Thread by @AllenWu29331265

Alright #Cardano community, here we go - a simple change that will solve the pledge problem completely with no change to a0 required. 1/n

2/n Terminology that I will use:

Flat MinFee = the currently 340 MinFee that SPOs have voted to lower to 170, this is the amount of ADA reward every block-producing epoch that the SPO receives before distributing rewards to delegators.

3/n SPO-set Fee% = usually 0-3%, and 99% for private pools or ISPOs, which is the reward taken by the SPOs from the pool’s total reward.
MinFee% = currently 0%, but there’s been some talk of raising it if flat MinFee is to eventually go to zero (big if).

4/n Leverage ( L) = a pool’s live stake last epoch divided by their pledge (35 mil live stake and 1 million pledge -> L = 35)

5/n Proposed change: Have MinFee% (currently 0%) be an algorithmic parameter for each pool dependent on their leverage L last epoch. Each SPO sets their SPO-set Fee%. Every epoch, the highest of SPO-set Fee% and MinFee% is applied to the pool.

6/n MinFee% = 0.5%*ROUNDDOWN(L-20)/10
Max MinFee% = 20%
Flat MinFee = 0

With leverage = 30, MinFee% = 0.5%. L = 40, MinFee% = 1%. L = 100, MinFee% = 4%.

7/n Example1: Pool with SPO-set fee% = 1%, 500k pledge and 35 mil live stake would have a MinFee% of 2.5%. When the same pool’s live stake drops to 25 mil, MinFee% drops to 1.5%. When live stake drops to 15 mil, MinFee% drops to 0.5% (so fee% becomes the SPO-set fee% of 1%).

8/n Example2:
Pool with SPO-set fee% = 0%, 0 pledge and 35 mil live stake last epoch would have a MinFee% of 20%. When the SPO ups their pledge to 200k, next epoch their MinFee% drops to 7.5%. When their live stake drops to 10 mil, MinFee% drops to 1.5%.

9/n Example3:
Pool with SPO-set fee% = 5%, 100k pledge and 10 mil live stake last epoch would have a MinFee% of 4%. Since SPO-set fee% > MinFee%, their fee% next epoch is 5%.

10/n What does this accomplish?

To answer this question, we have to first state the types of actors we wish to reward. Small SPOs with good pledge relative to stake? Yes. Big pools with high pledge? Yes. Multi-pools with high pledge? Yes-ish, if they don’t split when unsaturated

11/n But that’s mostly due to milking 340 flat MinFee. Small SPOs with minimal pledge who use the pool to fund their work that helps the community? Yes. Big pools with low or no pledge who don’t contribute? No. MPOs with low or no pledge and don’t contribute? Big no.

12/n Removing flat MinFee without other adjustments could lead to pool-spamming sybil attacks. This is because the effects of pledge are basically negligible. We want pledge to make a pool competitive (competitive = give more rewards to delegators, which

13/n incentivizes them to delegate). The problem with doing so directly (like applying leverage to saturation) is that it punishes small SPOs who contribute who do not have the capital to put up sufficient pledge. Imagine if, as a delegator, you have to constantly monitor

14/n if the pool is above a certain leverage or have your rewards tail off hard. That’s a job and a half, and most people would just say f-it I can’t be bothered imma just delegate to a bigger pool. Small SPOs would die off in droves.

15/n With my version of applying leverage, in such a situation the small pool would just have MinFee% go up. To put this into context, even a MinFee% of 20% would only lower your staking rewards from 3.5% per year to 2.8%.

16/n And this loss in rewards isn’t to the protocol, it’s given to the SPO. If you’re delegating to a small SPO to support what they do, this is hardly an inconvenience so you don’t need to constantly monitor the situation.

17/n So what does this change do to no pledge 0% fee MPOs who milk flat MinFee? For one, without flat MinFee they’re milking a dry cow. If they up the SPO-set Fee%, people leave. So they have no choice but to pledge up or dry up.

18/n MPOs who already put up healthy amounts of pledge will be fine. They can set whatever fee% keeps them both profitable and competitive.

19/n tl;dr no more flat minfee. Minimum fee percentage adjusts to leverage (how much stake your pool holds vs how much pledge you have). Pledge too low for the amount of delegation you service = fee% goes up, therefore making delegation leave unless they are there to

20/n donate to your cause (purpose-based pools). Zero pledge pools get yeeted unless they put up some pledge.

21/n Problem: Whale attack on small SPO with low pledge by moving millions in delegation in one epoch, then moving it away the next (upping MinFee% significantly to scare off delegators while not having to pay it themselves).

22/22 Solution: If a pool's pledge did not change last epoch, limit the amount that MinFee% can increase in a single epoch to 1%. Makes the attack no longer viable while not exploitable because it requires not changing pledge.