ISPO
An Initial Stake Pool Offering (ISPO) is an innovative funding mechanism within the blockchain space, primarily utilised to enhance safety and accountability in project financing compared to traditional methods such as Initial Coin Offerings (ICO) or Initial DEX Offerings (IDO).
With the rough idea originating from the Cardano ecosystem, the concept was first implemented successfully by MELD. This attracted significant attention with $600 million delegated at its peak (1B ADA).
Mechanism
In an ISPO, participants do not exchange fiat currency or other tokens directly for the project tokens. Instead, they exchange their staking rewards for the project tokens, effectively trading future potential for immediate involvement in a project. This mechanism operates exclusively on proof-of-stake blockchains, where staking is integral to its function.
Project teams set up and maintain validating nodes on their chosen blockchain. These nodes validate transactions and earn rewards in accordance with the logic of the chain. The mechanics of proof of stake node operations are that the node operator receives a certain reward for block validation and the the delegators to the node also receive a certain reward for delegating to a certain node.
The node operator can apply a certain percentage "tax" on the delegator's rewards, this is usually a mechanism to differentiate between different nodes and makes certain nodes more attractive to stakers than others. This exact mechanic is what makes the ISPO work as this "tax" can be charged at a higher percentage than would otherwise make sense to when it is accompanied by rewards in a different form, in this case, the project's tokens.
Security Features
The ISPO model offers several advantages that bring more security and certainty to the participants compared to other mechanisms.
1. Technical Competence: Projects must demonstrate the ability to set up and manage nodes, which requires a certain level of technical knowledge and commitment.
2. Skin in the Game: Projects must commit substantial initial funds for node infrastructure, operational costs, and the minimum stake requirements, ensuring they have vested interests in the success and longevity of the offering.
3. Reduced Risk for Participants: Unlike ICOs or IDOs, participants are not investing actual funds but staking rewards, minimising their financial exposure.
4. Increased time horizon. ISPOs usually happen over a longer time, since neither staking rewards nor project token rewards to participants are huge in short timeframes. This means that a project going for an ISPO model is less likely to make a large sale at 1 point in time and then "rug pull" with the proceeds from it. They are also less likely to interact with the community for a short period of time until the sale and then go silent, possibly rugging the community.
Implementation Example: MELD ISPO on Cardano
MELD conducted its ISPO by running two types of nodes:
- Nodes with 100% fee allocation, offering 2 MELD tokens per 1 ADA staked per epoch.
- Nodes with 50% fee allocation, offering 1 MELD token per ADA staked per epoch.
The ISPO spanned 32 epochs (160 days), with MELD maintaining a significant pledge across multiple nodes to secure and stabilise the offering.
Participants could receive bonuses based on the duration of their stake:
- 1-9 epochs: 0% bonus.
- 10-19 epochs: 8% bonus.
- 20-29 epochs: 15% bonus.
- 30+ epochs: 25% bonus, plus a "Diamond Hands NFT" for sustained support.
Shortcomings observed in practice
Due to a soft cap of Cardano nodes, to accommodate the demand MELD had for the ISPO, multiple pools had to be set up. This allowed scammers to also create pools impersonating the legitimate MELD pools and effectively get the stake rewards from uninformed delegators.
The same soft cap meant that people delegating above that soft cap would not bring further benefit to the project as the pool would not receive additional rewards, effectively wasting that stake. This put projects in a difficult position in which they could either not give token rewards for those delegated funds, upsetting the community, or give out those rewards resulting in a financial loss for the project, the opposite of the goal of the ISPO.
All the awareness about the ISPO had to be conducted through marketing or word of mouth without an easy way to display info covering the concept and details in the pool description, where a delegator would see it when browsing pools to delegate to.
Cardano staking does not have any lock-up possibility, ADA can be staked and unstaked at will and more or less instantly, limiting project options for long-term ISPO investment. MELD staking does give the possibility to lock your stake in exchange for a greater reward percentage from block rewards.
Addressing the shortcomings onMELD
Normally, each MELD node has a hard cap of 20M (pledge + delegation). However to allow for ISPOs, a project can request to set up an ISPO node without a cap. This removes the risk of fake 3rd party pools as the project only needs 1 functional node to which everyone interested can delegate. This also removes the wasted stake from delegators, since there is no cap. All stakes count, the project gets all the rewards that it should, and can give all delegators the rewards promised without incurring a financial loss. This also simplifies the delegator experience since there is only 1 place in which they need to delegate (instead of multiple) and improves the project communications to their community and delegators. It also simplifies the "bookkeeping" and implementation on the project's side when it comes to tracking details such as the number of delegators, amounts delegated, how long each delegator participated etc.
MELD clearly shows these "special" pools, in the staking interface.
This shows the delegators that this pool is different from the others. It also makes it easier for delegators looking exclusively for ISPOs to find and compare them. MELD also provides a short summary of the ISPO offering of each project directly on the node page in the MELDapp to make it easier for participants to compare different ISPOs quickly. This gives better visibility to projects, and makes the job of raising awareness about their offering easier.
Because MELD has the option of locked staking, people might think that if they create a locked staking position for the ISPO they will be locked into their initial choice. However, in MELD staking you can always move pools EVEN WITH A LOCKED POSITION. By doing this, the delegator maintains the choice of where they want to stake, and can change between ISPOS or to non-ISPO staking pools if they so wish.
What's Next for ISPOs
The DEGA ISPO is the first ISPO on MELD.
Having begun on Friday, March 8th 2024, and running for 37 epochs until Monday, September 9th 2024, this is already proving to be a considerable success.
In under a month, DEGA managed to achieve 150 million MELD delegated, allowing the MELD community to earn an allocation of DEGA tokens, while DEGA earns the yield from that staking.
Stake Pool Name: DEGA ISPO Stake Pool Ticker: DEGA1 Stake Pool Address: https://app.meld.com/staking > AVAILABLE POOLS > DEGA1 Stake Pool Status & Progress: Rewards Dashboard
Last updated
