to multiple pools from a single wallet very soon. We will also provide a user interface for stake pool owners to delegate stake pool pledge from HW wallets immediately after these features will be released in new firmware update by Trezor and Ledger (early next month).
If you are interested to find out more about k- parameter and how it affects Cardano, please carry on reading, if you think you know enough, go to check the saturation status of the pool you are delegating to.
k as a parameter is a sort of a “soft-cap” on the maximum pool size in Cardano ecosystem. The staking reward mechanism is designed so that, at the equilibrium (assuming rational participants and no external factors), the stakeholders’ best response behaviour converges to k pools of equal size delivering the same level of rewards per unit of stake to their delegates. IOHK addressed why increasing this number is important. They want the rewards-sharing mechanism of Cardano to reward people fairly for supporting the platform in a sustainable way, not as a short-term windfall. Many economic systems have a tendency towards consolidation and a smaller number of strong players. On the other hand, blockchains can only be successful when control is decentralized. One way to discourage a trend towards a few large pools that collectively control the system is to introduce a counter-incentive to the pool’s growth. As soon as stake delegation to a single pool increases above a threshold, the rewards automatically diminish, encouraging ADA holders delegating to that pool to find a new home in order to improve their rewards.
The mechanism by which IOHK decided to control the desired number of pools is by introducing a saturation level of pools. Once a pool reaches the point of saturation, it will offer diminishing rewards. The saturation level is calculated as (total ADA in circulation) / k (desired number of pools). Shelley mainnet started with k=150 (this sets pool saturation to around 210 mil. ADA). This was a very conservative increase from the ITN (Incentivized Test-Net) era (k=100), intended to make the environment transition from ITN to mainnet as smooth as possible. IOHK believes that the k-parameter is not amenable to small, gradual increases (unlike, for example, the d-parameter, which lends itself to a gradual reduction). Each increase in k requires pools and delegators to take action. For pool operators, this means a careful adjustment of their parameters and in particular their margin; for delegators, it means choosing new pools to delegate their ADA to, especially if their current choice becomes oversaturated. Therefore, according to IOHK, the best strategy for an upwards adjustment of k is to move in larger, less frequent increments — and to move it as far and as fast as practical network dynamics and economics will allow. We disagree as we understand the dynamics of the majority of delegators but we are not in charge.
IOHK plans to implement the k change in a staged manner. The first change is the aforementioned switch to k=500 at epoch 234 (21:44 UTC Sunday, December 6, 2020). This move will push stake pool saturation to around 64 mil. ADA. IOHK claims that delegators can redelegate at any point between now and the change, unfortunately, according to other findings, if the new k-parameter really becomes active in epoch 234, any delegation changes need to be done in epoch 232 or earlier (therefore on 1st December, 21:44 UTC the latest). IOHK encourages delegators to keep an eye on their favourite pools in the saturation meter a day or two before 6th December (we encourage you to do this before 1st December to be sure). If it shows significantly more than 64 million ADA at this point, you should certainly consider redelegating. To be clear, though, no one delegating to an over-saturated pool will lose any of their stake. It is simply that the percentage return on their stake will be reduced if they stay delegated to a saturated pool.
IOHK also stated, that after modelling the long-term viability of stake pools, they found that k-values of 1,000 were stable in the long term. As a result, their aim is to move to k=1,000 in March 2021. They also recognize the importance of economic factors that also strongly influence pool profitability and will continue to consult widely with the community on the plan. A number of opportunities should be presented (including community panels and seminars) for further discussion, while helping the community understand the changes better and contribute their perspectives.
While this will require some effort from the community, it is an essential step for the Cardano ecosystem to maximize its decentralization. As smart contracts and multi-currency support will be coming soon to Cardano, a high level of decentralization should be the jewel of the ecosystem, and a strong competitive advantage over other blockchains.
Based primarily on this IOHK article and other sources.