The Inglourious Cosmos Validators
Cosmos Validators are incentivized to run nodes to receive commissioned rewards. Discover how a community was formed as the story unfolds.
Proof-of-Stake node operators receive minimal rewards to run nodes in the network but they’re very motivated. Why is that? There’s a story behind this as we zoom out to see the larger picture
I took a stab at this research some time ago to seek out and understand the incentive models behind Cosmos, a Proof-of-Stake blockchain, that powers an implementation of Cosmos called the Cosmos Hub network. The hub is operated by a set of Validators —figuring out how often the network generate rewards, what the rewards look like, the reward frequency, how to operate “full” nodes, and why these Validator network operators continue to thrust themselves into Cosmos by investing time and financial stakes into it.
“Proof-of-Stake (PoS) network operators diversify and run multiple blockchain networks. The effective strategy seems is learn from each of the networks and cross-pollinate that knowledge across the community within each network chains. The choice of PoS network selections — on which one to sink their time into — varies quite a bit. This probably depends on how it matches up with the team’s background, their expertise, financial backers and belief in a network’s ability to create a breakthrough technology strengthened by a developer community”
Brief Introduction to Cosmos
The current specifications limits Cosmos to 100 network operators (also called node operators) that are delegated with the responsibility of extending the blockchain on the network and executing blockchain transactions within the blocks. The more tokens are delegated to a node, the higher their chances it’ll have to propose a new block.
The delegated node operators are called Validators. The Top 100 Validators set for Cosmos Hub is in a coveted and glorified position of being in the fore-front of operating cutting edge blockchain technology! The Validators set will increase to 300 in the next 10 years to invite more node operators to participate in the network over time.
How much does it COST to QUALIFY as a Validator?
To be validator, Cosmos, at the time of this publication, has a governance set to have only 100 Active Validators*, based on the number of ATOM tokens delegated to the validator. Well, you’ll just have to beat the 100th seed validator, currently at 43,400 ATOM tokens.
*Note: Cosmos Validators is planned to be expanded to 125 Validators soon based on Proposal 10 that passed in a governance vote.
Let’s say you went to an exchange and purchased 44,000 ATOMs with your fiat USD. At the time of writing, ATOM costs an average of USD$3.63 in exchanges to acquire. This will cost you nearly USD$160K. For early Bitcoin investors, this is equivalent to a tune of nearly 14 Bitcoins.
That’s a heck lot of money to throw down into a work-in-progress Cosmos inter-operable blockchain!
Taking a look at the middle of the pack validator, say around the 50th spot, over 613K bonded tokens, Firmamint, which amounts to 0.36%. If you were to host your own validator, and buy tokens from exchanges to then delegate into your validator, that would cost you 613K × USD$3.63 = USD$2.23M! This is quite a barrier of entry.
To view the full list of validators, check out https://www.mintscan.io/validators
How much does it COST to HOST a Validator?
This is a really good question to answer, and the answer is complicated. Here’s a quick rundown of the setup, followed by costs to host.
The Cosmos documentation suggests that Validators architect their setup with a Sentry Node Architecture (or SNA). It’s much like fronting a Validator with a set of Load Balanced nodes with added benefits of mitigating Distributed Denial of Service (DDoS) attacks. These could cost about USD$24 per month* each to run, if you pay it up front for 3-years, or risk using residual servers that aren’t used by a public Cloud service provider, like AWS. Usually you’d want at least 2 if not 3 Sentry Nodes. Add things like networked drives, reporting and bandwidth, it could be close to USD$100/month for 3 Sentry Nodes.
*Note: The USD$24/month refers to current AWS Spot Instance pricings but it costs double for 1-Year Up-Front Reserved Instance pricings for m5d.large instance types that has 2 vCPUs, 8GB of RAM, 10 GigE throughput, with an attached 75GB SSD
When Cosmos Hub first started, the software wasn’t mature enough to connect to a hardware-secured key management services or USB-based keys like those from Yubico called YubiHSM 2, or using Ledger’s hardware wallet, the Ledger Nano S.
Most validator nodes were performing software signing services, to validate as part of the consensus protocol, and to block proposal operations when its your node’s turn to do so. Use of hardware security modules (HSMs) are recommended to be hosted on a dedicated server(s) within data centers. These could cost hundreds of US Dollars each month to run, with the initial engineering costs to install costing you a few thousand US Dollars. You are now faced with an initial setup cost of thousands of dollars, with a monthly run rate of USD$500 to USD$5,000, depending on how complex you set it up as, with redundancies or not, which dedicated hosts to enter agreements with, which data centers to sign up with, etc.
Alright, let’s say you pick the middle of the pack solution, with a USD$2,500/month setup*. How much ATOM delegations do you need to make it all back?
*Note: We will assume this would include the 3 Sentry Nodes on AWS, a dedicated pair of servers for redundancies, hardware security modules, plus the depreciation / replacement costs over a 3 year period
“Thousands of dollars a month… will it be worth it?”
Let’s Run the Numbers!
Let’s pick the example above, with one of the Validators in the middle of the pack again like Firmamint.
ROI for middle-of-the-pack Validator
They’ve got 613,788 bonded tokens which amounts to 0.36% of the voting power — equivalent to the chances of becoming a block proposer.
Your chances of proposing a new block (and earning block rewards) is
613,788 ÷ 170,213,138 = 0.36%
According to Staking Rewards, a block is proposed every 6.900 seconds and the block reward is currently 3.81 ATOMs per block proposed.
Hence your node will propose blocks this many times:
0.36% × 86,400 seconds per day ÷ 6.900 sec = 45 times per day
This is Firmamint’s Validator node’s block proposal frequency, or “voting power”. Validators are rewarded 3.81 ATOMs for every block proposed. This generates approximately. If you factor in daily withdrawals of the rewards for re-staking (similar to a compound interest effect) and proposer bonuses, it goes up to over 4 ATOMs. We’ll factor in 1% of block proposal misses from operational mishaps, spams and network congestions.
4 ATOMs × 45 times/day × 30 days ~= 5400 ATOMs/month
These newly minted ATOMs are ready to be distributed to the delegators.
But as a Validator service operator, one can charge commissions. In Firmamint’s example, they charge 15% commission.
Hence delegators will get 4,590 ATOMs while Firmamint gets 810 ATOMs. Assuming ATOMs will fluctuate between USD$3 and USD$4 per ATOM in the open market, Firmamint will generate USD$2,430 to ~$3,240 per month
So, at a cost of USD$2,500 to operate, a middle-of-the-pack validator with a 15% commission will have at a slight loss to a gross profit of USD$740 per month to operate a fairly solid staking-as-a-Service.
That’s probably just enough to host weekly meetups to attract more delegators into the network!
… a middle-of-the-pack validator with a 15% commission will have a slight loss to a gross profit of USD$740 per month to operate a fairly solid staking-as-a-Service.
That’s probably just enough to host weekly meetups to attract more delegators into the network!
Can Validators run affordable hardware underneath a desk?
Let’s say there are some other Validators around the same voting power as the 50th-percentile nodes simply uses a Linux box hosted underneath a desk at home, and uses a Ledger Nano S key to secure the Cosmos blockchain.
That virtually brings the operating cost to nearly zero. Well, nothing really costs zero to run. Let’s put a number to this, say USD$100 per month to run for shared internet services, power, cooling and desktop hardware replacement costs.
We’ve established earlier that a 50th-percentile (median) validator of the Top 100 Validators generate 5,400 ATOMs/month from their delegators. If the validator charges 10% commission, that’s ~540 ATOMs.
At USD$3.50 per ATOM tokens, that’s USD$1,890 per month of income generated
But this isn’t what you’d expect from a glorious blockchain staking-as-a-service provider!
… this isn’t what you’d expect from a glorious blockchain staking-as-a-service provider!
What if a Validator doesn’t have that much tokens delegated to them?
Under the moniker “🌐 KysenPool.io”, they are currently in the lower 90th-percentile group of validators. At the time of this writing, KysenPool’s voting power is at 0.03%. This is equivalent to proposing nearly 4 blocks per day, earning about 430 ATOMs for their delegators each month. KysenPool charges only 1.9% commission. That means the operator is rewarded a little over 8 ATOMs per month, which is around USD$1 per day!
Let’s take it down another notch!
What if Validators don’t charge a commission???
At the time of this draft, a recent Cosmos governance vote on Proposal 12 (this one’s more like a poll) shows that the community is slow to signal whether or not on zero-percentage commissions are healthy for the network. Zero-percentage commission means that a staking service provider can choose to not get paid anything to host a Validator for others to delegate into it for free, and receive the full rewards for block proposals and running transactions. Cosmos Hub ecosystem of delegators expects the validator community to continue contributing painstaking efforts to keep the Cosmos blockchain going.
Are Validators Charging 0% Commission Harmful to the Success of the Cosmos Hub?
This governance proposal is intended to act purely as a signaling proposal. Throughout this history of the Cosmos Hub…
Click here to see the latest results on Hubble
This begs the question, how does the Validators keep their operations afloat based on the little profits that they gain from commissions, (or no commissions at all) for Cosmos blockchain node operators?
Sustainable Business Models
Today’s sustainable state is a really high bar
Let’s fix the commission to 10%, as it’s Cosmos’ current default setting, with one third (34) of validators picking this commission rate. Let’s assume Cosmos ATOMs fluctuates around USD$3 to USD$4 per ATOM. To run a small sustainable team, one could need a USD$200K to $1M annual revenue rate (after deducting hosting costs) to fund for a lean team of engineering, marketing, administrative, and advisors, with a 2-year funded runway. If the validator needs the low end (USD$200K), and say the annual current staking reward at right floored to 10% (vs. 10.8%), then a node operator needs $20M worth of ATOMs delegated to them
USD$20M × 10% staking rewards × 10% commissions = USD$200K
Assuming ATOMs float around the USD$4 per token range for the year 2019, this would equal roughly about 5 million ATOMs. At the time of this draft, only the Top 10 Validators are within this range.
Things look bright for the Top 10 Cosmos Validators!
Tweak the numbers — Price Inflation, Commission Inflation, etc.
What if ATOM prices inflate by 10𝑥 to USD$40 per ATOM? Assuming the number of ATOM delegated doesn’t change, then that sustainable business model (USD$200K revenue rate) shifts down to the Top 18 (2.5M voting power)
Combine that with increasing commissions to 20%, then what happens? The sustainable model spreads out to the Top 33 validators (1.25M voting power). What if the node operators themselves have some stake in their wallet, the number of sustainable number of operators get better.
You get the idea.
For what it’s worth — to have all Top 80 validators achieve this sustainable U.S.-based business-model, the ATOMs delegations need to be at USD$400 per token and validators need to charge commissions at 20%
True sustainability — operate multiple blockchain networks
Over time, if there are similar networks coming online with a similar incentive model and large enough crowd of delegators, validators may only look for a lower goal, say USD$20K/year revenue rate per network. Then operate a dozen networks using a similar infrastructure to hit economies of scale.
If that happens, then the bar significantly shifts for Cosmos Hub, making it far more achievable to run a sustainable business model around operating a Staking-as-a-Service platform.
My gut tells me that whoever runs the most efficient, secure and resilient Validators will persist towards the future. Those that are running a solid engineering operation, improving the Inter-Blockchain Communication (IBC) protocol, while being the most brilliant marketers of Cosmos.
The current token economics incentives are too low outside of those that have less than 5 million ATOMs delegated to them (the sustainable business model) at the current ATOM price ranges floating around USD$4. Demand for ATOMs in the future may shoot up, but the inflation model may keep things in check. Again, only time will tell.
Proof-of-Stake network operators diversify themselves into multiple networks. The effective strategy seems is to diversify into multiple networks, including Cosmos. They learn and move on, mapping their knowledge between different network chains.
The choice of PoS network selections — to sink their time into — varies quite a bit. This probably depends on how it matches up with the team’s background, their expertise, financial backers and belief in a network’s ability to create a breakthrough technology strengthened by a developer community.
Researching into multiple networks have incremental costs associated to engineering time and cloud hosting fees. At some point in time, node operators will discover their own sweet spot and comfort zone.
So for now, it’s really up to the enthusiasts to be the “buidl-ers” and cheerleaders of Cosmos Hub to make it happen, while the operators continue to seek out to participate in several other PoS networks. Soon, we will see who will come out on the other end of the tunnel in these experimental times and stand tall as the glorious Validators and look back years from now and say “we were a part of this!”
About KysenPool — a Silicon Valley-based startup which setup enterprise-grade Cosmos Validator services and rose quickly become one of the Top 100 Active Validators . KysenPool continued on to participate in governance votes*, propagate interesting Cosmos-related news via social media’s outreach on Twitter, writing guides to help newbies on-board with Cosmos staking, and participating in discussions such as on Riot. See the article on their Journey of a Startup Validator
DISCLAIMER: The author is the Head of Blockchain Research at KysenPool. This disclaimer informs readers that the views, thoughts, and opinions expressed in the text belong solely to the author, and not necessarily to the author’s employer, organization, committee or other group or individual.