INITIAL POOL STAKE OFFERINGS IN CARDANO: a critical overview
To the projects and delegators
Above all else, this document aims to present the various models of Initial Stake Pool Offerings (ISPO’s) available presently, or in the past, in a fair and impartial way, to provide the Cardano community a broader perspective on the ISPO landscape, by roughly comparing and discussing the multiple approaches used thus far. The goal of this exercise is to offer tools that empower the delegators in their assessment of the different projects and to establish a suite of best practises that facilitate the fair and smooth running of future ISPO’s that protects both the interests of the projects and their delegators. This is in no way an attempt to pick winners and losers — I am invested in nearly all these projects.
It took over six months of closely following ISPO’s to put this together and ultimately for the benefit of the whole Cardano community. Please contribute. Funds raised will be used to buy an engagement ring. Wish me luck!
- 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.
- 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.
- I recently became an ambassador for Flickto, which is also running an ISPO.
What is an INITIAL STAKE POOL OFFERING (ISPO)?
ISPO’s are a relatively new method of raising funds for projects building in proof-of-stake blockchains, such as Cardano. Rapidly increasing in popularity, this method allows delegators to support specific projects and help to raise funds to accelerate project development. By staking to network pools associated to ISPO’s, delegators increase the chance of those pools to mint blocks and, consequently, increase the rewards that these pools earn from the Cardano protocol. In exchange for the support provided, ISPO participants are awarded project tokens, either for free (i.e., earning project tokens in addition to their ADA staking rewards) or by partially or fully exchanging their staking rewards for project tokens. This method allows delegators to safely get behind projects and accelerate their development in exchange for project tokens early on, without risking or locking their funds, courtesy of the Cardano proof-of-stake system. Another major advantage is that ISPO’s allow the participation of both small and large ADA holders on equal grounds, unlike other financial mechanisms that require investors to commit high values upfront, which typically discourages the participation of small holders.
How to compare different ISPO’s?
First, I would like to commend the work of a fellow internaut that collected information on ISPO’s in a Reddit thread. At the time I was already considering writing this article and seeing how it proved helpful to the Cardano community is what motivated me to start.
Within a short time there were several ISPO’s available to Cardano delegators and this brought up an important question, how can delegators somehow assess what is being offered to them? After all, as long as they have a choice between two projects, these tokens will come at a cost, even in free ISPO’s. Because staking to project A at a given time means that the delegator is not staking to project B at that time. This can be overcome by hedging — dividing the stake between the different projects. But this poses a new question. What if one project happens to be much more rewarding than the other? Then, hedging may not be the best option. The choice is further complicated by the many differences between the projects and their tokenomics.
Below I will explain the simple metric that I used to compare the different projects, the rationale behind it and its shortcomings. No, nothing here is perfect. Sorry. It should be easy to follow, but just in case, I used a metaphor that hopefully makes it accessible to everyone. In my experience there are two types that work best, sex or food metaphors. I chose food (boring, I know…), because let’s face it, you will find this on crypto communities in Twitter, Medium or Reddit — you’re a nerd not getting any. Even if I could explain this with a sex metaphor, which I can’t, you would probably not understand it anyway. Furthermore, considering recent tweets from Charles Hoskinson, I thought it would be easier to keep him interested if I used food. Hope he likes pies.
Percentage of total supply allocated for the ISPO
At first glance, it may be tempting to simply look at the tokenomics of the different projects and compare them using the percentage of total supply allocated to the ISPO’s, to determine which are most rewarding. However, this comparison would only be fair if all projects distributed tokens at the same rate and throughout similar timeframes, which is not the case. Therefore, the rate at which tokens are offered in the ISPO’s is arguably more important than the percentage of total supply allocated to the ISPO.
Imagine that you have two different people offering you a whole pie and you can only choose one or the other. The first person says that you can get half of the pie in one day and the second half in the following day, while the second person says that you can only get a thin slice of the pie every day for 24 days. Both people offered you the same pie, but at different rates, and I bet that everyone would prefer half of the pie instead of a thin slice per day.
The percentage of total supply allocated to the ISPO informs on just how much of the project is up for grabs to the delegators, i.e., the percentage of the project that the team is willing to share with its community via the ISPO (Fig. 1). Nearly half of the projects (7) allocated 10–15%, a third of the projects (5) allocated less than 10%, and only a fifth of the projects (3) allocated 20% or more of their total supply to the ISPO. Flickto is a clear outlier in this regard, allocating 52% of FLICK total supply to the ISPO.
Percentage of total supply earned
Given the differences in total supply, a simple (very simple) way to speculate on how rewarding projects are relative to each other is to: 1) use a fixed amount to stake (e.g., 1k, 10k, 100k, 1M ADA), 2) calculate the rewards earned per epoch and 3) determine the percentage of total supply represented by those rewards. This metric is very, very simplistic and it doesn’t mean by any account that the projects with the highest reward ratios (i.e., those rewarding the highest percentages of total supply per epoch) are necessarily the most profitable. Nevertheless, this approach establishes a first baseline for comparison.
In an ideal world, a serious attempt at comparing profitability would need to consider more factors. Initial circulating supply can be a major driver of price and ignoring it is ill advised in the short-term. Additionally, one can argue that technical innovation (often difficult to evaluate), together with community support (as a proxy for project investment) constitute two other important factors to consider. Here, I focused on total supply rather than on initial circulating supply because: 1) it is harder to find credible information on initial circulating supply, and 2) I plan on being a long-term holder. Nevertheless, I considered more than just the percentage of total supply earned per epoch in the management of my personal stake. And if I was a financial advisor, which I am certainly not, I would probably advise you to do the same.
Imagine that you are a small business owner in a food festival looking to get some slices of pie to resell in your pastry shop, for profit of course. There are 10 or more stands selling some sort of pie and every 5 minutes you can only buy slices from one of them, but not the others. The pies seem the same size, but you can’t know for sure, and they are all cut in a different number of slices, some with incredibly thin slices and others with thicker slices. Each stand has a sign saying that customers may only purchase a maximum percentage of that pie during the whole day and the number of slices you can buy every 5 minutes differs from stand to stand. How would you choose where to buy?
One way to go about it is to maximize the amount of pie that you will take home. For that, you would determine which stands offer you the highest percentage of the total pie every 5 minutes and not the highest number of slices, because the size of the slices differs from stand to stand and would not be informative. At the end of the day, you just want to take as much of the total pie as possible, because you think that the more pie you have, the more profit you will make. (Percentage of total supply earned)
Things are rarely easy in life and this approach neglects a few important factors. Your method of comparison assumes that all pies exist in similar amounts, are equally good and equally popular, and these are all aspects that can affect the reselling price. Given that these are experimental pies being first offered for people to buy, the amount of each pie available is likely to have an important influence on the price of the slices that you want to resell (Initial circulating supply). Not all chefs are equally creative, some make new and exquisite pies and others offer more traditional flavors, it is important to check the ingredients that make up for each pie and taste them to see how those flavor combinations work (Technical innovation). Finally, the number of customers queuing in line in each stand may also provide a clue on the demand for each of those pies (Community support).
This is about as much as I can deliver on “ISPO’s for foodies”. You get what you pay for… Deal with it!
Introduction to the projects
Having defined ISPO’s and explained the metric that I used to compare reward ratios in the different projects, as well as its flaws and assumptions, I will quickly go through the ISPO’s one by one. The goal is not to present the projects, their use cases or their innovations to the delegators. I provide links for that, and delegators can and should do their own research before joining any ISPO. The goal is to follow up on the procedures and methods adopted to overcome the challenges presented by ISPO’s as a financial tool, identifying good practices, as well as and less desirable ones, alerting to potential exploits and red flags of unethical behavior. Hopefully, these comments will be taken as constructive criticism, because that is the intent. My wish is to open the discussion on some of the procedures and provide food for thought, so that the community may come up with some sort of standards that protect both the projects and their delegators. Bear in mind that: 1) I didn’t participate in all ISPO’s; 2) I am not equally well informed about all of them; 3) the data may not be equally reliable in all cases. Below some of the general information about the different ISPO’s, which are addressed in order of appearance.
And now a deeper dive into each ISPO. For the sake of fairness, everything presented in each project’s dedicated section was reviewed directly by team members or community moderators. This was a very helpful exercise that greatly helped to clarify some of the talking points. The comments are mine and I am happy to inform you that for the most part the reviewers described them as fair and largely unbiased.
Because the post would simply be too large, these sections are provided in separate posts. Links below:
That was exhausting. Looking up details and double checking information on 15 ISPO’s scattered all over the place and presented in very different ways was excruciatingly painful. Take a moment to appreciate the dimension of what you just read, you ungrateful bastards.
Percentage of total supply earned per epoch — all ISPO’s
Now that we have looked at all ISPO’s individually, we can put all data together and see how they compare to each other in terms of the percentage of total supply earned per epoch. I will not include the bonuses, as the graphs would simply become too crowded, and that is also the reason why I separated ISPO’s with fixed and variable rewards. Remember that these values are calculated for a 1M ADA stake. It is an uncommon ADA volume, but the reason for that is to have it in an order of magnitude closer to that of the pools, which can be useful for other calculations. Nope, I am not secretly a whale, just a try hard. Everything presented here is equally valid whether your wallet has 10 or 10M ADA, only the order of magnitude differs.
When examining the graphs, please note that the Y-axis is on a log10 scale (Fig. 17). It is abundantly clear that the variation in the reward ratios of the different ISPO’s is quite large, with the percentage of total supply earned per epoch being as low as ca. 0.001 in some cases and as high as ca. 0.1 in others. This 100x difference is partly owed to the start of some of the ISPO’s with variable reward ratios that had unusually high values in the first epochs due to the low saturation of the pools. But the range still differs quite substantially (ca.50x) even when we eliminate this artefact. Nevertheless, there is some convergence in the reward ratios of the different ISPO’s, that for the most part varied within a narrower interval (0.001–0.004).
It’s not the goal of this overview, but I will dedicate a few lines to Flickto, in the quality of ambassador and believer in their mission. Flickto is an incubator seeking to decentralize the media industry and to empower content creators by facilitating production and distribution of their projects (e.g., films, short-films, series, documentaries). Striving for quality content, Flickto uses a team of experts to review submissions and pre-select promising projects that are then voted for production by FLICK holders. Besides opening up a new funding avenue for quality media projects, the model proposed by Flickto envisions a fair distribution of the revenue and generates passive income to FLICK holders.
As expected at this stage in Cardano development, the ISPO landscape is currently dominated by DEX’s and De-Fi, with only a few projects outside of this scope. Flickto is heavily oriented to the community, which is reflected in the percentage of total supply allocated to the ISPO (52%), and ranks among the projects offering the highest reward ratios, which provides a great opportunity for accumulation and diversification. Get some exposure and stake with Flickto [FLICK]. If you are staking in the few ISPO’s ending soon, consider Flickto when looking for a new home and or a partial delegation, so you don’t miss out on the long-term bonuses.
Staking rewards annualized percentage rate (APR)
Above I showed how the reward rates can differ substantially between the different ISPO’s, but how does that translate in terms of actual returns to the delegators? Are the ISPO’s with the highest reward ratios the most profitable? As I mentioned above that is not necessarily the case, since initial circulating supply, technical innovation and community support need to be taken into account as well. But more important than that is to understand that these projects are all at different development stages and have not been trading for the same amount of time, which greatly affects their valuation. Therefore, the goal of this section is to show how the APR from ADA staking rewards in the average pool (Regular) or in an exchange (“Inace”, because of reasons…) compares to that of staking to the different ISPO’s, and NOT an attempt at comparing the staking rewards APR in project A or B.
This section addresses valuation in a very direct manner, which makes it a very sensitive subject that is very easy to take out of context for all the reasons mentioned in the paragraph above or to be interpreted without due caution. As such, I decided to deliberately withhold information. I calculated the rewards APR for all ISPO’s with tokens trading currently, but after careful consideration I decided to only show two examples from the ISPO’s that have finished so far (Minswap and MELD). I simply don’t want degens like yourselves to take a valuation estimate from a single point in time to decide what is ”best”. That responsibility will not be on my shoulders.
Essentially what I did was to calculate the rewards generated over a year with 1M ADA staked in the ISPO’s, convert those rewards to ADA (15/02/2022) and examine how the ADA earned in ISPO’s compared to the ADA earned from staking in pools not participating in ISPO’s, for which I assumed a 4.5% APR. The results are very clear, the ADA staking rewards APR is much higher in either of the ISPO’s than in the average pool (ca. 17x) or in an exchange (ca.8x). Even though I am not showing you the values for other ISPO’s, a 4.5–10.4% APR from projects in their early stages doesn’t seem that hard to beat. If this is not incentive enough to take ADA from the exchanges and stake it natively in ISPO’s, I don’t what is!
Insights, recommendations, best practices and pitfalls to avoid
Hopefully, the content presented so far provides compelling arguments for delegators to participate in ISPOs. Despite the many differences in design and reward ratios in the various projects, ISPOs can greatly increase the returns on your ADA bag with little to no cost and, more importantly, without risk. That being said, it is very unlikely that all solutions presented are equally good. In my perspective, it is definitely worth going through them and identifying positive and negative aspects in an effort to attain basic standards that help to improve future designs to be more transparent and fair to their delegators.
This is the part in which I sit on my high horse and educate you (just threw up in my mouth). Not at all! My hope is that the issues raised provide a baseline for reflection and discussion on how ISPOs can provide a better experience for both projects and delegators. These will reflect my opinion on the matter, I am sure there will be others. Remember, I am no.ONE.
- 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.
As great as the ISPO model is in terms of the benefits that it provides to both the projects (accelerated development) and the delegators (early and cheap entry point), there are a few aspects that merit attention. The increasing number of ISPO’s and the complex models arising in the most recent versions show that this financial tool is here to stay. Perhaps it is time to start thinking on how they fit in a proof-of-stake blockchain in the long-term, what could be the consequences for the protocol, what is the legal framework, what are the fragilities and vulnerabilities that can be exploited. Because, people are people and we can expect bad actors in Cardano just like in the other blockchains. Yet, somehow, ISPO’s seem to be flying under the radar rather unchecked, or are they?
- 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.
It is my sincere hope that this critical overview helps the Cardano community to better navigate the ocean of ISPO’s at their disposal, and that it contributes to the improvement of ISPO designs, and ultimately to their success. Within the grasp of anyone staking natively, this financial tool provides a great opportunity for delegators and projects in the Cardano space. Like everything in crypto, there are risks and concerns that should be addressed soon rather than later, but my experience has been quite positive so far.
Because I don’t want to end on a heavy note, I will make a call back to the start of this overview. I mentioned that I was going to use a food metaphor to explain how I compared ISPO rewards, instead of a sex metaphor that nobody would understand. I bet you loved those pies… but can you be sure that it wasn’t a sex metaphor all along? Trust nobody. Rugged!
It took over six months of closely following ISPO’s to put this together and ultimately for the benefit of the whole Cardano community. Please contribute. Funds raised will be used to buy an engagement ring. Wish me luck!