Cardano's incentive mechanism is designed to encourage stakeholders to participate in the network, including the operation of stake pools. The reward mechanism follows three principles:
- The total reward for the stake pool must be proportional to the size of the pool until the pool reaches saturation.
- Rewards in the pool must be proportional to the pool member's shares.
- Pool operators will receive higher rewards for their efforts.
One necessary modification concerns pool performance. If the pool operator ignores his “task” and does not generate the blocks he is supposed to generate, the pool reward will decrease accordingly. However, there is a potential challenge that any single stakeholder could create a large number of small pools to control the majority of shares in the system. This can lead to Sybil attacks, in which an attacker can take control of the network and perform malicious actions.
Sybil attack is a type of network attack in which an attacker impersonates multiple identities to gain control of a system. The name of the attack is based on the novel Sybil by Flora Rheta Schreiber, about a woman with multiple personality disorder. In the context of blockchain networks, Sybil attack can be used to take control of the network by creating a large number of fake nodes. This could allow attackers to perform malicious actions, such as:
- Control of block production: An attacker can use his fake nodes to create the majority of new blocks, thus controlling the writing of data to the blockchain.
- Asset appropriation: An attacker can use his fake nodes to alter transactions, such as transferring money from another user's account to his own.
- Attacking the network: An attacker can use his fake nodes to clog the network, making it unable to function properly.
To prevent Sybil attack, Cardano uses a new incentive mechanism. When registering for a pool, the pool operator may decide to “pledge” some of his or her personal shares to the pool. Committing more will slightly increase the potential rewards in his pool. This means pools where the operator has pledged a lot of shares will be a bit more attractive.
So if an attacker wanted to create dozens of pools, he would have to divide his personal stake into several parts, making all of his pools less attractive. In other words, an attacker who creates a large number of pools will need to spread them out. He cannot make all his pools attractive because he has to divide his bet into too many parts.
The amount of influence the pool operator's stake pledge has on the pool's rewards can be fine-tuned with a configurable parameter. The value of this parameter can be adjusted to balance fairness and security.
- This mechanism is based on the idea that pools with more pledged shares are more attractive to stakeholders. This makes sense because pools with more pledged shares are more likely to operate efficiently and reliably.
- This mechanism can be fine-tuned by changing the value of the "a0" parameter. A higher value of "a0" will give a greater advantage to pools with more pledged shares, while a lower value will give a greater advantage to smaller pools.
This is not an investment advice and does not constitute investment advice. This article holds the author's independent perspective and is not endorsed or moderated by Cardano Spot.