Authors: Simply Staking
This is a continuation of the Forum Discussion to Set a minimum commission of 5%
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.
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.
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.
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.
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.
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.
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.
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.