Thread by @TobiasIlskov

When discussing Cardano parameters, most of us are familiar with k and minpool fee by now

but have you heard of

"a0" ?

This parameter governs how an SPO's locked pledge (their personal commitment) affects the reward rate they and their delegators earn.

Let's dig in! 🧵

a0 is a variable in Cardano's staking reward equation

which can be any number between 0 - ♾️

and defines the degree to which an SPO's pledged stake affects the amount of rewards their pool earns with each produced block.

For example, if a0 were high, you might see:

A saturated pool with 50k ADA pledged by the SPO earn 2.5% ROI
&
Another saturated pool with 1M ADA pledged by the SPO earn 3.5% ROI

Both produce roughly the same # of blocks, but the protocol pays the pool with high pledge more

On this graph,

the X-axis = stake pool pledge / staked ADA in the system
&
the Y-axis reflects rewards per block

As you see, the higher the pledge, the more the pool earns per block.

As a0 increases, the slope of this line Increases, magnifying the effect of pledge on rewards.

From I understand, a0 is currently around 0.3, which doesn't impact rewards very much

So, what effect does a0 have on stake distribution? Should we raise it?

Here are a few important points to consider:

1) Raising a0 incentivizes SPOs to increase their pledge, which increases their personal stake and discourages bad behavior. This is good for Cardano's security

2) A high a0 would incentivize MPOs with several unsaturated pools to consolidate into fewer, more saturated pools with higher pledge.

However, a0 would need to be raised A LOT to outweigh the extra minpool fee revenue MPOs get from several unsaturated pools.

3) A high a0 makes it difficult for pools with no/little pledge to compete in the SPO market. This greatly increases Cardano's resilience against Sybil attacks, and could possibly take the role that the minpool fee currently serves in Cardano's security.

4) The major drawback to a high a0 is that it creates a rich-get-richer quicker situation,

where poor SPOs can never grow their way out of a low % ROI by attracting delegation

Right now, new SPOs only offer lower % ROIs until they make enough blocks to dilute the minpool fee

With a high a0, it wouldn't matter if a stake pool was saturated, they would always have an ROI disadvantage without a high pledge,

which some very good SPOs can't afford

turning stake pool operation into a game for the already rich

So what do I think of a0?

While it may certainly be a useful tool, I'd be very careful with it

Inclusive accountability is part of Cardano's core ethos, which imo a high a0 would damage. ANYONE should be able to start and run a competitive stake pool if they put in the work.

That's it!

I know I have a strong opinion on this one,

so make sure to let me know your thoughts or any important points I missed.

Cheers! 🥂

#Cardano