The case for a commission floor
The year 2022 may very well be one of the best in the books for the Cosmos Ecosystem. Many new application specific blockchains, all operating independently, yet bridged together with a working Inter-Blockchain Communication protocol.
Invisible behind the scenes is a non-stop working army of validators that very few understand and are often under-appreciated. Here lie technical traps, whale games, and politics.
Today we’ll discuss the topic of commissions, specifically “Commission Floors”. There are arguments on both sides whether commission floors are good, so let’s dive in. Our goal is to share ideas and opinions, but still allow you to make your own educated decision.
We’ll go a little deeper than typical articles regarding this topic. For light articles that make you feel good, there are many other article on the web. We’re digging into the sticky oil between the gears, but stop just short of drowning.
Not all the points below will apply to your network, but we are too tired to write more than one version of this so just use your head.
A Cosmos Proof-of-Stake blockchain requires validators to form consensus to produce a block that the world can trust. Each validator team runs a program on a server that calculates what it thinks is the right result of a block. All going well, other validators will agree, a block will be produced and transactions such as transfers and swaps complete.
In this process each validator votes with the power of the coins they “bond” plus the coins that others “delegate”. The sum of these quantities determines voting power. To produce a block, you need at least 67% of voting power to agree.
To incentivize teams to run validators, each block that gets produced also “mines/creates” some new tokens.
In a give and take type situation, participants who do not wish to run validators themselves may “delegate” tokens to validators and get a portion of the mined tokens.
In return for performing validation and performing governance duties, a validator will get a “commission” from the portion of the tokens allocated to delegators.
As and example and skipping a lot of math, assume a delegator earns 1 token commission for a month. A small portion of that token will be given to the validator for their services, typically 5% or 0.05 tokens.
The validator may do anything they wish with that token and this leads in to the next subject. What do we want the validator to do with those tokens?
Desire for growth or decay?
Each blockchain was created with a particular vision of the creator(s). A blockchain will have little market value without its users. And of course, users will only come if there are things to do. There are only things to do if someone creates a program, which often require additional tooling to help programmers onboard . It goes without saying that there will be no program on the blockchain without a working blockchain with blocks created by validators.
Ultimately if there is not enough to do on the blockchain, or the blockchain is not stable enough, the blockchain will be effectively both useless and worthless.
When given the choice between aiming to grow or aiming to die, it is natural for good leaders to choose growth.
How does growth happen? When everyone pitches in towards the same goal, including Validators.
The best businesses and corporations succeed as a result of clear vision being provided by leaders, and top notch members all contributing to a common goal. A blockchain needs many different kinds of members:
- Blockchain base layer engineers
- API/SDK framework teams
- API/RPC endpoint providers
- Dapp Creators
- Probably more
There is no such thing as one aspect being more important than another. A blockchain with weakness in any of of those member roles will suffer. On the other hand, a blockchain project having the best minds in each of those spaces has the ingredients to flourish.
While we would love to talk about all aspects today, we will focus on “Validators” for today.
The validator dream team
Let’s keep in mind two main goals we have thus far:
- Growth of the ecosystem
- Quality team members in each role
Also remember that each block mines a certain number of new coins for distribution to the validators and delegators.
Let’s say that for any given block, we mine 100 coins. We as a blockchain project can use these 100 coins to get for the same price either:
A) 10 good validators
B) 100 good validators
What would you choose? You would choose B) 100 good validators.
If you look, most cosmos chains have about 100 validators, but the number is not material. The point is you have many validators.
Put this thought aside for a second.
Who are validators?
Validators for the most part love technology. A great number of them have extensive experience running real products in real life.
For example, if you use a credit card, play video games, or watch movies, you have a reasonable chance of having encountered systems that were designed and provided by Chill Validation members at some point in their career.
An exceeding number of validators are technical people that corporations would pay top salaries and signing bonuses to bring on board. This includes some very well known validators, as well as some lesser known validators.
In some hand waving generalization, if you’ve seen a validator survive a chain upgrade a few times, they’re probably not so bad. If you’re technical, you can pretty much tell by the kinds of questions and corresponding debug information they share. Yes, it’s that obvious, and we’ll go into that a different day.
What do these validators want?
Some validators are just completely rich and whales as a result of what they have done. Kudos to them. They just want to collect coins for fun and make new projects.
Some validators are actually companies, the same kinds you are trying to run away from on the centralized web. They have enough money and now they want power over you in this new world too. All is not well in blockchain land.
Many validators however are not rich, and not rich beyond belief. They want to put the skills they have acquired over the past 10 to 40+ years of their career and share it with you. Their hope is to run a Validator node well, take their mined coins, spend some (lets be real here), and reinvest some back into the ecosystem.
Why should the network care?
Remember, the network generates enough coins each block to draw in 100 quality validators. The network also wants to grow.
You have 100 validators who have the skill to contribute, but have we enabled that?
Smart people don’t think losing money is smart. So if it costs more to run a Validator than the earnings, it is not sustainable long term. Professionals cost money, in some countries more than other. However it is rare that you will find a country that pays engineers below their national average.
Imagine if we covered the costs to run a validator by 100 validator teams and they had extra to reinvest and contribute to the ecosystem. That is a dream that even the biggest corporations struggle to achieve. Yet it is here at your fingertips if a network decides that is valuable.
Why 0% validators are value vampires
On any given network, a large number of tokens are delegated to 0% commission validators. As a delegator, we certainly enjoy earning that extra 0.05 coins for each coins we share of mining rewards.
However, it was that very commission that we want as a network to get reinvested into the network for growth.
If those 0.05 coins “run away” to delegators (who “get enough already”), that is 0.05 coins less for talented validators to reinvest. That adds up.
Even worse, the bottom validators are often running at a loss or barely breakeven. That is not the way we get talent to agree to investing more time into the ecosystem.
In the worst cases, some validators will run at 0% to gather delegations for months or years, only to suddenly increase the commission later on a public that is largely too lazy to redelegate. At this point, the network has:
A) Lost months of years of reinvestment
B) Starved the lower tier validators
C) Now providing a great number of coins to be liquidated against the project’s market liquidity
It’s like letting a vampire suck on your neck for months or years, then just bite your head off. There we said it.
A case for supporting the little guy
A common argument for not having a floor is that the network shouldn’t be trying to hand out coins to those new lowly tiny validators. They should earn their delegation like everyone else.
You would be a fool to say that’s not valid. In fact it is valid.
However remember, THAT IS NOT THE ONLY GOAL WE HAVE. Network growth today is more important than a stuck up mental position of you didn’t earn it.
You want to know why there are starving poor people in some third world countries that have billionaires running around? Because their lowly workers didn’t earn it. They’d rather see their staff starve as a matter of principle and market rate. Is this your network?
As a network, we want all pistons in an engine to be firing from the moment we turn the key. The car does not go faster if we ask the 4th piston to prove itself before we give it fuel.
Again, our basis for argument is that your network likely has many talented people looking for the right opportunity to pitch in. The sooner they break even and earn a little, the sooner they contribute to your ecosystem.
Besides, it’s not like those tiny validators are taking away a lot of commission. They don’t have much delegation in the first place.
The 0% commission validators have little to lose other than voting power, so if nobody is losing, why not grow a few extra talented contributors for your network.
A case for 1%
As a first stop above 0%, we make the leap to the next full integer value of 1 (and divide it by 100 to get percent).
At this point, there are no value vampire validators dumping all network growth mined coins overboard. Each validator has at least some coins to which they can reinvest into the ecosystem.
If this is as far as you can agree, our job is done. We thank you for being this open minded.
A case for 5% or 10%
As a network seeking growth, we want to see validators freed up from paying the bills so they can move into contributor mode.
Thus a higher commission is good for network reinvestment in two cases:
- A highly imbalanced network where the lower end validators do not have enough extra funding to start contributing
- A new network where coin value is relatively low and many coins are necessary to make aggregate value.
What is the value of starving out the lower validators? Is this beneficial for the network?
If the network wishes to test the financial ability of a new validator to survive losses over time, it truly is the design of a sick mind. Even if it isn’t a deliberate sick goal, if this is the scenario your policy creates, you have accomplished no better.
For completely new networks, guaranteed coin earnings for loyal validators can entice them to find more ways to contribute. Investment and growth together is fine. In fact, we have done so in several networks already (a future article).
So as a leader wanting all 100 validators to contribute to growth, it would be my goal to ensure each validator is empowered to do so.
Encourage delegation to the lower end, adjust the floor as necessary, build a loyal validation team.
Starving workers work slow. Don’t starve your workers.
A case for reducing the floor
Let’s assume we have a 5% commission floor and even the small delegators have more than enough to survive and feel enticed to contribute, there is room to lower the floor. Why? Because we still preserve our mission for network growth.
This may happen if your token suddenly explodes in value and stays up there, or delegations get very much evened out between the top and bottom.
A case for 0%
If we were an entity who did not need the commission to survive, it probably means we have enough coins on “this network” to survive or enough coins from somewhere else.
At this point, gathering voting power would allow me to vote in a manner counter to the common good.
As an example, Juno Network recently voted to allocate $520k of Juno to run some RPC nodes and add Juno to Keplr by default. They also elected to allow Keplr to later hold the network ransom in return for further funding. We are not saying this is what will happen, but this increased risk of inefficiency is what could be made more frequent with “selfish” power.
Additionally as a power hungry validator, we would want all new validators to starve and die. Why divide power when we can keep more of it ourselves?
The argument to withhold until a validator does more
A common argument made is that a validator hasn’t earned the delegations. They should do something small or magnificent to get people to delegate.
We agree that wonderful people have earned their delegations and we certainly want to work towards that end as well.
However again, empower those at the bottom to earn, cover costs and help everyone grow.
If we “Truly Are Early”, then we must invest in growth and empower all to assist.
Running a validator takes work, and to value it at 0% is something humanity overcame decades ago. Don’t go back there.
And remember, even just 1% is recognition of value for work done.
The argument against arbitrary floors
Many argue against commission floors because 5% is arbitrary.
However that is a poor argument because it enforces the idea that because we can’t pick the perfect number, it is better the default the value of work to zero.
If network growth is something desired, pick a number for a floor and get on the path to improvement.
If we may suggest, at least pick the arbitrary number of 1% if you are unable to agree with anything else.
We argue strongly that any validator that is trying to do their validator job correctly has indeed performed work of value
The argument for “we don’t want commission”
While it may be true that a particular Validator either hates money, doesn’t need money, wants to be nice, or is just pure evil trying to grab votes, it isn’t worth sacrificing the chance for the network to grow.
At this point in time, all blockchain projects are in growth mode, and your project can not afford to allow validators to chuck your development funds out the window.
Each coin delegation to a 0% validator is one less coin that a good validator could have put to good use.
If your network is done growing, please let us know.
If a Validator truly doesn’t need money, they can give away their commission to a charity or their delegators.
However the fact that a validator doesn’t need the commission shouldn’t volunteer all other Validators to fight against a zero commission floor.
The argument for “we promised 0%/1% and it’s sad”
Do you really really think these validators are truly “sad” and is it so sad and distressing that you as a leader of a network would be willing to sacrifice network growth so that some manic depressive can stop being sad?
(We’re not picking on you, we just see the word “sad” abused to the point of… well… being sad)
Let’s get real here. Those sad validators can rebate away their commissions and still keep their promise. They can do whatever they want with their coins.
However as a network, as a leader for growth, we must set the vision for growth. That must be enabled with empowerment rather than apathy. As leaders you must create the culture and to sacrifice your entire growth and culture because a few vampires might rebate is akin to abdication.
We are going to make a giant leap of faith and predict 1) everyone will get over needing to pay 1% or 5% to their validator in return for massive network growth driven by 100 Validators who all contribute to the ecosystem.
Besides, this is the role of governance/government. To ensure the ecosystem supports the greatest good. Let’s not be afraid to create a better tomorrow just because someone might sob for a short second. We’ll be happier when we are much more successful, together.
The argument for “0% differentiation”
Some validators argue that 0% is a necessary method to differentiate new validators to get delegation.
This is silly. How do 0% delegators differentiate themselves? Give negative percent commission? Give 00.00%?
Just because there is a 1% or 5% floor doesn’t mean all validators must lower to 1% or 5%.
The validators who have earned their 5% or 10% loyal crowds will keep them.
All 0% validators will be pushed to the new floor and be just as uninteresting as when the floor was 0%.
The argument for “some relayers need more commission”
Yes, this is a messed up thing in Cosmos. Some validators spend all most all their commissions on subsidizing relay gas fees.
Raise the floor to 5% and make it even less horrible to delegate to a 7% validator doing relaying.
The fact that a network isn’t rebating a relayer for gas, while they need to put up the equipment and time is completely taking advantage of people.
So if a network is so stingy they won’t even support their relayers, the least you can do is get the floor closer to what the relayer needs to do good work.
Become a leader for growth
We understand we can’t win everyone to agree with what we think is ideal. But if you made it this far, we’re thankful you at least took the time.
We look forward to growing with you should your network allow. We would find it ever more enjoyable if we could have talented peers who were able to contribute along side us.
Yes it isn’t your responsibility to ensure validators get a commission. However as a leader with a vision for growth, you should do everything possible to ensure that happens. A commission floor is a simple first step for valuing the contribution of your validators who are on call 24x7x365.