A background on governance
Cardano Foundation recently announced a testing of voting on the Cardano mainnet after a successful testnet voting period. On the testnet called Pre-Production, most pools voted they were dissatisfied with the current protocol parameters (including Ada North Pool Pre-Production pool that runs on a rock pi.)
The mainnet question is the parameter for an optimal number of staking pools for the protocol influenced by the so-called K-parameter that sets a limit on the pool size of an individual pool. This is also related to the second question, the cost each pool will take as a minimum during an epoch of validation. The so-called minimum fee is currently 340 ADA per epoch.
Cardano Foundation has encouraged the testing of voting mechanisms. We are already seeing exciting things happening, like a pool offering its delegator to message what they want the pool owner to vote on their behalf. The background is the Cardano Improvement Proposal or CIP - 1694, which you can read more about in this NBX article. In short, the plan is for the delegation of voting power to direct representatives and to have an additional type of staking delegation method separate from the pool validation delegation. The current experiment does not implement the direct representative; instead, it lets the staking pool vote on behalf of the delegators. However, it is still valuable for taking the first steps in the community toward this exciting era of governance on Cardano.
Should NBX and staking as a service participate in voting?
NBX owns the pool Ada North Pool. As validators of the network, we are conscious of our role in the ecosystem and want to join in on this governance journey with the rest of the community when we see we should and can do so. One of our guiding lights is we want to ensure we are contributing to the safety of the protocol as this has potential implications for the long-term prospect of Cardano; thus, in particular, we will consider participating when votes affect the protocols in ways that can affect the safety of the protocol. We look forward to helping evolve the discussion on if and when exchanges should participate in voting.
In short - In the spirit of experimentation and for the sake of taking some first steps for governance, we have chosen to participate in this governance event. All our delegators have the potential to unstake, and they can delegate to other pools if they would like to by either transferring to an owned wallet and then redelegate or, as a majority of our delegators already have their own wallet accounts, they can just skip right to redelegation if they so would like to. We also welcome any efforts by exchanges to create some ethical frameworks on voting behavior in the Cardano ecosystem.
Some dilemmas we have identified for this voting round
One dilemma (and we use the word here to describe difficult choices not choices that are equally undesirable) is an identified effect of the proposal of increasing the K parameter from 500 to 1000. In short, this means that each pool will be saturated faster and incentivize more staking pools. However, doing so also creates more pools that should all be able to propagate blocks efficiently, creating potential challenges when scaling throughput on the base layer of Cardano. It also creates demand for more validators with sufficient setups to be efficient block propagators now and in the future. As historical data has shown, the demands of the blockchain in terms of resources required have increased as network activity has increased and the ledger has grown.
Of course, there are workarounds to throughput that evolves other methods than the base layer of Caradano, such as layer two isomorphic state channels. Still, you must also be mindful of Cardano’s layer one capacity and possibility. Another problem is that many pool operators with more Ada delegated than the saturation limit are likely just to set up multiple pools. In reality, decentralization parameters such as geographical distribution, various internet infrastructures used, operation systems used, and different operators could be less affected than what the K parameter would suggest initially. A note here is that work is being done on an industry standard for a decentralization index.
Then we have the dilemma of halving the minimum fee of 340 Ada per epoch to 170 per epoch. In short, this should make smaller pools more competitive on the return they can offer if they want to be as competitive on pricing as possible. However, the actual return of a pool depends not only on this factor but, for example, on the pledge influence factor as well. A complete formula can be found on the cardano.org website, and we at NBX also wrote about this. One could argue that a lower minimum fee could risk a race to the bottom for fees to the validators where the overall network suffers if the rewards are not sufficient to incentivize a well-run validation service such as, for example, ensuring proper time synchronization, upgrades in due time for the network, participating in testnets and safe and professional roll outs of new features such as scaling solutions on top of the regular validation service.
Our planned voting - K = 1000
Overall the parameter changes proposed are gradual and a compromise between many dilemmas - more than what was presented in this article. By increasing K to 1000, there is an opportunity for a more decentralized protocol with ample room to grow its throughput on its base layer and other scaling solutions. This all relates to the question of when a blockchain is decentralized enough. In general, the more diverse the validator set is, the safer the protocol is, and an increase in decentralization still seems within a reasonable amount for the tasks the Cardano blockchain has set for itself to bring about positive global change - suggesting global participation in the set of validators as well. The protocol itself has enough headroom regarding propagation (currently, anything within 5 seconds is encouraged) as our data shows that we are well within these propagation times for almost all blocks on the network, at least on our validators. Finally, the network has in the past successfully increased from 150 to 500 validators in epoch 234, with the numbers of validators far above the K-parameter suggesting many available pool operators match this increase in the K-parameter. For these and other reasons, we will vote for an increase in the K parameter to 1000.
Our planned voting - Minimum fee of 170 Ada
We believe that staking pool operators have other tools to adjust their collected fees, not only minimum fees. Hence, safety mechanisms are also in place for the market to form some form of equilibrium, not only from the minimum fee alone. Arguably more significant actors have an advantage here by being able to offer value-added services other than taking a minimum fee and can attract a higher delegation to spread the minimum fee across. However, we also believe that there are mechanisms for other pool operators to be competitive as well, such as an increase in pledge or setting the % fee taken on all rewards and different future abilities being researched, such as collective staking pool protocols. The tipping point for us is that this still gives safety to the protocol by incentivizing skilled pool operators while lowering the overall cost for the delegators. If we increased K to 1000 pools while still having a 340 ada minimum fee, the pool operators would take a more significant portion of the rewards. Having incentivized and active delegators is essential for the protocol's safety, and because of this, we will vote for a minimum fee of 170 ADA to keep the cost the same for delegators.
Why do we not plan not choose to vote to abstain from voting or to say none of the above?
As an exchange, the simplest form of voting would be to abstain and let other parts of the ecosystem decide the future of Cardano. However, exchanges are also a part of the ecosystem and have an interest that Cardano thrives and grows as they have often spent significant resources to offer Cardano to its customers. There are also degrees to how exchanges are involved in staking pool operations; Ada North Pool is an excellent example, with a large number of delegators being part of the pool long before NBX acquired the pool. NBX believes it is in all of the Cardano ecosystem's interest that we also figure out reasonable solutions for exchange voting. A vote to abstain would mean we would be less active in this debate. With that said, we will be mindful of our role in the ecosystem and welcome discussion on creating good frameworks for exchange voting in the future. In short, we are voting this time because it is a good experiment, and we hope this sparks discussions that will further governance on Cardano.
When it comes to voting, none of the above, we have a pragmatic approach where we are aware of how many voting methods could have been used. Sometimes, you have to be brave enough to start testing and iterate. Cardano has a long history of a slow and steady approach, with iterations and testnets paving the way for better and better services. A future for Cardano will likely be in how it creates platform agnostic tooling and different voting methods depending on what suits the topic being voted on. For example, imagine voting background context information available as NFTs and able to be fetched by any blockchain client during the voting process. We are excited to contribute in our way and to be part of that conversation.
We end this article with a quote from Voltaire:
“A minister of state is excusable for the harm he does when the helm of government has forced his hand in a storm; but in the calm he is guilty of all the good he does not do.” (from The Age of Louis XIV)
While we are just one cog of the Cardano ecosystem - we think that by actively voting in Cardano governance, we can contribute to the discussion and be a positive actor in the space.