How does stake pool saturation prevent centralization?

Question

From cardano.org:

Saturation Parameter (K)

Saturation is a term used to indicate that a particular stake pool has more stake delegated to it than is ideal for the network, while k is the targeted number of desired pools. Once a pool reaches the point of saturation, it will offer diminishing rewards. The saturation mechanism was designed to prevent centralization by encouraging delegators to delegate to different stake pools, and to incentivize operators to set up alternative pools so that they can continue earning maximum rewards. Saturation, therefore, exists to preserve the interests of both ada holders delegating their stake and stake pool operators, and to prevent any single pool from becoming too large.

But, if a stake pool operator starts a second stake pool on the same server as soon as a stake pool gets saturated, how does that help decentralization? It's still the same guy and the same server. What am I missing here?

Answer 1

You're missing nothing, the Reward Sharing Scheme (RSS) Version 1 (RSSv1) is permissionless, and any one entity can open multiple pools. In fact it's quite lucrative because of the minFee at 340. You can open multiple low pledge pools, collect the minFee and have less skin in the game.

The game theory incentives of k (pool saturation limit) and a0 (increased rewards for higher pledge) were meant to encourage an entity to maintain one pool in theory, but in practice that is deeply flawed.

You can see pool groups at balanceanalytics.io 's decentralization charts. It's quite telling.

There's open discussion on a RSSv2 and CIP-50 (among other CIPs) planning on hivemind thinking the new reward sharing scheme.

Right now the best option is education on delegating to single pools with high pledge, they are doing it right.

Answer 2

As the article says, pool saturation helps to "divide" delegated ADA into different pools, this mean that not only big pools can be chosen from the algorithm to verify a block but also the smaller one. In this way the job is split and the decentralization is higher.

If a SPO decide to create a second pool, the level of decentralization is lower. True decentralization is reached only if every operator manage one and only one pool.

You can read more here

Answer 3

The saturation parameter (k) should be considered alongside the pledge influence parameter (a0).

The purpose of a0 is to incentivize pool operators to delegate a larger pledge to their own pool by providing greater rewards to pools with a higher pledge. The idea being that this will encourage operators to concentrate their available Ada into a smaller number of pools, rather than creating lots of pools with a lower pledge.

This is the theory, and I believe it is still a work in progress in terms of tweaking those mechanics as it would seem that this may not be providing a sufficient incentive for pool operators to behave in this way.