One of the main complaints about ICS since launch is that it puts an unfair burden on validators. Consumer chain rewards that accrue to them from ICS generally do not cover the cost of running the chains. This has been intensified by the bear market making rewards worth less in general, and some particular tokenomic decisions of consumer chains (Neutron doing a huge airdrop instead of having those same tokens released over time in the form of rewards). A lot of our research since then has been on how to reduce the cost of ICS to validators.
Partial set security does this by reducing the number of validators that must run each consumer chain. This gives validators a choice in the matter, as well as making it so that the validators who do run a consumer chain get a greater proportion of the rewards.
The main purpose of Megablocks is to enable Atomic IBC, but it also has a cost saving aspect. All participating consumer chains will be able to run on one Comet instance, reducing costs.
But today I’d like to talk about a more direct way to optimize the ICS cost structure for validators: Per consumer chain commission rates. This is a very simple idea. Each validator would simply be able to choose a separate commission for each consumer chain. So for instance, a validator might have a 5% commission for the Hub, 10% commission for Stride, and 20% commission for Neutron (just an example).
This makes sense from several angles. First of all, it obviously allows a validator to adjust for consumer chains which may be more expensive to run or have lower rewards. By raising commission, for that consumer chain, they can recoup more costs without affecting their commission on Hub rewards or other consumer chains.
But from a more theoretical perspective, it also provides an answer to an important question: Why would a chain be less profitable as a consumer chain than as a standalone chain? This can also be rephrased as: If a chain could sustain an independent validator set as a standalone chain, why would it not be able to sustain the Hub’s validator set as a consumer chain?
Currently, these questions have a simple answer: Because the reward split between consumer and provider generally has 25% going to the provider, that’s 25% the amount of rewards that could be going to provider validators.
So, all else being equal, a consumer chain will need to be 4x more profitable to deliver the same rewards to provider validators. This math changes if consumer chains were to send, say, 75% of their rewards to the provider, but this is not a deal that would work well for them.
There’s another lever that can be pulled, though: Validators could choose different commission rates for each consumer chain. This makes intuitive sense on several different levels.
First, validators can use this to adjust to consumer chains that are less profitable, by setting a higher commission for them. This gives validators the flexibility to recoup costs for more expensive consumer chains.
Second, it aligns incentives between the validator set and the delegators. Delegators generally want consumer chains that may not pay a lot of rewards now but might pay a lot in the future because it’s like an investment. Validators, meanwhile, are stuck with consumer chain costs right now. A higher rate of commission across consumer chains in general allows them to recoup costs while ICS is getting off the ground.
Here’s an example of a hypothetical consumer chain’s numbers. In the first instance, there is an inequality between the reward that would be going to the valset if it was standalone vs consumer chain.
In the second example, the consumer chain’s commission has been raised to 20% across the Hub valset (this is a simplified model, so we are considering every validator’s commission to be the same). The rewards going to the validators are now equalized between the standalone and consumer scenarios.
Where did the extra money come from? Since commission is higher, the ATOM holders are now getting less rewards.
This points to the third way to look at this. The cost to validate a given chain come from two places- cost of capital, and cost of infrastructure. The cost of capital is the cost of risking capital in PoS to secure the chain. The cost of infrastructure is the cost of running the actual nodes. In the first example, too many rewards were being given to the capital (ATOM holders), and too few rewards were being given to the infrastructure (validators).
Allowing the validator commission rate to be tweaked per consumer chain allows for the market to price the capital it takes to secure a consumer chain vs the infrastructure it takes to run it, and reward each side correctly.