CHIPs discussion phase: Optimizing ICS reward distribution with per-chain commission

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.

Why would a chain be less profitable as a consumer chain than as a standalone chain?

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.

Per-consumer chain rewards

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.


This feels like a no-brainer.

What does the timeline to institute this change look like?

Interesting idea thank you, however there are several important points to discuss:

-Stride, ICF and other delegation programs have a maximum 10% commission requirement in the Cosmos Hub, will they be ok with fees above 10% for certain consumer chains?

-This idea could work if it is done for the whole validator set, for example adding a minimum 10% or higher fee for certain consumer chains. Because if individual validators raise the commission on certain consumer chains they might then lose delegations in the Cosmos Hub so they wouldn’t raise the commission

-Neutron had a monthly revenue in September of around $300, to share amongst the 180 active set validators and all ATOM stakers. We could raise the commission for Neutron to 100% and still wouldn’t change much

-For me the solution should be more about bringing revenue to validators to cover the CCs costs, not raising fee on a negligable revenue amount. The Vote Power Tax idea of @effortcapital is promising, since it would both accelerate and scale AEZ growth by giving resources to validators to run 5+ consumers chains and at the same time improving decentralization, I think we should focus on this idea. Other ideas would be to use part of the NTRN unclaimed from the airdrop currently in the community pool to be distributed as rewards to validators to help them cover at least the costs to run Neutron


I guess it is ok as an option but it won’t solve the problem. As Cosmis Validator pointed out Neutron still is not bringing any sort of revenue. Stride has more revenue but even that won’t cover much even if commission was set to 100%. But nevertheless I think this option should be available to the validators.

Also commission from consumer chains should be somehow visable to the delegators as this might affect to whom will they delegate ATOM to.

1 Like

Thanks for the questions. I will respond on Monday. :slight_smile:

1 Like

Ok it’s a week later, but here I am.

This is an interesting question. I assume that they would have to adjust to what is considered the reasonable market commission rate for a given consumer chain.

I haven’t thought that far along, but minimum commission is an interesting idea in combination with per consumer commission. It could even be offered by consumer chain teams, and set in the consumer addition proposal to make a given consumer work for the valset.

With 20/20 hindsight, I wish that Neutron had made some very different tokenomics choices. They spent their entire security budget doing a huge airdrop to ATOM holders, around 7% of supply. With no inflation, this leaves very low fees. If they had chosen to use the 7% airdrop to instead pay ICS fees for a few years, the annual income for the Hub would be close to $10M or more of NTRN per year, and would get closer to covering validator expenses. That is to say: I don’t think that Neutron is a typical example of a consumer chain.

I strongly agree with your idea to use the unclaimed NTRN, and I hope to spearhead a proposal to do just this. I also think that “minimum validator income” ideas could be useful.

That being said, I think the variable commission fixes some fundamental economic imbalances in ICS, namely: ATOM holders want consumer chains with big future upside, while ATOM validators need to bear the costs now.

1 Like

There were high expectations for Neutron when it was added as the first consumer chain because it would add the “much needed” WASM functionality that so many wanted to put on the Hub. So why isn’t Neutron being used? Supposedly there was a lot of demand for WASM on the Hub, but when you give them Neutron, nobody is using it.

Was the Hub WASM demand a fake all along?

Great that you strongly agree about this. Given the recent large approved funding to Informal Systems and the fact that you voted to cut validator revenues in half, knowing the major issue of nearly 0 revenues from consumer chains but important costs, and new consumer chains such as Noble joining imminently, we hope to see this proposal on-chain ASAP about the unclaimed NTRN

Thanks for this Jehan. This seems like low hanging fruit to help with some of the issues we’re facing today. Definitely in support of this. Will this be introduced anytime soon or is this work still in progress?

I agree with a lot of what has been said above. This is great, but is just a bandaid and doesn’t sovle the larger problem. ICS economics need to be prioritized, possibly through the creation of a CC negotiation type DAO that makes sure CC relationships make sense for both sides and even go after new chains.

Until those economics are fixed, any governance topics that involve revenue will be touchy. ICS was always meant to help solve the inflation problem as consumers paid their share for security. We have yet to see that come to life.

1 Like

I agree that this is not enough by itself, and will really shine with stuff like Partial Set Security, but I wouldn’t call it a bandaid personally. I think it’s a small but pretty key economic adjustment.

We’re not trying to make it free to run a consumer chain, but just make sure it’s not less profitable on ICS. If a chain can’t be economically viable as a standalone chain, it probably won’t be viable as an ICS chain.

Currently, the big difference is that consumer chains only give 1/4 of their rewards to the Hub, and then validators only get 5-10% of that. This change allows validators to capture much more of the rewards for earlier-stage consumer chains. Raising commission from 5% to 20% on a chain means that the validator makes as much commission as they would if it were a standalone chain.

If there are consumer chains that would not be viable as standalone chains, this is a separate issue, and not one we can solve with economics.

Even if Neutron had been a standalone chain, no one would have wanted to validate on Neutron since there is no inflation and negligable revenues even at 100% commission. Neutron exists just because Cosmos Hub validators have been fully subsidizing all their costs for months. And now they launch some grants program? Come on, start by paying validators subsidizing you for many months already and many more months ahead and then later you can start thinking about giving grants to others @Spaydh Moreover, the community has been complaining as well that the AADAO has been funding Neutron even more than the Cosmos Hub. @jtremback since the NTRN unclaimed from the airdrop are now in control of the Cosmos Hub let’s start using this as you mentioned as revenue for validators. I doubt anyone in the Cosmos Hub would be against this proposal

Unclamed neutrons should be used in the AAT in the future right ?

1 Like

(Wrote this but never posted!)

It is part of a wholesome solution, but if it’s implanted on its own the benefits by itself aren’t enough is what I mean.

With the vision of endless consumer chains, I don’t think it’s realistic to expect every chain that launches to be a chain that could afford to be a standalone chain. Expectations need to be reworked that either we only onboard economically viable chains, or chains at least have to pay their cost. That doesn’t mean they should pay less than what it costs to run their chain and the added reputation & financial risks. They are paying for security they wouldn’t be able to achieve on their own otherwise and there’s value in that. A theme in cosmos is building really cool & innovative stuff, but not having the right economics. I feel this is only being looked at from the consumer chain & product perspective and not including enough of the viewpoint from the infrastructure that secure these chains. Relayers are a prime example of this. Never built in economics and even now it seems the team is hesitant to enable real economics to make it sustainable.

Ideally, the cost to add chains decreases soon with coming updates and solves a lot of this.

This topic was automatically closed 14 days after the last reply. New replies are no longer allowed.