In a blockchain world dominated by giants, what if a simple cap could shatter monopolies and empower the underdogs? Cardano's stake pool saturation point has already revolutionized decentralization. Now, envision extending that game-changing mechanic to governance. The Mechanics of Saturation in Cardano Stake Pools In the Cardano blockchain, stake pools play a crucial role in maintaining network security and decentralization through Proof-of-Stake consensus. A key feature designed to foster this decentralization is the saturation point, which acts as a built-in limit on how much stake a single pool can effectively accumulate without diminishing returns. This mechanism ensures that no one pool becomes overly dominant, encouraging the distribution of the stake across multiple operators. Specifically, the saturation point is calculated based on the total active stake in the network divided by a parameter known as K, which represents the optimal number of pools the protocol aims to support. Currently set at 500, this K value means each pool's saturation threshold is around 1/500th of the total stake, or approximately 70 million ADA under present conditions. When a stake pool approaches or exceeds this saturation point, the rewards for delegators begin to decrease proportionally. This creates a natural incentive for ADA holders to redistribute their delegations to unsaturated pools, where they can earn higher returns. The result is a more balanced ecosystem where smaller or newer pools have a fair chance to attract stake and participate in block production. Without such a cap, larger entities could monopolize the network, leading to centralization risks that undermine the blockchain's security and resilience. Historical data illustrate this dynamic: multi-pool operators, who run several pools under one umbrella, control significant portions of the stake, but the saturation mechanic prevents any single pool from overwhelming the system. For instance, visualizations of stake distribution show that while groups like Avengers or Binance hold notable shares by total stake, single pool operators collectively dominate, comprising over 30% by stake and more than 70% by count, highlighting the protocol's success in promoting diversity. The saturation point serves to limit the size of pools, but does not prevent one entity from operating multiple pools under a different ticker. In a decentralized manner and without KYC, it is not possible to force one entity to operate only one pool. Decentralization of block production is in the hands of ADA holders. They will decide by delegation whether to support a single pool operator or a multi-pool operator. Despite this limitation, the saturation mechanism has a positive impact on decentralization. Moreover, this mechanism could be further expanded. For example, by requiring a larger pledge, or by having the size of the pledge affect the size of the rewards. Extending Saturation Principles to Promote Fair Governance Building on the success of saturation in stake pools, a similar approach could be applied to Delegate Representatives (DReps) in Cardano's governance framework to address emerging concentration issues. The voting power of DReps reflects the delegated stake. There is no upper limit to the voting power of DReps. Current voting stake distribution reveals significant imbalances, with top DReps like Yoroi Wallet amassing over 500 million ADA in delegated voting power, while lower-ranked ones hold just a fraction. Introducing a saturation parameter for DReps—perhaps setting a K value of 100—would cap the effective voting influence per DRep at around 56 million ADA, based on the current 5.61 billion ADA in active voting stake. This would dilute the power of oversized DReps, forcing delegators to seek alternatives and fostering a more equitable governance landscape. Such a system would mirror the stake pool model by reducing the effective weight of votes beyond the saturation threshold, incentivizing redistribution without outright banning large delegations. Delegators to saturated DReps might see their influence scaled down, prompting them to support smaller DReps who align better with niche community interests. This could invigorate participation, as smaller DReps gain visibility and resources to engage more actively. Moreover, it addresses the "sticky stake" phenomenon, where delegations often remain unchanged due to inertia, even if the DRep becomes inactive or misaligned. Challenges and Opportunities in Implementing DRep Saturation While the saturation concept has proven effective for stake pools, applying it to DReps introduces unique complexities due to the subjective nature of governance. Unlike pools, where performance is measurable through block production and rewards, DRep decisions involve nuanced judgments on proposals that may not align perfectly with every delegator's views. Trust becomes paramount; switching DReps isn't as straightforward as moving to another reliable pool, as finding one with consistent ideological alignment can be challenging. One of the arguments for maintaining the current status quo, where DRep can have unlimited voting power, is that it deserves its power, i.e. it has the support of a large number of delegators, or rather their stakes. Introduction of the saturation mechanism could lead to frustration if delegators feel compelled to create their own DRep accounts just to echo a preferred representative, potentially fragmenting the system further. Among the top 5 DReps are Yoroi Wallet and Eternl Wallet. Are they the best DReps that make decisions that are in line with their delegators? It may be so. The opinion on this is subjective. However, it is more likely that ADA holders delegated to Wallet DRep simply because it was easy through the wallet interface. Many ADA holders may want to withdraw staking rewards without quickly finding a quality DRep. Therefore, they may opt for the default option - Wallet DRep. Introducing a saturation point could compensate for the quick decisions of lazy or uninformed ADA holders. Additionally, governance lacks the financial incentives tied to staking, where rewards motivate optimal behavior. DReps operate voluntarily, and delegators gain no direct benefits from participation, which can result in apathetic or outdated delegations. Tying governance to staking rewards—such as reducing rewards for saturated DRep delegations or boosting them for active, rationale-providing DReps—could bridge this gap, aligning economic motivations with decentralized ideals. However, this might blur the intended separation between consensus and governance layers. Ultimately, decentralization hinges on community action; while saturation for DReps isn't a panacea, it offers a promising tool to counteract concentration, sparking vital discussions on how Cardano can evolve toward more inclusive and resilient decision-making. Similar to pools, one entity can register multiple times, i.e. have multiple DRep IDs. This would create a similar problem to what we see with pools. However, in the case of governance, we have a certain chance to limit this behavior. Unlike MPOs, multiple DRep IDs controlled by one entity could be perceived more controversially. DReps need to be more visible and communicate with the community. Their identity will be publicly known, at least for the largest ones. If they were to establish multiple DRep IDs, the community could perceive this as an unwanted attempt to gain excessive influence in governance. There is also the possibility of amending the Cardano Constitution and allowing CC members to somehow limit the decision-making of those DReps who are suspected of managing multiple DRep IDs. However, this is a very controversial step and could ultimately require the introduction of KYC/DID mechanisms into governance. Conclusion There are good reasons to introduce a saturation point for DReps, but also reasons to choose a different mechanism. The problem is that no one has proposed a different mechanism yet. Another option could be delegation expiration. Delegators would have to delegate to DRep again at regular intervals. However, this could be annoying for some ADA holders. In addition, wallets could start automatically renewing delegations. A more suitable mechanism seems to be linking staking rewards to delegation to DRep. That is, introducing a saturation point and slightly increasing staking rewards for those who choose unsaturated DReps. If there are 2 founding entities among the top 5 DReps and 2 DReps that gained their voting power through a UX trick in the wallet, Cardano on-chain governance cannot be seen as successful. We have made a big step forward, but we still have a lot of work to do.
