Setting Minimum Validator Commissions

There is pressure on the validator community to provide 0% commission rates.

The truth is that running a validator is not a 0-cost endeavor. In an effort to mitigate validator costs, without punishing those who desire to run the lowest cost possible, I would like to discuss a minimum commission rate.

We are already able to set the address for commission claims. So, those that do not desire to profit from their validator operations could send their commissions to another address. (IE Angel protocol, or something of the sort)

What rate do you think would be most appropriate?
What effects do you think this would have on the community?

10 Likes

As of a couple weeks ago, we crunched some numbers and landed on the avg delegated amount of Luna to each validator being 3.2M, but the median being only 961K. Validators don’t keep airdrops, and let’s say the base Luna staking yield is 5% (more than current, but hopefully less than post Col-5).

961K * 0.05 = 48K in annual Luna staking yield. If we convert that to USD at $6/Luna it’s $288K. Let’s also say the validator commission is 5%. That amounts to $14,400 annual revenue.

To set up your own hardware and infrastructure with multiple backup sources to prevent downtime is a significant capital investment with ongoing expenses. Outsourcing to a validator service provider will cost you roughly $2K/month in our benchmarking ($24,000 annually). That would leave you operating at a ~$10K annual loss.

All that is to say what you already know, but the community may not fully appreciate: validating is not typically a lucrative enterprise. We can make more optimistic projections for post Col-5 staking yield and future Luna price appreciation, but must also acknowledge validators take on the risk of bear and bull markets.

I hope to make the case here for 5% as a minimum consideration. I believe many may propose 1-2%, but 5% of your total Luna staking yield is not a significant burden, especially when it doesn’t affect the airdrops that appeal to many Luna stakers. I would hope the average is closer to 10% to be honest, as in current conditions 5% still leads to operating at a loss. I think it would be a good faith minimum though, as I understand people may balk at 10%.

6 Likes

I can confirm from the feedback I have received that 5-10% is when many validators reach the break even point.
700USD+ per month in cloud based services is not uncommon.
Though it is possible to run alone, many people decide to partner up, or run additional services and outsource the validator portion.
Others run multiple validators across networks. Providing an attractive minimum for these individuals would encourage them to bring resources to bear on the Terra platform.

There are a few validators who do not want to take commissions. They would be able to send their commission to other wallets, my current suggestion would be to Angel Protocol. Though, other options may exist as time goes on.

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In the opinion of a common staker and user, I think it’s fair to have an equal commission for everyone that follows luna price and adapts to validator costs at 0 or near to that. (we have to recognize that they are all important for network decentralization and offset their costs).
People must also be able to recognize the validators that bring the most to the community. Therefore, a way to positively discriminate the validators that bring more without significantly impacting the voting power must be thought of. It is imperative not to stagnate proactive builders. COMMUNISM NO please

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0% should never exist it is completely stupid, it is really the dumbest oversight ever, it should not be in the system.

If we take away 50% stake from 0% validator it means nothing to them… when it should mean 50% impact to revenue and motivation to correct things. There is the argument nothing more needed.

Overall there be some game theory or protocols or so to help distribute the staking evenly across the network.

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I believe that setting a minimum fee will be beneficial for the Terra validator community because it currently is a race to the bottom.

Many validators are running nodes in losses to keep its validator place, hoping that at some time, the other 0% fee validators will fatigue so they can stop losing money.

Another benefit from removing this competition is that validators would need to adopt different strategies to attract validators. These strategies can be building communities or tools, thus providing more value to the Terra ecosystem.

Setting a fixed fee could be interesting as well, since it removes the fee competition completely. Other blockchains like Fantom and XDai have already adopted this.

We will support a proposal that sets a minimum fee between 5-15% and a proposal that sets a fixed fee of +10%

4 Likes

I think setting a minimum commission for validators is a great idea.

Minimum commissions would encourage validators to compete on quality, service, community, and building.

If validators are well compensated it will create competition to provide value to the community.

Delegators will now be able to choose validators based on things that benefit the long term growth of the ecosystem instead of incentivizing the cheapest hosting.

Do we want Terra running on solid infrastructure with a decentralized voting base? If the answer is yes then setting a minimum commission will help guide the network in that direction.

Justin
Luna Orbit

6 Likes

I agree with the others here that at least a 5% (maybe 10%) minimum should be put in place. The pressure to offer 0% when starting to gain delegations is super strong and followed by the fear of losing them as soon as you finally need to increase commissions. At least today, at least 95% of the Terra validators are losing money running the validator. Maybe that will change as Luna increases but even then 5% will probably not fully cover until we 10x and you have substantial delegations.
The comments I see from community members (advice to prospective delegates of what to look for) about what are validators doing extra for the community such as dashboards and finders as a criteria for them to be considered for delegation are a bit silly. Running the validator to secure the network isn’t enough for the community to warrant having costs covered??? I’m only talking about hosting/hardware costs. Not the hours to get setup and keep things running. Labor isn’t free. Sure those other validators deserve to be rewarded for doing more but that should be what sets them over and above the baseline of costs covered.

3 Likes

It has come to my attention that there is an technical issue with implementation.

If anyone knows a Cosmo-SDK expert that wants to be our hero, here is a link to the github.

I agree with the general sentiment expressed here that a minimum commission rate would be a move in the right direction.

In fact, at the current Luna price level, it feels that a 10% commission might be a likelier break-even point for most validators except a few of the largest sized nodes, especially once you consider costs of labor/effort.

For now, I would support any min comms at or higher than 5%.

2 Likes

Also not sure what can happen technically for validators that have previously set a Max Commission rate below what the new Min Rate becomes. For example if Min rate becomes 10% how will the system handle a validator with a Max Rate of 5% like @petes-fan-club since this is locked when the validator is created. Not sure if anyone has lower than 5% set.

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An alternative could be to not display validators on Terra Station with a fee lower than the minimum.

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So, really cool thing about the cosmo-sdk under construction there is that a minimum amount set by the network parameter, would override any parameter set by the validator!
IE, if someone had their maximum commission set to 5%, but the global parameter was 10% they would still charge the 10% commission.
We should also be able to vote the minimum up or down after it is available as a parameter.

1 Like

If the goal is to make small validators profitable, I prefer this proposal by @petes-fan-club.

This makes the yield staking with small validators higher, which naturally shifts users from big validators to smaller ones.

Positive incentivization is always better than restrictive regulations, as far as I’m concerned.

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This is an excellent proposal, that did no get enough attention when it was published.

I think coding issue will exist here, but at a larger rate. We don’t have a parameter to piggyback off of.

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The network deciding who gets my stake is no different than me putting the money in a bank, and not knowing what they do with it. Staking carries risk, I very much like to decide how I take that risk and who I want to support on the network.

The network needs to protect itself from centralization, that’s a given. Either by making diminishing returns on over delegated validators (which can be abused to bully validators), or by incentivizing multiple delegations across many validators.

Taking the choice away is a step backwards.

I fully support a 3-5% minimum fee for validators. I understand that still isn’t profitable for most, but it’s a minimum fee after all and would still be a dramatic improvement to our current situation where people think they should get stuff for free. Let’s move slowly into this and see how it affects staking.

On the subject of costs though, is anyone running a node on Akash? In theory it should be considerably cheaper than running a node on AWS, etc, and Akash validator nodes are common on other networks.

Validator commissions should be a free market - fee floor interventions seem ill contrived, see no real valuable arguments for it

6 Likes

What value for validator to run at 0%? And what value for Terra that small private validators are not being able to cover their running costs?
It should be official statement that Terra doesn’t need independent private validators. Only big projects operating at 0% and using validator name for marketing

I believe you answered your own question, small private validators that can’t cover costs shouldn’t have comissions at 0%, nor is the responsability of the network to make them profitable.

Running a validator only isn’t a viable business plan, you need to convince users to use that validator, either by creating a project like Angel protocol or Orion.money, or by creating value to the community like Terra Bites.

The network will always need to balance demand for validators with the incentives, right now I don’t believe there is lack of demand, so we should not try to force incentives.