An Initial Stake Pool Offering or ISPO is a unique fundraising model only available in the Cardano ecosystem. Users can delegate their ADA wallet balance to a stake pool and, in exchange, receive the token for the project that they are participating in.
This is completely different to traditional Initial Coin Offerings (ICOs) or Initial Decentralised Offerings (IDOs), where users will exchange or sell one token for the project token.
With an Initial Stake Pool Offering, you're giving up regular ADA staking rewards in exchange for the project's token.
You don't lose your initial investment of tokens. You simply need to delegate your ADA to the projects stake pool to earn the rewards in their tokens.
How Are Funds Raised in an Initial Stake Pool Offering?
Cardano stake pools are governed by the protocol to give the delegates to a pool a fluctuating supply of rewards which is approximately 4.5-5% PA paid out every epoch (5 days). With fundraising ISPOs, the pools fees are set to 100% and the 4.5-5% rewards that delegates usually claim are all collected and distributed to the stake pool operator instead.
A full saturated Cardano stake pool can hold 65M ADA in delegation towards it.
The estimated amount of return per epoch for a fully saturated pool is at 4.7% is approximately 40,000 ADA per epoch or 2.9M ADA per year.
At today's current price of ADA, that is $3.6M USD per annum.
With multiple stake pools running, it can be quite profitable.
Recent initial stake pool offerings such as Meld went for 36 epochs and ran 10 stake pools over that period of time. It works out to roughly
36 x 10 x 40,000 = 14,400,000 ADA or
approximately $18,000,000 at today's price of $1.25 USD..
Don't forget that a lot of the delegation was gained which Cardano's price was high and above $2 USD.
Different Types of Initial Stake Pool OfferingsThere are some slight variations in Initial Stake Pool Offerings. The most common as we know if the 100% fee structure on a pool.
The MinSwap project used a unique model where they leveraged existing stake pools to simply distribute their tokens throughout the network. Leveraging existing pools meant that these existing pools didn't lose delegation to the projects pools. Instead, they attracted more delegation helping decentralise delegation to low saturation pools and distribute the tokens of the project.
In the case of MinSwap and SundaeSwap, the Initial Stake Pool Offerings were simple token distribution events. Similar to that of an airdropped. The decentralised exchanges needed to get their tokens out to as many users as possible, and being engaged with delegates, a community and stake pool operators was a win-win on money levels.
Benefits of an Initial Stake Pool Offering (ISPO)
There are many benefits that make the Initial Stake Pool Offering very attractive.
- It is easy and familiar: Any Cardano holder can participate in the ISPO the same way as they would when delegating to a stake pool for rewards.
- Low risk: There is very low risk for a user. Since you're only giving up your ADA rewards, you're not losing your
- Non-custodial staking: Your ADA never leaves your wallet. The delegation, unlike other staking protocols, never leaves the wallets of the delegates and is always in control of the delegates.
- No locked-in period: As a delegate to an Initial Stake Pool Offering, if you have to sell, you can sell. If you want to move to another ISPO, buy NFTs or anything else, you can. You have full flexibility of your funds.
There are also a few benefits from a project's point of view:
- Community building: As the period that an ISPO can go for ranges in length, it could last for a few months to half a year or more, depending on the funding goals of the project. During this time, it allows for engagement and education regarding the project.
- Marketing: To attract users to an ISPO, you need to do heavy marketing. As a by-product of attracting delegation, you also get more views on your project.
Of course, there are also downsides to running an ISPO from a delegates and operators point of view.
- Technical knowledge: You need a good pool operator to ensure proper block production and rewards production.
- Length of time and price fluctuations: The length of time of the ISPO can also have a negative effect as markets may crash and change the project fundraising goals.
- Centralisation of Delegation: Projects such as Meld came close to a full 650M level of saturation across their pools.
What Projects are Raising Funds via an Initial Stake Pool OfferingThere are many projects that are raising funding via the ISPO model. Check out our post that talks all about current and past ISPOs.
Are Initial Stake Pool Offerings Good or Bad for the Cardano Network?
It's hard to ignore these ISPOs' impact on the Cardano stake pool ecosystem.
When Meld started their ISPO, we say millions of stake move. Much low saturation and growing stake pools lost delegation. Some struggled to survive and others gave up altogether.
The centralisation of this ADA to these pools hurts the smaller operators but is still good for the network as long as the pools work.
One huge positive that can be seen from the ISPOs, is that it attracts users to move their ADA off from centralised exchanges to stand-alone cold wallets to be able to participate in the Initial Stake Pool Offerings.
What is the Future of Initial Stake Pool Offerings and Cardano's Unique Funding Mechanism?
Initial Stake Pool Offerings are popular. Many people like the idea. At the end of Meld's ISPO, many delegates didn't simply move back to their original stake pools or help decentralise the network by moving to a low saturation pool. Instead, the majority of delegates moved to other ISPOs that were operating.
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