An Initial Stake Pool Offering (ISPO) is a unique way for a project to raise funds by using Cardano’s delegated Proof-of-Stake mechanism in which the project operates a stake pool and gives its tokens to delegators in exchange for their periodical staking rewards.  



In November 2021, MELD, a noncustodial lending protocol being built on Cardano, completed the world’s first ISPO. In less than five months, MELD raised $10 million USD from the ADA staking awards from over 40,000 delegators. MELD utilized the stake pool operator (SPO) system in Cardano’s Proof of Stake (PoS) platform to raise funds for their project. Instead of ADA holders receiving the usual ~ 4.0% - 4.5% APY in ADA staking rewards from delegating their ADA to stake pools that secured the blockchain, delegators received MELD tokens in exchange for MELD keeping their ADA awards. MELD used the ADA to fund the development and operations of its future dApp.  

To get the delegators’ ADA awards, a SPO would raise the variable fee component to the 99%, collecting all of the delegator’s potential staking rewards. ISPOs quickly became a popular way for projects creating dApps, or decentralized applications, to raise funds for development, labor, marketing, and other costs startups need. Today, dozens of projects have utilized ISPOs and the funding mechanism has become a normal part of fundraising for many startups building dApps on the Cardano platform. ISPOs have become such an integral process of Cardano-based startup financing that companies such as Maestro are offering enterprise-grade infrastructure services, which will streamline stake pool and ISPO deployment.


Technical aspects

ISPOs are unique to Cardano, which is an open-source, decentralized PoS blockchain. To understand ISPOs, we have to understand Cardano’s delegated proof of stake consensus protocol (dPoS). In a PoS protocol like Cardano, SPOs are randomly selected to validate and add a block of transactions, which is in contrast to the large computing resources required in PoW chains like Bitcoin. Since validators are not “racing” to add a block of transactions, they are not using substantial computing resources, lowering the energy consumption of PoS chains like Cardano substantially. 

Cardano relies on invested participants, or SPOs, to secure the network. Cardano’s 3,000 SPOs are full nodes who validate, propagate, and add blocks of transactions to Cardano’s blockchain. To become a SPO, one must first set up a stake pool using the appropriate software and hardware. Next, the SPO can pledge stake, or ADA, as part of the pool they operate, giving them a vested interest in the success of the pool and the security of Cardano. This stake is publicly viewable and a higher pledge incentivizes other ADA holders, which now number in the millions, to delegate their stake to a SPO’s pool. The higher the total combined stake of the SPO and its delegators, up to a maximum threshold, the higher the chance the SPO has of getting selected to add a block of transactions as a slot reader. When a SPO is selected and successfully adds a block of transactions, they are rewarded with ADA, which are split between the SPO and those that are delegated to their pool. ADA rewards are paid out each epoch, which occurs every 5 days. ADA rewards earned via blocks added in the current epoch are paid out to SPOs and their delegators two epochs later.  It’s important to know that staking rewards are distributed at the blockchain protocol level, not by the SPO.  While the SPO can increase the fixed fee or change the variable rate, which is publicly available for everyone to view, they don’t pay themselves or the SPO’s delegators. The blockchain handles the distribution of staking rewards to the SPOs and delegators.

Currently, Cardano's parameters allow pool operators of a stake pool to receive two fees: a fixed fee and a variable fee. The fixed fee is set at a minimum of 340 ADA per epoch, and is made to cover the server costs of running a stake pool.  Cardano’s parameters don't allow SPOs to charge a fee less than 340 ADA per epoch, but they can charge more. The variable fee, also called profit margin, is a percentage of the remaining ADA rewards that a SPO can keep before the rest is returned to their delegators.  Competitive stake pools typically charge variable fees between 0-5%, but can set the variable rate between 0% to 100%.  For example, let’s say a stake pool generated 1,000 ADA in fees during an epoch.  The SPO has kept the 340 minimum fixed fee and is charging a 5% variable fee.  The SPO would receive 340 ADA, leaving 660 ADA.  Next the SPO would receive 5% of 660 ADA, or 33 ADA.  The remaining 627 ADA would be divided proportionally to the size of each delegator’s stake and sent to their respective wallet addresses.

A noncustodial wallet, which is required for a person or entity to delegate their ADA to a stake pool, is set up through applications such as Eternl, Yoroi, or Daedalus. When a person or entity sets up a private Cardano wallet, that wallet will contain a unique staking key which must be registered before delegation is possible.  When that person delegates their ADA to a stake pool, that transaction is added to the Cardano public blockchain. Since all transactions are public, the SPO or anyone can identify each wallet by their unique staking key. With the staking key, all of the transaction history of that wallet can be publicly viewed, including what stake pool they delegated, when they delegated to a pool and when they redelegate or leave a pool, the amount delegated, and the amount of staking rewards they received each epoch.  Now that we know how stake pools work, we can learn about the mechanics of ISPOs.

How Do ISPOs Work? 

ISPOs are one of the biggest innovations of the Cardano community that utilizes the attributes built into Cardano’s blockchain infrastructure. If a new project plans to build a dApp on Cardano and use the ISPO mechanism to distribute tokens, below are the steps they would take to create a ISPO:

  1. Marketing—The project would typically market to the public about the new dApp it's creating on Cardano, including the dApps functionality and utility.  
  2. Native tokenizationFor the public to participate and support the development and functionality of the dApp, they will need to obtain its native token, which can be minted by the developer. Cardano native tokens, which has advantages similar to the ERC-20 and ERC-721 tokens on Ethereum, can be created natively on the Cardano ledger.  Unlike Ethereum, where custom tokens must be smart contracts, which require more computing resources to use and are more prone to bugs or hacks due to vulnerabilities from the developer’s code, Cardano’s native tokens have the same logic as ADA on Cardano’s ledger. This means that native tokens have the same security properties that Cardano’s native coin ADA enjoys. Native tokens also offer programmabilityDevelopers can program functionality and utility between their dApp and its custom native token, such as staking for voting, access to content, and many other features. 
  3. Create stake pool(s) for ISPO—The project must also set up public stake pool(s) and market them to the public so that anyone interested in participating in their project can delegate to the pool for a set period of time, or epochs. In return for their delegation, the delegators will receive the project’s native tokens instead of their normal ~ 4.0% - 4.5% APY in ADA rewards.
  4. Changing the variable feeThe SPO changes the ISPO-designated pools variable fee to 99%, meaning they get 99% of the ADA rewards generated in an epoch after the fixed fee is paid to the SPO. In our earlier example, the delegators received 95% of the remaining ADA rewards, or 627 ADA of the 660 ADA remaining after the fixed fee was paid. If the variable fee was set to 99% instead of 5%, the SPO would receive 653 ADA of the 660 ADA remaining, leaving only around 7 ADA to be distributed to delegators that epoch, which is miniscule when split between hundreds of different delegators. With a 99% variable fee, we see that the SPO is essentially capturing all of the ADA rewards. These ADA rewards can then be used by the project to fund delivery of the platform, such as development, third-party testing and any additional project costs.
  5. Give native tokens to delegators—Projects usually publicly announce how many tokens will be given per epoch to delegators. For example, a project could announce that for epochs 300 through 325, ADA delegated to the ISPO pools will receive 2 native tokens per ADA delegated. The SPO could announce that a total amount of tokens per epoch will be given proportionally to ISPO delegators based on their stake. The SPO knows the ADA delegated from each wallet via their staking key and for how many epochs, as this information is all publicly available on the blockchain. With the information from the blockchain, the native tokens earned by each delegator can be calculated. The project can airdrop the tokens to all of the participating wallets using their staking key or have some other claiming process for the tokens.

ISPO example

An example of a platform using the ISPO mechanism is Genius X, an accelerator program of early-stage blockchain startups building dApps on Cardano. The Genius X ISPO uses four stake pools to distribute 250 million tokens across 25 epochs, which is from May 15, 2022 (Epoch 339) to September 12, 2022 (Epoch 363).  10 million $GENSX tokens, the utility token of Genius X, are distributed across the four stake pools.   



ISPOs have many different applications, some are considered more qualitative while others are quantitative.

    1. Additional fundraising—Many projects need capital to fund their operations, marketing, and development before their dApp is launched. Previously, most of this funding would come from venture capital firms or high net worth individuals. Cardano-based startups could also seek specialized funding from initiatives like Project Catalyst. However, ISPOs don’t require KYC, meaning anyone, regardless of income level or nationality, can participate. For example, the Genius Yield ISPO at its peak had over 270 million GENS delegated to four different stake pools, with one stake pool only having 50% of the ADA staking rewards allocated to Genius Yield. Delegations at this level can result in more than 100,000 ADA in new funding per epoch.

    2. Building a community—An ISPO can build a community around their project, which is needed for long-term success. Having only a few venture capital investors is usually not enough for most dApps requiring high utilization to survive. In addition, staking to a pool is noncustodial, which means delegators can withdraw their stake at any time. As there are many ISPOs, projects who want to keep their delegators will have to constantly engage with the community. If delegators begin to feel less excited about the project, they will redelegate, which reduces the funding for the project.

    3. ISPO time period—ISPOs take time. While a venture capital fund could immediately give a start-up capital worth $3 million USD, the ISPO will typically take longer to get $3 million USD because the lower amount of ADA awarded each epoch. While some projects want the time to cultivate the community, other projects who urgently need funding to continue operations may not like the longer time period or commitment that ISPOs require.

Legal aspects

In many countries people are restricted based on their income or profession from investing in startup companies, which are deemed too risky for most unsophisticated investors to understand.  In the United States, an accredited investor has to have an earned income of $200,000 (or $300,000 if married) in each of the prior two years, a net worth that exceeds $1 million (excluding the primary residence), or be a professional investor by having certain licenses.  Many countries have similar requirements. 

In these countries, most of the population could be legally restricted from buying the utility tokens of Cardano-based startups. Since all participants interact with the blockchain protocol, which pays them the rewards, participants are usually not restricted from participating in any ISPO based on current regulations.  However, the projects retain most of the delegators’ ADA rewards and in return give delegators their dApp’s native token. Since the ISPO is a decentralized method of fundraising, it has not been held to the same regulatory requirements of similar traditional finance methods.  This question on regulatory compliance for ISPOs could change in the future.



ISPOs fit into the egalitarian school of thought around crypto. As there is no KYC, anyone can participate in an ISPO, regardless of the amount of ADA your own. Similar to bitcoin, which is digital money not controlled by anybody and accessible to everyone, ISPOs fulfill the same objective, allowing anyone to participate. Any change to the stake pool operation and rewards mechanism would have to be at the blockchain protocol level through a Cardano Improvement Proposal (CIP). However, if a potential regulation coerced a CIP that would add KYC/AML parameters to the staking process, it would remain to be seen if it would be accepted by the Cardano community.




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