Validator Economics of Orbit : Building a Sustainable Blockchain Ecosystem
Topics related to the inflation of DPoS consensus has been dealt and covered in many places. Nevertheless, it is still an important topic of discussion which deserved it, as a well-designed structure certainly helps in sustaining the blockchain network. We will cover most of the critical factors in this post, so please stay with us.
Introduction
Orbit Chain is a next-generation Inter-chain protocol. What does that mean? It means that Orbit Chain is designed to be a Sidechain for other Blockchains, thus ‘Connecting the Unconnected.’
In order to achieve this, a decentralized governance system is required — one with rewards and inflation. We are currently deciding on the specific amount of inflation and the reward method, with a transparent voting process made through our trust-based governance tool on Orbit Chain.
Did you, by any chance, read the last article we posted, on Orbit Chain’s token voting system?
*Voter Compensation (Annual basis)
Reward Pool x 80% x The Number of Votes directly voted / The Total Number of Votes x (1-Commission Rate)
*Candidate Compensation (Annual Basis)
Reward Pool x {80% x (The Number of Votes directly voted / The Total Number of Votes + The Number of Votes voted from others / The Total Number of Votes x Commission Rate) + 20% x The Number of Produced Blocks / The Total Number of Produced Blocks}
The topic of today’s discussion lies in how this Reward Pool is calculated, and why such a pool is needed.
Well, let’s get started.
Reward Pool = Circulation x Inflation (%)
Basically, reward Pool is current supply in circulation multiplied by the rate of inflation. Take ORC’s current supply of 1,000,000,000 and take away the reserve, which brings us to 360,000,000. Multiply that to the inflation rate, and voila! We have the Reward Pool.
…. if we stop here, the problem is that the inflation rate has yet to be decided. Thus it would be impossible to find out exactly how big this Reward Pool is. Then how can we deduce an adequate inflation rate?
Just how much Inflation is enough? (alt: What would be a good inflation rate?)
Figuring out the right amount of inflation is not so easy as one might say. The reason behind this is that for us to bring in good Validators and for the Governance to work flawlessly, there must be enough incentives, or rewards. The word ‘enough’… well, it has different meanings for everyone.
Let’s imagine a scenario. What if the reward was too much? It would lead to a higher rate of inflation, as the circulating supply increases, which would then cause a downward pressure on the price. This causes a cycle in which a higher rate of inflation would be required for adequate amount of compensation.
Let’s imagine a different scenario, in which the reward is not enough. The Validators would not find it worthwhile to participate in the ecosystem and operate as nodes. Investors, too, would shy away from staking. Basically, an insufficient reward system would lead to difficulties in building a decentralized governance system. In the worst case, a node may not meet its break-even point (BEP), and may lead to its downfall as a Validator.
With those scenarios in mind, Orbit Chain approaches inflation from two major standpoints.
(a) Cost : The minimum cost required to build and to maintain a node
(b) Motivation : An amount bigger than the cost, as an incentive to participate in the node system
The truth is, figuring out the (a) Cost is not that difficult. The cost of participating in Orbit Chain can simply be calculated by adding the costs of servers to recommended specifications, network costs and the minimum manpower required.
Here’s the breakdown for the cost of running an Orbit Chain node server.
Full Node Setting: system Requirement
- CPU : 36 core / Memory : 72GB / Storage : 1TB SSD / Network : Up to 10GB
- Amazon Web Service recommended
Factoring these costs in, we can see that it would cost approximately USD 6,000 to 8,000 to operate a node per year.
With this base cost, and the current market value of ORC (USD 0.0093), we can then figure out what the minimum inflation rate to maintain the Orbit Chain is.
First thing to take into consideration is the reward given to block-producing nodes. 20% of the total Reward Pool is divided equally amongst all participating nodes.
Approx. Circulating Supply of 360,000,000 x Inflation Rate (%) x 0.2 (Block Reward) / 7 Nodes (Genesis Validators) = USD 7,000 (Node minimum operating cost) / 0.0093 (Price per ORC)
With the current price of ORC, we can deduce that to break even on node operation, a node will need at least 700,000 ORC. For the first 7 Validators (Genesis Validators), that number would come to 4,900,000 ORC per year, so for them to break even, the minimum inflation would have to be around 7%.
Okay, so these were the calculations with the minimum cost in mind. But for the Validators to be enticed into joining the Orbit Chain, we would need more than that. This brings us to (b), Motivation. Calculating this is a bit more difficult, as there are many variables to consider.
As mentioned before, there are numerous factors to take into consideration — the price fluctuations in ORC, Stake Ratio, the number of Validators, the staked number of ORC per Validator, et cetera.
That’s why there’s been heated discussions on what would constitute a good reward system, for a decentralized governance system and an organically-evolving ecosystem to flourish. There are numerous discussions that approach the issue from various angles, and different solutions proposed every day.
We too, gave this a long hard thought. We came to the conclusion that the inflation rate should be considered from two standpoints, taking into consideration outside factors.
(a) Compensation for node operations that could not produce blocks, to maintain operation
(b) Minimization of opportunity cost of becoming an Orbit Chain Validator
Why should the cost of Validator that does not receive block reward be compensated?
That’s easy. Orbit Chain needs Validators to grow, and to remain stable. Of course, theoretically, all nodes that participate as Validators receive, per node, a certain amount of Reward as a commission to the staked ORC. Until the end of the year, that amount sits at 10%.
If, however, the Reward Pool does not prove to be enough, Validators that fail to participate in block producing may receive a reward that is lower than the cost of operation. In such cases, most Validators would give up operating nodes, and defer their ORC to other Validators. There simply would be no reason to run a node.
Another possibility would be that to lower the cost of node operation, Validators may look to forming nodes using servers of lower specifications. This is also bad news for Orbit Chain, as it would be comprised of lower-quality nodes that are unstable and of lower performance.
This is why a Reward Pool that provides the nodes with sufficient rewards is required. A node should receive, through the 10% commission received from staking, enough compensation to cover its operational costs.
Should a sufficient incentive be provided for the opportunity cost as well?
To participate as a Validator of Orbit Chain ecosystem is to give up the opportunity to participate in numerous other node systems, and the cost of foregoing such opportunity must be taken into consideration.
Of course, this cost would have to be re-evaluated once Orbit Chain has had some time to grow.
But as of writing this article, there are few other contenders to be considered. Ethereum is planning a PoS transition and EOS is a good contender as well, with its DPoS. Then there are Cosmos, IOST, Tezos and a handful of others that reward its nodes based on the amount staked, giving professional Validators different options to choose from.
Then what rewards can you expect, if you were to participate in these gigantic projects inhibiting the upper echelons of total market cap charts?
Let’s look at Ethereum to start with. It’s due for a PoS upgrade very soon, and Vitalic recently stated that for Ethereum to switch from PoW to PoS, at least 30% (32 mil ETH) would need to be staked. And that staking would need to provide 3.3% annual return.
However, this annual return of 3.3% would depend on the amount staked on the network, and would yield an actual result that looks more like this:
We can also see, through the chart below, that most projects that reward staking provide anywhere between 5% to 20% annual return.
So even from Orbit Chain’s perspective, additional incentives above the minimum 7% inflation is necessary — it serves as a crucial function in attracting more people to participate as Validators and staking their ORCs!
(Of course, the 7% inflation rate itself is subject to change as more Validators join the ecosystem. All these can be and will be fairly decided through votes, through our future governance tool.)
So what then, is a suitable inflation rate? And what about staking rate? If you look back at the chart that shows the return rates for staking in Ethereum, it becomes clear that the optimal staking ratio can only be achieved through an optimal level of inflation.
We here at Orbit Chain think that an optimal amount of ORC staked is 67% of overall supply. While this may come across as a large number, let us explain why we think this way.
BFT Consensus algorithm, employed by Orbit Chain, reaches a decision in the most stable, trustworthy way when ⅔ of all nodes participate in it.
Another notable function, as Fredrik Harryson, CTO of the Ethereum client software Parity, pointed out — network attacks against a PoS system becomes more difficult if more funds are staked. And 67% would ensure that the system would be protected against network attacks, in addition to making sure the BFT Consensus algorithm functions at its optimal capacity.
So just how much inflation would be sufficient?
Have you been taking notes? Inflation is an important topic, as much as it is hotly debated over. But we did cover most of the critical factors, and took the notes for you.
(a) The minimum cost to run a node that participates in block producing
- 7 initial nodes that produce blocks (Genesis Validators)
- Minimum USD 6,000–8,000 per node per year
- 20% of Block Reward
(b) Compensation for node operations that did not produce blocks
- Minimum USD 6,000–8,000 per node per year
- A 10% commission on staking reward (Until the end of the year)
© Compensation to cover the opportunity cost of running an Orbit Chain node
- 3.3% annual return for Ethereum, and 5–20% annual return on other major projects
(d) Procurement of staked supply for secure, efficient operation of block verifications and Orbit Chain operations
- Final target of 67%, with an initial estimate of 30%
(e) Future value of ORC
- Transactions that depend on initial dApp adoption, and the subsequent usage rate and ORC price estimation
With all these aforementioned factors taken into consideration, we believe that Orbit Chain’s Genesis Governance can be launched with 10% inflation — 7% to cover the costs, and 3% to incentivize.
When we apply 10% inflation, Validators can expect a reward as below chart illustrates, based on current circulating supply. Once 67% staking is reached as planned, we expect the reward to be around 11% p.a on staked ORCs.
Future expectations and changes in Inflation
This decision made on inflation rate is our first step towards building a decentralized ecosystem and governance. It is, of course, subject to change, depending on a number of factors. Changes in ORC token prices, amount of ORCs staked, and the increasing number of Validators — they can all affect the inflation rate.
The current optimal model we have planned is designed for up to 100 block-producing Validators.
As we grow in the number of Validators, we also plan on deploying a Mining probability rate that is dependant on number of ORCs staked. Validators will also be enabled to set the rate of commission themselves (currently fixed at 10%), leading to a healthy organic growth in ecosystem.
Other plans include a change in Block Reward rate, from the current 20%, as per decisions made by the governance consensus. We’re also considering the idea of a penalty model, for problems that occur during node operations, that deduct from staked supply.
As what we planned are realized, we also plan on providing a tool to monitor and verify to make sure the inflation rate is at an optimal level, based on token prices and number of ORCs staked. The tool will provide a real-time update on Orbit Chain, so inflation rate changes can occur in a logical and organic ways.
Also in the plans is a two-tier Validator infrastructure, that are each responsible for different Pegging zones (IBC zones) that is necessary for the Inter-Blockchain Communication that Orbit Chain plans on implementing.
Validators in both IBC zones must be verified, through a trustless ORC Staking model, in their Inter-Blockchain Communication. Explained differently, it would mean that the value of ORC rises, depending on the type and the amount of funds brought into the Orbit Chain ecosystem.
This will lead to different Validator groups that are responsible for verifying and controlling the transactions that occur in different pegging zones, such as ones for BTC, ETH and XRP. This allows for the formation of more flexible, safe and efficient Orbit Chain ecosystem that allows for sharing of profit generated from transactions made within each pegging zone.
ORC is used within Orbit Chain for two models. One, a staking model for the governance system, that allows voting of BPs and for Block-producing consensus algorithm. The other the staking model for IBC zone Validators to use for verification of Inter-Blockchain Communications.
The current objective is to design a system that would enable both models to realize their purpose, and for them to stabilize within the ecosystem. The governance tool will be a key component in determining the inflation rate, through logical and organic changes made through the votes.
Final thoughts
So to wrap all of this up, it’s very clear as to what we need in our mission of “Connecting the Unconnected” — An efficient, stable Validator infrastructure and consensus community, and a logical incentive system to enable such ecosystem.
However, it’s important to make sure the decentralized nature of the system is upheld to the highest standard. It must be made sure that the incentive system is not abused by a few, or compromised in such a way that allows for abuse.
For the integrity of the system, a system that monitors the economic incentive setting must be open to everyone — one where anyone can propose changes and participate freely at will.
- Price of ORC based on 19, June 2019.
Orbit Chain Website: https://orbitchain.io
