Everything you need to know to successfully choose your validators
Learn how to choose the best validator to Stake you tokens with, and never miss on airdrops or rewards ever again.
The Blockchains within the Cosmos Ecosystem are all based on of Proof Of Stake technology. As such, one of the most important activities Cosmonauts can participate in is staking their coins to secure the network. With the introduction of the Inter-Blockchain Communication protocol (IBC) and blockchain tools such as Starport, we saw an explosion of IBC connected blockchains within the cosmos ecosystem, all offering different staking opportunities and experiences. It is then of the upmost importance for cosmonauts to educate themselves regarding their role as delegators in these blockchains.
TLDR: When choosing a validator, you want to delegate to someone with as close to 100% uptime as possible, with low percentage of the voting power, 5%+ commission, with transparent slashing event policy, that is present, vocal, active in the community and participate to the blockchain by providing tools and services.
Understanding the functions of a validator
Proof-Of-Stake blockchains rely on validators to secure the network. The role of a validator is of the upmost importance for the chain to function correctly. Validators run a full node server and participate in the consensus protocol by broadcasting votes that contain their cryptographic signatures to produce new blocks. The weight of the votes the validator is using to participate in the consensus and produce blocks is represented by the amount of delegations he have. That’s why, when a validator is down, the coins delegated to him are missing from consensus vote, and if a critical amount is missing, the chain can’t produce blocks successfully anymore.
By participating into consensus votes, validators commit new blocks to the blockchain and receive rewards in exchange. Those rewards are then split between all the delegators.
As you know, another important aspect of validators is also to participate in the governance of decentralized networks by voting on proposals or crafting their own proposals for the betterment of the network.
Active set and inactive set
Not all validators can earn rewards. You must be on the active set of validators for your delegators to earn rewards. Their number is usually between 50 and 150 depending on the chain while other POS technologies work differently and allow thousands. The validators in the active set are decided by the number of delegations they have and as such, it’s the delegators that control who should be in the active set and who shouldn’t using the weight of their delegations. It is possible to delegate to an inactive validator to help them enter the active set. The inactive set is the list of validators that don’t have enough delegations to be included in the active set, and as such, they don’t earn rewards while inactive.
Understanding the functions of a delegator
Delegators entrust their consensus voting rights by staking their coins to a validator that will use those rights to participate in the block issuance process and earn rewards in the process. Those rewards are then split among all delegators. It is a non-custodial activity, meaning delegators keep full control of their funds. Their coins stay in their wallets while staked. During the staking period, the tokens are bonded to the validator and are unusable. When the tokens are unstaked/withdrawn from delegation, they suffer an unbonding period (a cooldown period during which the tokens are frozen before being unstacked and usable again). During the unbonding period, delegators don’t earn rewards. The unbonding period can vary between 14 and 28 days depending on the chain.
Delegators can also participate in governance by voting on the different proposals through their staking interface. You need to delegate your tokens in order to vote.
Delegators have the most primordial role in a blockchain. It is their responsibility to keep the validators honest, insure that only the best and most serious ones make it into the active set and remain there, and spread their delegations in the best manner possible to strengthen the network. Right now, there isn’t enough education around the role of delegators for our blockchains to function efficiently. People see it as a way to generate passive income on their crypto and ignore all together the prime role entrusted to them by the protocol.
This is why we still have low uptime validators controlling a big part of the voting power, 0% commission validators cannibalizing big chunks of the delegations, centralized exchanges in top positions, and no contributors getting more delegations than core/active contributors.
How to choose a validator
There are many variables that can be used to compare validators and choose the right one for you. The most important indicators you need to look for are the following:
Up time performance is the easiest metric to use and is displayed in most block explorers in the validator tab. Obviously the closest to 100% is the best, but delegators shouldn’t be rebuffed by uptimes anywhere between 90% and 100% as its quite common to have some out-of-control downtimes from the validator’s end. The most important thing is for it not to become a habit. The simple rule of thumb is anything above 90% is a positive, if you go with 100% uptime validator, you won’t be mistaken in that regard. However, you need to pay attention to the other parameters. While uptime is easy to assess, it is not the only thing to check, and many other variables are as important as the uptime performance.
Self-delegation is the amount of coins a Validator is putting out of his own pocket to secure the network. If a validator has skin in the game along side his delegators, he is subject to the same risks and rewards, and you can have a certain confidence that he will act in his best interest and the best interest of his delegators.
How much is enough Self-Delegation?
There’s no magic number, some validators are run by VC funds and big organizations and its natural for them to have millions in self delegation, while others are run by normal community members that can’t have millions in self-delegation. As such, this should be looked at depending on the nature of the operator. As long as it’s a nontrivial amount depending on the operator, anything between a couple thousand dollars and several hundred thousand dollars should be what you’re looking for as self-delegations. Close to 0 is never a good sign.
Commissions are the amounts a validator is charging for his services. It is percentage based and taken off the delegator’s rewards. The average minimum commission rate is usually 5%. Many chains are starting to have a minimum commission rate of 5% enforced to ensure a minimum income for validators securing the chain. Good validating doesn’t come cheap and depending on the chains, validators in the middle or lower rankings don’t make any profits and mostly run their operation at a loss.
Blockchains and blockchain services rely on the infrastructure provided validators. It is then vital that validators generate profits to maintain and upgrade their infrastructure and keep scaling to meet the increasing demand.
As such, I would strongly advise to delegate funds to validators running between 5% and 10% commission rates and stay away from those at 0% or close to 0% commission. A 0% validator is hurting the network, as it’s forcing all other validators to operate at a loss to compete, making it hard for newcomers to join the network, and attracting more than its fair share of easy to grab/uninformed delegators promoting centralization based on unhealthy marketing practices. That’s why delegators staking with 0% validators are often excluded from airdrops.
Voting power is the percentage of coins delegated to a validator compared to the total amount of coins delegated in the hole network and translated by the weight of the voting power of said validator during consensus. If a big enough percentage of the validators with the highest voting power are down, the chain can cease to function. In order not to create single point of failures, and promote decentralization, it is primordial to split delegations among all actors of the blockchain. It is usually advised to ignore all together the top 20 validators of a set since they already hold more than enough voting power and delegate to lower validators of the set. It is advised delegating to the lower 40% of any active set as to split the voting power in a manner that is beneficial to the network.
Contribution to the Blockchain
Many validators run different type of nodes, relayers, create tools, block explorers and other smart contract contributions for the blockchain. It is always encouraged to support those that support the blockchain. It is not something all validators can do, as it takes specific skills and a lot of funds, as such, all kinds of contributions should be evaluated, and technical contributions should be as important as community contributions or other type of contributions since not all good validators have big teams or infinite funds.
Contribution to the Community
Most of the time, delegators want their validators to communicate with them, create a community, run a customer support service, educate, run events and be present to solve and address issues regarding the blockchain.
You want a validator that is active in governance, meaning that he votes with the community on the issues of the blockchain, participate in dialogue regarding the proposals and come up with proposals geared toward the betterment of the blockchain and the community.
Hard & Soft slashing insurance:
The risks of delegating your tokens to a validator are in the form of slashing events.
Slashing is a penalty the network enacts on validators, usually for 2 reasons:
- Downtime (soft slashing)
This occurs when a validator is offline and not participating in block signing for a certain amount of time. This situation can lead to 0.01% (can vary) of loss of staked tokens on top of not earning new rewards for the duration of the downtime.
- Double signing (hard slashing)
Double signing occurs when the unique private keys of a validator are used more than once at the same time to sign new blocks. This can happen if 2 nodes using same private keys are run at the same time. The penalty is a loss of staked funds of 5%, a jail time for the validator and an unbonding time for the delegator tokens. During the unbonding period, delegators stop gaining rewards.
Delegators need to be careful as there is no such thing as an “insurance” in the common sense of the term. Validators will usually cover the costs of such events from out-of-pocket funds. There’s currently no proven way to verify if such funds are available, so all you can do as a delegator is trust in your validator. Covering a 0.1% event isn’t like covering a 5% hard slashing event. Due to the lack of transparency, a validator should at least inform his delegators about the availability and provenance of the funds used as insurance and the nature and limits of said insurance. We are lucky enough that we have a good community of validators and so far, minus some exceptions, validators have been adamant in keeping their promises and been covering slashing event as advertised.
Best practices regarding slashing protection are:
- Announcing exactly the limits of said protection and what it covers.
- Providing a public wallet address that delegator can consult to know how much funds are put aside by the validator for their protection.
- Validators should allocate part of their proceeds to said public address as to raise a prevention fund to face such events.
It is easy to claim that there is a protection, but if the validator has no liquidity in the face of a slashing event, he can’t create money out of thin air to pay such protection. Don’t trust, verify.
How to maximize chances of getting an airdrop?
One of the main financial appeals behind staking coins in the cosmos ecosystem is the potential for airdrops. We’ve seen many valuable airdrops happen in the last months and it is normal to start maximizing delegations to qualify for as many airdrops as possible.
Based on past airdrops, here’s a list of best practices one can follow to help qualify for potential future airdrops:
- Don’t stake with a centralized exchange (airdrops exclude centralized validators).
- Don’t stake with top 20 validators (a bonus airdrop is sometimes offered to those delegating their tokens to lower ranked validators).
- Don’t stake with 0% validators (often excluded from airdrops).
- Vote on all governance proposals (bonus airdrop is often offered to people who vote)
Spread your wealth across several chains, the main ones being $Atom, $Osmo and $Juno and be sure to stake certain minimums values. Consider having at least : 25 $Atoms, 25 $Juno and 100 $Osmo stacked.
Validator airdrops / tokens
A trend we are seeing is the multiplication of validator tokens and airdrops to raise delegations and reward the community. There is inherently nothing wrong with that kind of marketing. But, as with any token or airdrop, people need to do their research and assess if its an empty promise or if it has a real value proposition. None the less, delegators are already rewarded by the blockchain for their delegations and as such, need to remember the premier role of spreading delegations across all good actors of the active sets, and choose first and foremost their validators based on the quality of their service and contributions before getting baited by financial incentives.
The following section will let you better understand the information that you usually find on a validator website when they describe their infrastructure and details about their operations.
What’s a sentry server?
A sentry server is a public node that the Validator node uses to access the internet. This let the Validator node to run on a private server, keeping him “hidden” from the public network. This type of architecture is used to mitigate risks of DDoS (distributed denial of service attacks) on the networks.
What’s key management?
Validators have private keys like any crypto wallet. There are many ways to ensure the security of Validator keys. It is very important for a validator to back up their keys and store them in a secure manner.
Popular methods of key management are KMS and HSM.
KMS stands for Key Management Service and is offered by Tendermint to allow private keys to be stored on a different server and used using a secure encryption method.
HSM stands for Hardware Security Module, which stores private keys in a secured physical drive (YuhiHSM, Ledger, etc.) and is used physically and locally with the server. This method is the most secure but harder to implement as many validators use cloud hosting or third-party data centers making it impossible to access their hardware to use such key management method.
None the less, the amount of people having access to the keys and the method with which the keys are stored is important and should be investigated to assess the security of the validator operation.
My validator website speaks of redundancies, what’s that?
Most known redundancies consist in running back-up validators in different geographical locations or data centers in order not to be reliant on a single service provider or location.
Monitoring relies in using different tools to keep an eye on the validator hardware and service performance to prevent issues and be notified if case of a problem. A good monitoring is key to minimize downtime and swiftly avert issues.
I hope you enjoyed reading through this long guide and found answers to your questions regarding validators and how to best delegate your funds.
While this article was more in-depth and advanced, I will be starting a new series of articles aimed toward onboarding new users without previous knowledge of blockchain to the Cosmos Ecosystem. It will be a set of step by step lessons from beginner concepts to more advanced guides ranging from installing keplr, buying your first $Atom, executing your first on chain transaction to discovering the different cosmos apps and activities such as minting your first NFT.