In the previous article on this series, we covered the requirements and steps for setting up a stake pool and getting it running on the mainnet. In this post, we’ll focus on the role of a stake pool operator, the challenges that accompany the task, and tips for becoming a successful stake pool operator.
Operating and Maintaining a Stake Pool
Inevitably, while running the stake pool we get to a point where it is of interest to get more information about the pool. Information about pools on the mainnet is accessible through different explorer tools. To access in-depth information from the mainnet about specific pool attributes its operations, you can use tools like cardano-node, cardano-db-sync, or cardano-graphql to access data on the Cardano blockchain. What do we gather?
This is a convenient way of running a product. Such a convention gives two things: it allows you to (a) perform pool operations and maintenance, and (b) start using stake pool operator tools.
If it is pool operations, it becomes a question of what you want to do: query the snapshot, query the leadership schedule, check the validity of KES keys, renew KES keys or operation certificate, withdraw rewards, or update to the Cardano-node and cardano-cli. On getting started with Guild Operators Tools, one arrives at a suite of tools and scripts that set up, manage, and monitor Cardano nodes. The tools range from GUI applications with just about any pool functionality to command-line interface monitoring and topology updates.
The technical tasks of operating and maintaining a stake pool are summarized as monitoring performance (block production, reward distribution, and more…), upgrading and maintaining node software, and ensuring uptime and security. For large stake pools, there is a guide on managing risks and handling the complexity of maintaining significant stakes. So, if there are non-technical aspects to it, how would that be the end of it? It is also your responsibility to handle delegator communication and incentives.
Ever since the role of staking ADA in enhancing the Cardano network and the benefits of running a stake pool were explained, it stands to reason that this is a lucrative venture. Did the opportunity come without challenges? Or, as we say these days, is it that we are blind to the troubles of running a stake pool? When stake pools debuted on Cardano, it was a challenge to the public, and still is, in a language they could understand if they can’t access and inform themselves of the expected hurdles.
Challenges of Running a Stake Pool
As expected, there are challenges and risks involved in stake pool operations. One of the challenges is high competition among pools, which is no different from any other business. While running a stake pool on your hardware is expensive, we have also established that it is possible to work with cloud providers and achieve the same level of results. As a pool operator, your responsibilities have grown beyond those of an ordinary participant.
To run the pool efficiently and distribute rewards correctly, you must stay updated with the latest developments and keep your pool compliant with the network rules. The technical issues that arise and affect your node, such as downtime or network latency, are your sole responsibility to address. Should any complaints arise from delegators, you must resolve them and mobilize new ones to join your pool to move it towards saturation for better returns overall.
Looking at the associated risks, we can classify the jeopardy into financial and security concerns. A discussion titled “Staking pools and some issues that should be considered” gives an inside look at the associated financial and security risks. Stake pools require resources, specifically hardware, to handle Cardano transactions efficiently. Since users can swap stake pools anytime, a pool investing in higher-quality and better hardware might not get sufficient delegators to justify the cost. It stands to reason that the financial risk lies in the pool expansion — without quick returns, money could be lost.
Moreover, if Cardano grows rapidly — which is where we are headed — but pools stall to invest due to this risk, the network could slow down, and when time-sensitive transactions are affected, it could discourage new pools from forming. A possible remedy would be to have the Cardano Governance system fund hardware upgrades when economic conditions channel difficulties in pool investment — which is where we are headed.
More often than not, it is obvious that people are drawn to pools with the lowest fees, which might reflect a lower investment in security. We can infer that these pools are more vulnerable to hacking, and when the poorest of security pools become the most popular, the entire Cardano is at risk in the worst-case scenario.
In a simple case, if your block generator gets compromised and there’s no backup to restore history from, you could lose your pledge, but there’s no need to worry about this, as the relay node helps with security reasons, too. A far-intensive risk is when the tax authorities or law enforcers, from their uninformed understanding and perspective, see pool operators as enablers of tax evasion. As a rule of thumb, stay looking out for regulations in your area.
The challenges may be present, but because we are championing more ADA staking, there are some actions we can take to run successful stake pools. As Cardano enthusiasts and Web3 pioneers in general, we shouldn’t feel the burden of the challenges but meet our expectations towards supporting the network to its full potential.
Tips for Success as a Stake Pool Operator
Because setting up and getting a node to run is the single toughest task, what happens after it is live has the biggest effect on the overall success of the stake pool operation. The stake pool business is not about tech, but more about marketing — an entirely different piece of the puzzle. The next big requirements are partnerships, community building, collaborations, contributions, and/or friends with heavy pockets.
It is readily apparent that a strong community presence is an ideal metric to consider while running a stake pool. If the numbers are high, it is likely that in your following, delegators will throw money into your pool, and when they cannot, they will tell others about it, or both. Offering competitive rewards is a double-edged sword to cut through, both building your own community — within the Cardano, smaller communities are the way to go as they align folks with unique goals and missions, all leveraging one technology — and getting delegators to work with you.
It is useful to collaborate with other operators and Cardano forums. For prosperity or lack thereof, you are likely to operate on low costs if others show you how they cut their costs (those who have come before you likely know where to get reliable service providers, e.g., cloud providers) without sacrificing important aspects like security. The benefits of working with others escalate to all other aspects of running stake pools. This includes the likes of simple must-dos, such as staying updated on the Cardano network upgrades.
Munene, a crypto farmer in Kenya, wants to run a stake pool with more earnings than simply staking from pools with higher rewards. If he stakes his ADA on a pool and gets 5% without factoring in the operation costs, it is equally possible that running a decent stake pool of his own would deliver the same returns. The additions of the stake through delegators potentially drive returns beyond the 5%, all acquired from margin fees. He could increase the pledge and reduce the margin fees to make the pool more marketable — the more the delegators, the more his earnings.
The alternative route to marketing, as witnessed, is showcasing the pool as a contributor to charity activity. Advertising your pool as a charity to have others delegating to it to support a nonexistent mission isn’t the right go-to-market strategy. Not only is this manipulation ethically wrong, but it also pressurizes others to advertise. Again, it does not align with Cardano’s mission. Here’s a complete guide to marketing crypto projects.
Bringing it all Together
In running Cardano stake pools, we reap a wide array of benefits. The potential for higher returns is evident from the fact that you are pooling resources with other individuals while still charging some fee on the rewards earned. If you are passionate about staking in Cardano, like we here at Ada Pulse, you can build a community of your own within the Cardano ecosystem. As a pool operator, it is even more rewarding when you converge people around a shared mission. Your community could bring in technology enthusiasts to chat about the latest developments on Cardano or even share tips.
We can’t emphasize the role of stake pool operators further now that this post has been all about them and how to do it right. But control over the staking process isn’t something you’ll see in the headlines for most published material on this subject, and you cannot do it technically unless you know what you are doing or where to look for guidelines. With the power in your hands, you decide how to run the pool, which network upgrades to support, and the charges. If a computerized hands-on approach for your investment is what you are seeking, stake operations are just about that.
There are other cases when folks set up stake pools not to earn from them but rather to make valuable contributions to decentralization. The seemingly unknown benefits for IT professionals are many. The skills of running a stake pool have proven valuable to those in software engineering careers. As we head to the future where technology contributes to a fair share of the global economic value, some folks are running stake pools to stay prepared for future opportunities, whether profitable or not as of then — it doesn’t surprise to see someone retire a pool after nine days without delegators on it, while marketing efforts on the period are merely unnoticeable.
While we can expect many cost insensitive pool operators to provide running pools as a service, staking ADA remains the prime way to enhance Cardano’s efficiency, contribute to the network and earn rewards. Moreover, we have taught you how to run a stake pool efficiently. This is encouraging when the entire Web3 community knows the architecture of Cardano and how operations run.
Next time you hear folks trumpeting about stake pool operations, you know what to show them.
Frequently Asked Questions (FAQs)
1. What is the minimum ADA for running a stake pool?
To run a stake pool, you need 500 ADA to pay registration on the mainnet, as well as be able to cover the transaction fees and a pledge amount to entice delegators. While there is no fixed pledge, pools with higher pledges are more attractive and tend to receive more rewards. A pool pledging around $100K ADA is generally the least appealing, but there have been cases where pools are successful even with a pledge of less than $100K ADA.
2. Can I run a stake pool on my computer?
Yes, although we do not encourage it. Unless you have dedicated hardware, most SPOs prefer cloud servers to personal computers for optimal uptime and security. Remember, running a stake pool demands a 24/7 online server and a stable internet connection.
3. How much can I earn from a Cardano stake pool?
Earnings vary from one stake pool to another. They depend on several factors, including the amount of staked ADA, pool fixed and variable fees, network performance, and the number of blocks produced by your pool.
4. How do I attract delegators to my stake pool?
Attract delegators to your stake pool by lowering fees to make it more appealing, ensuring optimal uptime for consistent block production, marketing the pool by engaging on social media and other Cardano forums, and offering incentives that align with your delegators’ interests.
