Downside of minimum commission rate

Terence Lam
Jun 6 · 3 min read
Photo by JESHOOTS.COM on Unsplash

I encourage every member in the Cosmos community to rethink the business model of validator. In particular, I notice there are some illusions:

  1. Does high commission rate mean high quality? If I sell you a Big Mac at $1,000, this is still a Big Mac.
  2. Does low price mean low quality? We may take a look at, Uber, or Amazon, Google, Facebook at their early stages. Resourceful companies can always find a way to deliver excellent services at low or no price, as they have other monetization methods.
  3. Does minimum commission rate help to decentralize the distribution of voting power? Maybe. But the downside will be devastating.

Yes, yes, I know. I know I need to include Forbole. So within the top 20 validators, three of them are charging 0% commission rate. Luckily Forbole is the smallest one amongst them.

Sikka may be the one which is criticized the most. It is because Sikka is run by two Cosmos/Tendermint official team members.

SparkPool is one of the largest Ethereum mining pools. It does not have strong exposure when compared with other GoS winners and contributors in the Cosmos community but it is backed by a huge market: China. They are so big and resourceful and can afford crazy marketing investment.

Forbole is an independent startup. But we think we can claim ourselves as a startup built on Cosmos, even though we are not insider. We have missed fundraiser. We didn’t have skin in the game. We started the Chapter 1 of our blockchain story by joining Cosmos forum in late 2017.

We cannot eliminate our conflict of interest when we talk about the downside risk of minimum commission rate. Feel free to assume we are just defending our #PayWhatYouWant campaign and triple check our points. Please note that the downsides, just like the upsides, are just probabilistic events.

1) It’s too late

Let’s imagine the minimum rate is set at 5%. The voting power of these zero rate validators may decrease by 10%. But with the remaining 90% of original VP, they are now earning 5% commission as opposed to nil. They are better off.

2) It doesn’t provide strong incentive to redelegate

Even with the minimum rate, they are still the lowest. The delegators don’t have strong incentive to redelegate from them.

3) It rationalizes the rebate program by the exchanges

Institutional scale validators such as exchanges have the infrastructure to rebate the commissions to its delegators. I strongly suspect some top validators are also doing so.

4) It may make the top validators stronger

With a minimum commission rate, the difference in pricing between the top validators (say the top 5 with a total 34% of VP) and the smaller validators using low/no price strategy will narrow and the top validators will look more attractive. Remember, there is a natural tendency towards centralization.

5) It is not a good precedent

Enforcing a minimum rate at protocol level opens up a precedent of macroeconomic control. This is a cost we have to pay while the reward (the degree of decentralization) may not be justified.

What I observe is that people have got a wrong cause-and-effect relationship. I agree validator need income to survive. But minimum fee does not help. Minimum fee will not create income for a validator. If you have no delegated stake, whether you are charging 0% or 100%, your income is 0. And this is a bit surprising to me that people have completely ignored below fact:

Inflation is not a reward. This is just an anti-dilution measure.

Currently, most of the atom inflow to validators/delegators are just inflationary atoms. The real sustainable income for validators should come from the future creation of economic value on Cosmos. Before this happened, technically speaking all of the validators should be operating at a loss. We are still in the investment phase of Cosmos.

The above may or may not happen. I just want to defend our #PWYW campaign. Don’t trust. Verify.


PoS blockchains validation and governance

Terence Lam

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PoS blockchains validation and governance