Kiriakos Krastillis's Blog

Cardano Staking Myth #1: ROI/ROS/ROA

Whats my ROS/ROI/ROA?

5.856%.

Return on Stake (ROS), Return on Investment (ROI), Return on Ada (ROA). There are a lot of terms flying around the Cardanosphere right now that all try to describe the same thing: "How much interest will I get from my staked Ada in a year?". For the sake of simplicity I will go with the term ROI here, since that also is a well understood term in the finance industry.

There is a misconception that pool parameters seriously affect the returns on delegated stake. What we have seen is that this only happens in theory. This article will show why.

Since all pools set their fixed fee somewhere around the minimum 340 Ada, the only parameter that can affect your returns is the pool’s margin aka the variable fee. Practice shows that the large majority of serious pools set a margin around 2% to 4%.

The Cardano Protocol itself defines the intended pool return of 5% to 6% for a saturated pool. The protocol is also set up in a way that forces the network to reach a saturated equilibrium. This means that all pools will get saturated in the long term. So let’s see what happens to that 6% saturated pool ROI once we apply the pool operators cut (fixed and variable fees).

Fixed Fee: For a saturated pool the fixed fee becomes negligible.
A saturated pool will produce upwards of 100.000 Ada per epoch so removing 300 or 400 Ada is a drop of 0.3% or 0.4%.
Your ideal ROI after fixed fees is 5.976%.
Variable Fee: For the variable fee things get more interesting, here we actually can have a bit of variation. Not significant but variation still.
Lets assume that a pool, like SPEC, takes 2% variable fee. The variable fee is subtracted from the ROI calculated in 1. So 2% of 5.976% is 0.120%.
If we subtract that from the ROI we get 5.856%. Let’s apply that to a real world example to get a feel for it. 1,000,000 Ada + 1 year with SPEC = 1,058,560 Ada
What would happen if the pool would be using a 4% variable fee? Well 4% of 5.976% is 0.240%. Your ROI now is somewhere around 5.736%. What does that mean for a million Ada?
1,000,000 Ada + 1 year with SPEC = 1,057,360 Ada

Summing up

So we have shown that a 2% pool will ideally return 5.856% and a 4% pool 5.736%.

Here is the question now, continuing our 1 million Ada example, you just made 57000Ada, almost 6k$ at current prices, do you really care that much about the 100$ the pool made? We can debate that but pretty much everybody will agree that it is change compared to what you do get. If you also consider that pools like SPEC actually use that income to not only secure the financial network but also have an impact socially and further projects that make Cardano more valuable I would say you get a great deal for it.

Of course all these calculations make two very important assumptions:

The pool really manages to produce all of its assigned blocks.
The pool is saturated.

Concerning the Spectrum Pool I can commit to point 1. SPEC is run professionally and set up to produce each and every one of the blocks it gets assigned. Our relays are strategically positioned to ensure fast block propagation. Our chances to produce each and every block we get assigned are really high! But to get saturated we need you, dear Ada holder! So delegate to SPEC and help us get saturated!

Cheers, K