A Deep Dive into Cardano’s Economic Parameters

Delivering essential insights to foster understanding in support of Cardano’s longevity

A challenge for Cardano’s decentralized governance lies in ensuring sufficient high-quality information for informed decision making by participants. A good example is the complexity of the economic parameters underpinning the Cardano proof-of-stake (PoS) incentive model. Their interactions are often not well understood, with only minimal public analysis of joint effects. Given governance participants can change many of these parameters, this knowledge gap poses a risk to Cardano’s longevity.

To address this, the Cardano Foundation proudly announces the “Cardano Economic Parameters” whitepaper release, authored by Professor Massimo Morini, alongside an executive summary. This content will benefit anyone operating a Cardano stake pool or participating in network governance. The Foundation plans to continue its support of such actionable contributions to Cardano’s academic excellence.

A comprehensive analysis of economic parameters

The whitepaper thoroughly examines pool incentives, providing a detailed analysis of how parameters affect the rewards of stake pools with different sizes and pledges, and the interplay with other ecosystem quantities such as Cardano reserves.

The first two sections delve into the relationship between the parameters k (desired number of pools) and a0 (pool pledge influence), as well as the adjustments to stake pool rewards based on pool performance and active stake. The discussion revolves around the impact on stake pool rewards based on their size and pledge, and interactions with other ecosystem variables, including reserves and their distribution. It further describes how the total reward amount is also influenced by staking incentive parameters and the ratio between active stake and circulating supply.

The third section analyzes the actual composition of Cardano's staking pools, investigating the relationship between incentive parameterization and the distribution of stake and pledge across pools. In concluding the whitepaper, the final section showcases the dynamics of reserves and their distribution to rewards and treasury. Specifically, it shows how the above parameters interact with parameters rho (monetary expansion) and tau (treasury cut) to determine the actual release. This assessment clarifies that the actual distribution of rewards, with 65% to 70% of releases going toward rewards and the remainder to treasury funding, differs significantly from the commonly held understanding that rewards receive 80%.

Exploring a brave new world

Notably, select whitepaper conclusions were unexpected, even for long-time professional stake pool operators (SPOs), and will inform the Foundation’s views on future parameter changes. The Foundation encourages contributions from those who wish to improve the presented whitepaper. As such, we are providing an open source markdown here for the next month and plan to incorporate material improvements into an updated version.

If you like what we do, the Cardano Foundation is now a DRep under the following address (ID): drep1ydpfkyjxzeqvalf6fgvj7lznrk8kcmfnvy9hyl6gr6ez6wgsjaelx