INITIAL POOL STAKE OFFERINGS IN CARDANO: a critical overview

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  1. This is not financial advice. I have no training whatsoever in the finance sector and I am in no way or capacity a licensed financial advisor.
  2. Despite my attempts to obtain data as accurate as possible, the estimates presented and discussed here are inherently flawed, as I have no more access to the projects than any other delegator. The data are collected from the available information in their webpages and whitepapers, derived from estimates based on my personal rewards estimates (on occasion influenced by personal actions and conditions), or based on snapshots likely to differ from those of the project teams.
  3. I recently became an ambassador for Flickto, which is also running an ISPO.

What is an INITIAL STAKE POOL OFFERING (ISPO)?

How to compare different ISPO’s?

Percentage of total supply allocated for the ISPO

Figure 1. Percentage of total supply allocated to the ISPO’s.

Percentage of total supply earned

Introduction to the projects

Table 1. List of the projects running ISPO’s in Cardano, presently or in the past, including a brief description, variable fees and the rewards scheme. Finished ISPO’s are highlighted in grey. This list excludes a multitude of projects associated with Drip Dropz (future article?).

Percentage of total supply earned per epoch — all ISPO’s

Figure 17. Percentage of total supply earned per epoch with 1M ADA staked. The panels show the baseline values for ISPO’s with fixed reward schemes (upper panel) and for ISPO’s with variable reward schemes (lower panel). Bonuses are not shown.

Shameless shilling

Staking rewards annualized percentage rate (APR)

Figure 18. ADA staking rewards (APR) in the ISPO’s organised by Minswap (MIN) and MELD Labs (MELD), the highest APR that I know off in an exchange (“Inace”), and the average APR in a native pool (Regular).

Insights, recommendations, best practices and pitfalls to avoid

  • Marketing: a strong marketing campaign close to the start of the ISPO is crucial to guide delegators, providing clear information on all relevant dates, times and steps to be taken; to attract stake from delegators looking to qualify for long-term bonuses; and to reduce the disparities in the rewards often seen in the first epochs of ISPO’s with variable reward schemes.
  • Information presentation: concentrate information as much as possible. Delegators should have easy access to what is being offered without having to go to your telegram or discord channels. Most projects have an ISPO dedicated section, all information should be there or, at the very least, the links to their platform of choice. Don’t scatter information throughout a multitude of posts and don’t bury important details such as bonuses in the FAQ’s.
  • Starting dates: everyone should be on the same page. Rewarding early supporters who delegated to the pool before the ISPO was officially announced may seem generous, but is far from ideal. On one hand, this practice may be exploited by delegators with privileged information and, on the other hand, it rewards delegators for acting blindly.
  • Reward ratios: be crystal clear in the formulation of the rewards ratios. It is tempting for projects to state it as “the number of tokens earned per ADA forfeited in benefit of the ISPO”. Avoid this at all costs. This formulation is easy to misinterpret and it’s not fair to put the onus of pool performance on the delegators. Do your calculations and state it as “the number of tokens earned per ADA delegated per epoch”.
  • Variable rewards vs Fixed rewards: Fixed rewards are undoubtedly easier to the delegator, but the ISPO becomes harder to manage for the project team, since it will be the total ADA staked that will determine how long the ISPO will last. Conversely in a fixed rewards model, the team controls the speed at which the rewards are distributed, but it is harder for the delegators to determine what their rewards will be. The inclusion of a parameter that prevents rewards from dropping below a predefined threshold could be an interesting addition.
  • Rewards calculator/dashboard: have them functional from the very first epoch. Being able to confirm that rewards are what they should be is not a luxury, it’s a legitimate right, especially if ADA staking rewards are being exchanged for the ISPO’s tokens. Provide an epoch breakdown that shows the stake being considered and the estimated rewards, rather than total stake and total rewards accrued. Improve transparency by providing the full list of staking addresses (cropped for safety) and their rewards. No ISPO has done this, but I would like to see the ADA cost of the tokens and per epoch, because ADA staking rewards have an immediate dollar value that varies through time.
  • Snapshots: be transparent, detail the procedure and avoid changing it throughout the ISPO. Delegators should have a pretty decent idea of when snapshots are taken, so they can manage their delegation efficiently.
  • Bonuses: most projects offer bonuses up to 25%. I believe this is sensible to a degree and that it does not seriously impair the fairness of the token distribution in the ISPO’s, i.e., the tokens earned per ADA delegated with or without bonuses. However, larger bonuses may have a more serious impact on the fairness of token distribution, especially when they come as a truck-sized cherry on top of a miniature pastry. Be extra careful with bonuses in the first epochs, as this is typically a period with rapid growth in delegation, which may cause or amplify disparities and impact the fairness of token distribution.
  • Lotteries: they definitely add a bit of randomness to the system, but should be fine tuned. The two current models allocate 10% of the tokens distributed per epoch to the lottery, which may be a bit excessive since it hurts the fairness of the distribution relative to the staking effort. Allocating 5% of the tokens distributed per epoch could be more sensible. In any case, a dynamic system in which the number of lottery winners increases with pool saturation seems a good idea.
  • Pool selection: when projects use community pools, the selection criteria should be sensible in terms of commitment and the selection method (random selection or voting) should be stated clearly. A note on voting. Preference is context-dependent and projects should consider the ramifications of this carefully. A fully transparent system in which the results are known during the voting and in which votes can be recast leads to a conditioned choice. This does not measure preference anymore, because choice becomes dependent on the perceived likelihood of success. Very different things.
  • Duration: I don’t think there is a right answer for this. However, when it comes to projects mobilizing large amounts of stake, to the extent that they increase blockchain centralization, shorter time frames may be preferable.
  • Token vesting: the larger a project is and the lower the percentage of total supply allocated to the ISPO, the more protected the project will be from large price variation owing to the actions of a few large holders (aka whales). I believe this is the reason why a few projects have opted for no vesting periods or for rather small ones. But as projects get smaller, they are increasingly more prone to whale behavior. A whale staking 1M ADA in an ISPO with 1B ADA in total delegation has arguably less power than in a project with 10M ADA in total delegation. The key is to be sensible and to consider projects on a case by case basis. My position is that vesting is probably useful in smaller projects and that using thresholds best protects against large holders. Rather than vesting an equal percentage of the rewards to all delegators, projects can opt to divide the vested supply equally through all delegators up to a certain threshold. Some will become fully vested and others won’t, but all have similar amounts of tokens in hands. The next batch of token supply can then be divided by the remaining delegators in a similar process, until all delegators are fully vested.
  • Asking more: it is my impression that delegators are not asking nearly as much as they should. Because ISPO’s can be highly profitable, many seem happy to blindly agree with everything without questioning procedures or thinking twice about their impact. Delegators seem to be way too trusting, in what should be a trustless system.

Concerns

  • Network centralization: it is painstakingly obvious that ISPO’s are contributing towards network centralization. With the exception of mission driven pools, why would delegators stake natively in regular pools, if they can stake to ISPO’s and greatly increase their revenue? Some projects have included community pools in an attempt to minimize the centralization effect, but owing to the diversity of the legal systems regulating the projects in their home countries, this may not always be a solution. To better tackle this issue, we need to fully understand which stake is being mobilized to the ISPO’s. It is my impression that a very significant portion is coming from delegators already staking natively. Single pool operators and ISPO’s seem to be fighting for stake, while an incredibly large portion of the ADA in circulation is still sitting in the exchanges. Governance is clearly and understandably being neglected in favor of smart contract functionalities and scalability, but decentralization cannot be left on the shoulders of the delegators labelled as “civic duty”. IOG needs to step up and address the issue head on, there is only so much we can do. In the meantime, I believe that the most efficient way for ISPO’s and community pools to coexist is to target the stake sitting in the exchanges, in a coordinated effort to inform and help ADA holders in their transition to stake natively. ISPO’s have dedicated marketing teams that could be of great assistance in this task.
  • Legal framework and accountability: delegators are largely unprotected and dependent on the good-will of the projects. ISPO’s are indeed a great financial tool available to Cardano delegators staking natively, but the power of the delegators is quite limited. With no more direct consequences than community backlash, projects can simply decide to change ISPO rules at any stage without real consequences, because after all it is ISPO’s are probably nothing more than an informal agreement. The only power delegators truly have is to take away their support from the projects. Don’t take me wrong, everyone should be aware of the risks and do their own research. The state of things is somewhat fair in free ISPO’s, because whatever happens there is no damage to the delegators. However, in ISPO’s where ADA staking rewards are exchanged for project tokens, things are suddenly not so simple anymore. Delegators may incur losses owing to bad behavior or negligence. So far, the few issues that occurred had prompt and fair resolutions, but what protects delegators if teams decide to behave differently? I don’t have a solution for this and I don’t know how ISPO’s can fit in legal frameworks, but it is time to start thinking about it, at the very least for ISPO’s taking ADA staking rewards.
  • Selfing: in Biology this refers to an extreme form of inbreeding in which hermaphroditic organisms self-fertilize. This relates to ISPO’s in two slightly different ways: 1) ADA funds from a project being staked in its own ISPO; and 2) personal ADA funds from team members being staked in the ISPO offered by their own project. Suddenly we are stepping on thin ice. Besides being ethically questionable, selfing behavior in ISPO’s, through the use of project or personal funds, leads to a greater share of the project tokens being held by the team, defrauding the project tokenomics. In essence, the team ends up with a larger share of the project than what has been specified in the whitepaper. Selfing is especially perverse if team members take advantage of privileged non-public information in self benefit (insider trading). Potential red flags include rewards to early supporters delegating before the official start of the ISPO, bonuses and surprise bonuses to early supporters. Don’t take me wrong, I have nothing against rewarding early supporters, as long as the bonuses are properly announced and disclosed with transparency, applying to everyone from the official start of the ISPO. Under different conditions there is potential for abuse. Selfing is likely occurring to some extent. Even though I have no reason to believe that it might be a serious problem, I also don’t have the means to determine the severity of this behavior. I encourage project teams to err on the side of caution and avoid this practice, and those in the community with the capacity to investigate this behavior to do so.

Final Remarks

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