Staking strategies for optimal returns
We’ve probably all been in situations where financial advisors asked us about our investment strategy so they could better tailor their offerings to our needs. Usually people don’t like that kind of questions. After all they don’t seek financial advisor’s help just to be asked questions, do they!? What they want is to get answers and the best possible return on their investments (ROI / ROS for Returns on Staking). What they want is the sweetest raspberries they can get.
Well, if your mindset is like what we’ve just described you should probably change your mind and start considering other possibilities because raspberries grow on stems with thin and sharp thorns. Getting raspberries without the risk of getting scratched or getting punctured is impossible unless someone else picks them for you. Avoiding the risk comes with a price though. That means a lower ROS for you since you’ll be paying fees to those who pick the sweet-sour fruit for you. So, for us to be happy with the rewards on our ada we need a staking strategy. Before we can define a staking strategy we need to ask ourselves a few questions.
It’s perfectly natural that each and everyone of us wants the best possible returns on our stake. However, like described in previous section, “the best possible ROS” is not the same for each of us. What we consider a great ROS it is not necessarily so great for you or for someone else. You might be asking yourself where the difference comes from. Well, the difference comes from trade-offs that you need to make when deciding what your staking strategy will be. Nobody is happy about trade-offs but let’s face it, there’s no free lunch in life. Once you accept this fact, trade-offs suddenly don’t look that bad and the rewards between 4% and 6% are not as bad as you thought, especially when you don’t have to go gather the raspberries yourself.
The picture shows that risk, effort and ROS are related. The point that we are trying to express with the cube is that with some effort and risk you could maybe get a bit better ROS. While it’s difficult to predict how things will play out on mainnet we can still base our assumptions on Shelley Incentivized Testnet (ITN).
What we consider a great ROS it is not necessarily so great for you or for someone else.
So, to help you formulate your staking strategy you can ask yourself three simple questions:
- How much risk do I want to take (risk of not getting rewards or getting lower rewards)
- How much effort (time) do I want to put in?
- What ROS is acceptable for me?
NOTE: Just to be clear, when we talk about risk here we don’t talk about losing your ada. Your ada is as safe as your passphrases. Staking is perfectly safe. We talk about risk of missing rewards due to a pool going offline or skipping its block producing slots for whatever reason.
Staking strategies are nothing special albeit the funny names we have given them. They are just ways of how people approached staking during the ITN. We don’t have success rates for these strategies but we feel they can still serve as a starting point when you find yourself asking what pool to delegate to. Based on the answers to the questions above you can see which of the strategies suites your needs better.
Riding block production trend strategy
This strategy is for active users who don’t mind putting in the effort and take a bit of risk for getting greater returns. Let’s see what it is all about.
During the ITN we created a twitter poll where we asked delegators about their staking strategies. You can see the response on the screenshot below.
As you can see, most people appreciate the lowest fees but almost 30% like to ride the block production trend. The sample from the poll is just 47 votes but it’s better than nothing. At least it’s a number we can work with.
We know that the number of slots that a pool gets elected for in an epoch is random but still within certain limits. We know so because the height of the stake is taken into account when slot election takes place. For example, in ITN a pool with 100 million ada would get assigned about 40 blocks per epoch but sometimes it could also be 30. Block trend riders follow those numbers and when they feel that a pool with 100 million ada is producing less than its average number of blocks they jump in, hoping (“guesstimating”) the pool will get a higher number of slots and thus minted blocks in the next two epochs (the time it takes to get rewards from new pool after switching). To some people this method seems a bit crazy since things are supposed to be random, but still, 30% of delegators do it.
How much can you get with this method? Like we said before, we really don’t have numbers but we think this is gambling. This approach will probably not be as popular on mainnet as it was on the ITN simply because the length of the epochs. On the ITN the epochs were 1 day long while on mainnet they will be 5 days long. While the principles remain the same regardless the epoch length, it will probably be less attractive because of the reduced period of getting the adrenaline fix.
- Presumably above average rewards
- Can be fun if you like to gamble
- Demands effort – You’ll need to follow a set of pools and actively switching the stake between them – time consuming
- Risk of getting lower than average rewards if not switching the pool in time
Die-hard fan strategy
As you could see from the screenshot of the twitter poll in the previous section, delegators usually base their decision on various factors when it comes to choosing a stake pool. They take into account nationality, content and price. We are pretty sure there are even more factors to be considered but unfortunately twitter polls are limited to four voting options only.
Die-hard fan strategy is usually taken by delegators who cheer for a particular pool operator rather than chasing the highest ROS. Whether they base their decision on a stake pools’ higher purpose/mission, stake pool operator’s nationality, superb technical expertise or just the personality cult he/she might be building on social networks it doesn’t really matter. Everyone has the right to their opinion. Actually, supporting pools that provide good content or contribute to the Cardano ecosystem in any other way is the right thing to do. The risk with very popular pools is they can get oversaturated. The saturation point on mainnet will be at about 207 million ada. If you don’t want to check your ada too often you better find a pool that is unlikely to reach the saturation point. Once a pool is saturated its rewards don’t increase with stake anymore and consequently rewards drop because they are divided among more delegators. Saturation point is there for a reason – to protect Cardano from becoming centralized. On ITN there were some saturated pools and many more pools near saturation point. It seemed everyone wanted to delegate to the pools whose owners had a lot of media exposure even if that meant lower ROS. Go figure.
- Your own satisfaction and good feeling about supporting a pool whose mission resonates with you
- Not much effort needed except for the occasional rewards check unless the pool is near the saturation point
- Probably a bit lower ROS (well known pools can afford a bit higher fees but you consciously accept that because you support the pool’s mission/idea)
- By delegating to one pool (or pool operator) only you risk getting no rewards in case the pool goes down due to malfunction or pool operator diminishing his pledge under the pledge amount declared
- Watch out for saturated pools
Lowest fees chaser strategy
If you don’t care about Cardano ecosystem and just want to fill your bags to sell them later at the first jump in price then this strategy could be right for you.
There are many pools out there lowering their fees (like 1 PCT pool from ITN). We perfectly understand that not every pool can compete by providing youtube content or some other form of content so their only way to compete is to go with lower fees. If a pool operator goes with lower fees on one pool it is still reasonable but starting a plethora of low fees pools is bad for Cardano ecosystem as it lowers decentralization and pushes good pool operators with reasonable fees out of the ecosystem. Thankfully this behavior won’t be possible in the future thanks to the pledge. However, the pledge influence will be really low at Shelley launch and since the pledge amount can be anything we can expect the behavior of certain operators on the ITN to continue on mainnet.
Cardano has built-in mechanism to avoid decentralization but Cardano is so much more than decentralization. IOHK has given us the chance to build a new financial system and really make a difference with global wealth distribution. As a delegator you have your vote. You’ll be able to influence the evolution of Cardano. Act responsibly and delegate wisely or we’ll all find ourselves back in the system that we have now.
- Higher ROS (due to lower pool’s fees)
- You are not really helping Cardano ecosystem to grow
Wise Cardano fan strategy
As a stake pool operators we should not write what we are about to write but our mission is beyond our fees. Our delegators will decide whether a our business mission deserves support or not. We are here for the long run.
The faster Cardano grows the the sooner you’ll be drinking mojitos on your favorite beach or get to whatever your dream is.
In our opinion wise Cardano fan strategy produces the best sinergy between delegators, stake pools and the whole Cardano ecosystem. With this approach you might not get the highest ROS but on the other hand you won’t need almost any effort and you’ll keep your risk for not getting any rewards really low. All you need to do is follow the steps and occasionally check your rewards:
- Create a few wallets. 5 or 6 would be a good number. More than that can be difficult to manage but certainly not impossible, especially if you are fond of Cardano.
- Make a list of pools with reasonable fees and pools belonging to pool operators whose aim is to contribute to the growth of the Cardano ecosystem. The faster Cardano grows the the sooner you’ll be drinking mojitos on your favorite beach or get to whatever your dream is.
- Delegate each wallet to one of the pools from the list
By delegating to many pools you support different pool operators and ensure your rewards keep pouring in even if one or more of your pools fail due to a malfunction caused by a hacker attack, hardware failure, an erupting volcano, old lady cutting the country’s optical cable with an axe or <put your favorite dister here>.
- avg ROS (can be even higher, depends on your pools selection)
- lower chance for not getting rewards in case of a stake pool failure
- support pool operators who provide value to Cardano ecosystem
- avg ROS
The aim of this blog post was to give you a few ideas on how to approach staking. We’ve shown you how you can approach staking and help Cardano ecosystem to grow and evolve into the most powerful and decentralized blockchain ever. Without giving up much you can still enjoy the sweetest raspberries with almost no effort at all.
We welcome you to delegate to our pool on mainnet. Remember, your stake is your vote. Stake wisely.