[PROPOSAL #826][PASSED] Minimum Commission Proposal

Hub Proposals
1

Minimum Commission Proposal

EDIT 29/09 - Has been put up for voting - Mintscan

EDIT 27/09 - Updated the status to Last Call as the proposal will soon go live. Any final feedback will be appreciated.

Authors: Simply Staking

This is a continuation of the Forum Discussion to Set a minimum commission of 5%

Background of the Issue

This is not the first time the universal minimum commission for validators debate has been brought up. In a previous proposal with a similar context, the overwhelming majority of validators and the community voted against implementing a universal minimum commission.

Whilst this was less than a year ago, we believe that the context has changed with the introduction of Replicated Security.

The proposal below will:

  • Introduce a global minimum commission of 5% to allow validators to generate revenue in order to re-invest those funds into the security of the chain through enhanced operational capacity and better infrastructure
  • Lead to a reduction in staking APR by 1%.

The minimum commission would remove the incentive for delegators to choose a validator purely off of their commissions. In a healthy governance system, delegators would ideally choose a validator based on other metrics such as the quality of their infrastructure, their socials and their approach towards participation in the network (be it code or governance).

In doing so, this will promote a healthier level of competition rather than a race towards zero.

Why do we need minimum commissions?

The Cosmos validator ecosystem is diverse with respect to the types of validators that are present. There are validators that are professional companies such as Notional and Simply Staking (the proposers of this proposal) and then there are those validators that validate as a hobby. What all types of validators have in common is the need for revenue. Revenue is required as a justified cause for contributing your time and effort to the cause. Earning income is also required in order to pay for operational expenses and for better infrastructure (which the Hub requires even more so).

With the introduction of Replicated Security and the onboarding of new consumer chains, hardware demands have been ever-increasing. In response to this, there have been a few shifts in commission rates on a per-validator basis. However, the policy on the Hub still remains 0% which once again, leads to unsustainable and unviable operational practice.

Financial Viability and Sustainability of a Validator in the Replicated Security Era

According to recent Chorus One research on onboarding consumer chains, some interesting insights were presented. The report presented how much costs are associated with running a node with the lower-bound estimate calculated to be roughly $15K.

In that same study they shared that, based on their estimates, those validators with a voting power of 0.2% on the Cosmos Hub would just about break even when two consumer chains will be on-boarded. That scenario has happened already with the successful onboarding of Neutron and Stride as consumer chains. It is important to note that the research had the assumption that validators had a 5% commission attached to them.

Assuming that there are validators who run with 0% commission with the hopes of climbing the set, they will have sunken costs of roughly $15K per year with no revenue. This is not a sustainable practice for a network which boasts about its security. For a validator running on 0% commission with the hopes of one day raising their commission to generate enough revenue to turn sustainable, they need to reach a share of 0.4% in voting power on the Hub which equates to roughly 980,000 ATOM delegated to them.

If the whole premise of the Hub is being a chain for providing security to other chains, we would need a set of robust validators with strong hardware, infrastructure and sustainable revenue streams in order to provide what is going to be asked of the Hub when more consumer chains get on-boarded.

Centralising Risks

There is a plausible case that due to the increased costs associated with Replicated Security and running a validator at no/low commissions, those validators are most susceptible to ceasing operations due to the extreme pressure of off-chain costs and the lack of on-chain cash flow generation.

From the basis of funding, the Cosmos Hub can not assure itself of the validator’s continued participation in the future. The objective is to formulate a resilient, reliable, and enduring Cosmos Hub – we see no avenue to this eventuality under a system that does not effectively monetarily support its node operators. In such a system, where validators are likely to become defunct, delegators will turn to reputable large validators for safe harbour thus increasing and consolidating the voting power of the Cosmos Hub.

If this scenario happens with a few validators, one can see the possible issue of having a more centralised system. This is why we need to protect those validators by allowing them to make some form of revenue which in turn will protect those delegators from an unexpected shutdown of a validator’s operations.

APR Hit

We usually like to discuss changes to the monetary mechanics of the network in APR. Currently, a validator offering 5% commissions will yield a delegator 18.17% on their ATOM. On the other hand, a validator offering 0% commissions will yield 19.12%.

The change for a more secure and sustainable validator set costs a delegator 1% per year in ATOM rewards.

Why 5%?

We think 5% is the fairest in order to create an equal and sustainable validator set. Those at the bottom can find different value approaches for delegators to delegate to them whilst actively generating revenue for their operations.

Take the lowest validator in the set at the moment with 42,953 ATOM bonded on their validator. Assuming a 5% global minimum fee is applied, this validator would earn $3902 per year on their tokens. All of the funding could be used to re-invest in hardware or to cover some costs or to even pay for marketing campaigns to boost their delegations.

Narrowing the gap between validators

Not only are validators with a 0% commission financially unsustainable, but they pose additional risks to users. New users frequently choose 0% validators because they see that there is no cost. However, we have recently seen validators like ‘nodes by girls’ and ‘sunflower’ who take advantage of this system by attracting delegators with the promise of low commissions but then without any prior warning, increase the commissions to above normal levels.

We reduce the effectiveness of this type of trickery by having a minimum commission.

Learning from the Past

The discussions have been present for years starting back in 2019 with Proposal 12 In which the majority of validators voted that having 0% commission is harmful to the network. More recently in Proposal 76 which wished to create a global minimum commission of 5% (similar to this proposal), the overwhelming response was to reject the proposed changes as mentioned above.

We believe that Proposal 76 was on the right track however lacked substance in helping us understand: why we need to raise the commission, the implications involved with such a change, and what are the ways forward for those validators who relied on low commissions as a value play to attract delegators.

11 Likes
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Fully support this proposal. The APR hit from 19.12% to 18.17% in the most extreme cases for delegators (0% to 5%), to create a sustainable chain and validator set that is being used for security as it’s main value prop, makes logical sense to me.

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hello,

it would be very nice and innovative to integrate the following idea alongside a min commission.

don’t know if easily feasible ( i guess no x)) i still think it would solve many problems at once

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While I support original prop, I do like this idea as well.

0.5%-1% per consumer chain, with a cap idk somewhere around 10%? (total guesstimate with no figures behind it)

Not sure if someone would like to code that out, this minimum commission at 5% is something that can easily be done via governance param change.

I assume we’d just do follow up proposals instead of some type of coded version of this. Not sure we’ll see a return any time soon to match those levels though.

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This is related to another discussion we are having in the forum. This idea would be like an ATOM staker CC tax that we are discussing. This idea you suggest is nice but less flexible, with the ATOM staker CC tax its value takes into account all CCs, the revenue for each etc., increasing the minimum commission with each CC is not very flexible in case some consumer chains start providing better revenues for example. However, this idea might be simpler to implement so could be another idea to consider. Also, we shouldn’t only tax ATOM stakers. CCs cannot get the security of the Cosmos Hub for free being subsidized by Cosmos Hub validators. Some ideas being discussed is a variable CC tax for each depending on the revenues they provide or they need to buy X amount of ATOM and stake it with validators

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this is not a single purpose tax
this tax would modularize itself accordingly with consumer chain’s revenues

stakers must be responsible when they choose to add a chain to AEZ, nothing desincentivise them to make shitty choices currently

(polkadot auction model has been tried already and failed, btw)

(i agree this is maybe not the right place to talk about it, i just thought implementing both these proposals together would be beneficial for everyone)

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This is basically very similar to the ATOM staker CC tax being discussed in another thread in the forum. The suggestion here is to implement this tax as a gradual increase in the minimum commission, this is another solution yes and as you say ATOM stakers will be thinking a lot more about which CCs to approve.

I think it is totally the right place to discuss since it combines several solutions for different issues into one comprehensive solution actually. What do you think about this @Damien? It is an idea to easily implement the ATOM staker CC tax

Yes so if we don’t ask CCs to buy ATOM and stake it, there should also be a CC tax depending on the revenues on each. We cannot put infra cost tax for validators, now an ATOM stakers CC tax and the CCs themselves have no taxes, provide no revenues and have all the benefits. An idea to implement this tax as @pupmos suggested before is to raise the % of revenues from CCs going to the Cosmos Hub to at least cover the infra costs, if even increasing this % still negligable revenue then they should pay a tax variable depending on the revenues each CC is providing to the Cosmos Hub

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will always be amazed by people thinking consumer chains/startups/whatever should provide revenues from day 1.

i agree AEZ community have to find solutions to build a sustainable model for every party involved, but please, please, stop arguing as if the consumer chains were born 2 years ago.

for the rest of your statements, i quite agree.

anyway, i’ve expressed my point, let’s see what’s discussed next.

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Ok, so according to you we should be fine with CCs not providing revenue for a few years. So if the Cosmos Hub is acting as an investor for CCs then the funds to cover CCs infra costs should come from the CP, not from validators’ pockets.

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we should be fine with it for a year yeah imo.

i have a doubt suddenly, are validators voting for CCs’ onboarding? i feel they don’t and are just forced to follow a god’s choice.

anyway, as i said, i agree we have to find sustainability tricks for all parties involved, CCs included.

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Validators were promised good revenues during the voting period and proposals of already onboarded consumer chains, so far revenues are negligable: example, Dokia 3rd largest validator and with 15% commission so far has accumulated less than $15 in CCs revenue combined. Moreover, since Replicated Security was just launched there is a pressure for validators to vote yes to kickstart the onboarding of Consumer chains paying less attention to the revenues they bring it seems

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we’re still into the scheme “they should bring massive revenues from day one” I didn’t see Neutron or Stride promising that.

also validators’ duty is to point issues out during the props’ periods. a handful of them did, most of them didn’t. there are probably other reasons for that than the sole kickstart “pressure”.

anyway it seems we don’t focus on the same timelines, and we agree AEZ needs more sustainability rails.

the min commission is probably one of them, as incentivizing delegators to vote wisely could be another one.

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Minimum commission has worked well in all other chains that have added it.

Many chains have 5% min commission and it has always balanced the chain. Validators who contribute will grow. Anonymous validators with nothing else to offer than 0% fees, well, they stop growing. Like they should.

OP did have very good start for the discussion.

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This step appears reasonable in light of the latest challenges regarding the increased infra costs due to AEZ expanding and no balance between maintenance and payouts from CC yet. Assuming there still will be room for adjustments later when the ICS landscape changes.

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making a time limit and cool down period for 0% commission rate would allow it to continue being an effective marketing tool for validators.

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We have always been for support of a minimum validator fee to ensure a fair competition and a more rational balancing of governance and technical accountability against the current pure economic arbitrage that some validator use openly. Pleased to see the discussions are on the table again. They are likely going to pass someday anyway but the sooner the better to have a more professional validator set.

So that’s a big yes for us. hoping this won’t take another year to get through this debate !

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Salute - who is not for ensuring validators are fairly compensated for network security?

If 5% commission is set as the standard minimum, what would be the cap for max? 100%? This should be adamantly enforced/changed as well.

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The max commission (and more importantly max-change-rate) should be discussed, I agree. I would personally leave that for a different proposal though. Don’t want to lose the plot of making the network (that has it’s #1 value prop of network security) sustainable.

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Iam just adding here what i already wrote in the last thread.

5% might be too high to be accepted, so a lower percentage might be better to start with. If more consumer chains will be added a further increase might be necessary though.

As voting for a minimum commission poses a conflict of interest for every validator, CrowdControl will vote abstain if it goes on-chain.

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Hi I agree! I’m drafting a proposal that will include a 5% commission and include my proposal for Replicated Security “Reimagined” in the next week. Thanks for the shoutout!

1 Like