Commission Rates - The Race To The Bottom (Floor Proposal)

Greetings,

As a member of this decentralized community, I want to open a dialogue on the following race condition that unfortunately combined with SGX costs threatens small validators from being able to sustainably partake in the Secret Ecosystem.

Large validators exist within the ecosystem and have incentive to capture as many delegators as possible. This is not a nefarious incentive. All validators are chasing the same goal.

The problem arises when a large validator due to economies of scale (having more delegators) are able to sustainably exist with a lower commission rate than smaller validators. Note that this is particularly unique to SGX. In a non-SGX validator world (all other blockchains) smaller validators can still sustainably compete with larger validators because hardware costs are significantly cheaper than SGX. With the current conditions, large validators are dropping commission rates anywhere from 5% and lower to try to capture as many delegators as possible. While there is a list of validators that are sticking with 10%, these are validators that already are name-brand established, many of whom have contracts on the side with large delegators and aren’t concerned about race-to-the bottom conditions, especially when they are on multiple blockchain networks.

For delegators, lower commission rates means a higher return. Which as a delegator is great. Unfortunately, smaller validators are at risk, putting decentralization as a component also at risk. The weight of this dynamic does not entirely rest on the delegators, but (in my opinion) largely on the validators to make sure that there is a sustainable rate established such that smaller validators can exist sustainably even with lower delegator counts.

Validator Return Equation (VRE)

Total Delegators = T
Annual ROI = R
Commission Rate = C
Price = P

VRE = T * R * C * P

This leaves 4 options to help smaller validators.

(1) Increase the price
(2) Increase the Annual ROI
(3) Increase the number of delegators to their node
(4) Increase the commission rate.

Price is in the markets’ hands. This is despite the fact that most people here in this community believe in the network long term. Unfortunately, depending on a price increase is not a dependable solution to the problem. We cannot directly control price.

Increasing the Annual ROI (which is currently around 30%) would put into danger tokenomics and inflation.

Increasing the number of delegator to smaller validators is a great concept - but we cannot rely on delegators to choose a small validator with a worse commission rate if we assume running a validator node is a commodity. The “holistic” validator model attempts to offer more than just staking as a service as justification for a higher commission rate.

The problem with this model is the greater the spread between a holistic validator commission rate and the largest players’ rates (as large validators race to set lower commission rates to capture influx of delegators) exacerbates the movement of delegators from small validators with higher commission rates to instead choose to stake to large validators with a lower commission rate.

This leaves the final option: create a fixed commission rate floor that is a sustainable rate for all validators.

Who benefits from this? First, the large validators who are participating in a race condition - their return will actually increase. Second, the smaller validators also benefit because operations are then sustainable, and a holistic model becomes more sustainable because the spread between the sustainable rate and the commission rate of choice by the validator is pegged to a fixed floor.

Thus, I would propose a commission rate floor as a possible solution. While delegators get less return short term, in the long run the ecosystem will:

(a) Be more decentralized
(b) Have a greater contribution from a larger number of actors
© Incentivise holistic validator models

All of these benefits will translate to a higher price as the offset (for a delegator) for the cost of a higher commission rate. All of this assumes this change positively benefits the network greater than the current setup (Marginal Benefit > Marginal Cost).

Ultimately, I would like to start a dialogue on this. Is a commission floor a good idea? What are the alternatives?

Thanks for participating,

Carter Woetzel (Co-Founder of Secure Secrets)

p.s. After some good discussion below, I now think there are potentially better alternatives than a commission rate floor :slight_smile:

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Bump I and Carter share the same thoughts on this topic!!

I would love to hear from other validators and community
@tor @guy @moonstash @can

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I will be chiming in on this later tonight

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Even being one of the small-time validators that might someday get priced-out and have to shut down…just on principle, the idea of price-fixing leaves a bad taste in my mouth. I would much rather see community funds or Secret Foundation funds being delegated to small validators to help subsidize their costs and help keep things decentralized. If someone wants to eat all the costs of running a validator and multiple sentries so that they can offer the community a 0% commission way to stake, they should be allowed to. Using community delegations would be much better than removing a person’s freedom to be altruistic

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Is it really altruistic to offer 0% if it damages the sustainability of other validators? Such a decision is altruistic for delegators but not altruistic for the entire ecosystem. In addition, a 0% commission garners larger delegation, so even if there isn’t a “return” in the form of SCRT, there is a return in the form of governance leverage. I would love for you to expand on “they should be allowed to” as a stance in terms of freedom, you have my attention there.

I guess all I mean by “they should be allowed to” is that I feel that price-fixing goes against a lot of the core principles of blockchain and why it was created. So “being allowed” to set any commission rate is just the opposite of price-fixing, which I don’t agree with. Obviously others might not agree, but to me at least, there should be a way around it that doesn’t require price-fixing. As I mentioned, community fund delegation is one possibility. And if we got to the point where small validators got priced out, and there were only a few big time validators, people with more funds will see the opportunity, put up substantial upfront capital, and fill the void. They will decide that even if they take a loss at first offering competitive rates, they believe that SCRT price will increase in time to make it profitable. There WILL be people that make that decision, so the market will find that equilibrium in time, even if I (and some other current validators might not survive it). Obviously that is not great for some people, but I disagree that it permanently damages the ecosystem, because that free market WILL right itself. Of course, I’d much rather see subsidy by delegation, but if that doesn’t happen I don’t think everything will fall apart letting the market sort itself out
I guess I feel that if you are driven by principles to the extent that you believe Privacy is a Public Good, despite the potential of that being abused, and want to create the tools that enable it, without deciding where limits should be placed, shouldn’t you also feel that price-fixing is a Public Evil?

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Is it possible to truly decentralize a network that has a high-cost of entry (needing a high number of delegators + infrastructure expenses)?

Spinning up a bitcoin node cost $45 dollars a year.

This is in stark contrast to an SGX ecosystem. You say the market will find its equilibrium in time, but my response would be that the natural equilibrium won’t involve a truly decentralized network with the current barriers of entry. The free market economy doesn’t create decentralized networks, it creates wealth concentration with periods of dispersal. In my mind, that is the beauty of governance and blockchain in the protocol realm - the tools exist to encourage decentralization. If you can tell me that the typical market economy from 0 BC to 2020 encourages decentralization, than you will have convinced me to change. But precisely because decentralization is the goal, this is why alternatives must be considered outside of letting the market fill the void.

Because @baedrik I don’t view price-fixing as a public evil. I view over-centralization as the #1 enemy of a long-term sustained decentralized community.

This discussion really boils down to “How do we sustainably decentralize the network?” Your proposed solution of a subsidy is an interesting one, albeit I feel just as weird about a subsidy as perhaps you do about a price floor haha!

Unfortunately, with the strict requirements of SGX, there is a limit to HOW decentralized the network can be. Not even talking about validators, there will be far fewer full nodes running, because people won’t be able to pass attestation unless they put significantly more time and effort into setup than is needed for most other projects. Perhaps there will need to be some sort of incentivization in place for people to just run full nodes, not just validators (but that is an entirely different topic that shouldn’t be continued here).
But I am just mentioning that the specifics of this network means it will be less decentralized than other networks no matter what validators are charging in commission.
But I’m not sure I agree that what you propose is all that more decentralized than the alternative. Let’s say there is only about 15 validators that can survive the free market, in time maybe another 10 join in seeing the opportunity. Even if it doesn’t grow beyond that, I guess I don’t see that much more centralized than, 30 or 40 validators voting to price-fix at such an early time that a lot of the future delegators don’t get to vote for smaller commissions. I’m sure there are a ton of people just waiting for binance to swap their ENG, that would love to have a say in preventing price-fixing of their stakes, so us deciding to price-fix now is also centralization.

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The Cosmos community had a great conversation on that subject :

IMO a commission floor won’t limit validators from giving a kick back to delegators, and effectively circumventing the minimum fee idea.

It won’t really help decentralizing the network.

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I’m not weighing in here yet, want to get my thoughts better organized. But I will say that true price fixing requires the consumer to be in the dark and / or powerless to market dynamic. A monopoly has the same effect as price fixing in that regard, even though the consumer knows what is happening. The difference between both of these scenarios and creating a commission floor is that the “consumer” in this case can vote on this. They are not in the dark and they are not powerless.
That having been said the thing I don’t know if I like is the inability for a small player to break in by offering a lower commission. Maybe make is so the commission floor increases with the voting power?

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If the true concern is decentralization I think the incentives can be better aligned than a blatant price fixing scheme. I have not thought all the way through this yet, but it has been a topic of discussion. Other such approaches could include things like:

  • Variable bonding/unbonding times
  • A dynamic min. fee based on voting power (making top validators charge a higher min. fee, but allowing lower ranked validators, newer validators to attract more delegations to use min. fee as a way to attract delegators)
  • Limitations placed on delegations to those with the high voting power
  • Enigma/Foundation delegations to smaller validators that are actively contributing in the ecosystem
  • Cooperative efforts amongst validators to implement products within the ecosystem and earn SCRT to self-delegate

Crypto was founded on libertarian principals, and Proof of Stake has at its core an element of “skin in the game.” As I’ve seen on other similar threads we don’t want to confuse “free market” with “fair market”. I think by taking the approach proposed in the original post this would create a moat and be BAD for de-centralization, but good for the first 25 validators up and running.

I appreciate you bringing this topic up as I think decentralization is an important consideration. I think we can solve the problem with more creative, collaborative free market solutions. I’m definitely going to be thinking on this as others have stated.

*EDIT: I have edited this post and removed inflammatory remarks per my apology below. Anyone seeing this discussion should not need to see these remarks as they look to follow the conversation and contribute meaningfully.

  • Brendan | WhisperNode
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@Brendan

I did not need to call anyone out specifically and apologize. You’re probably right that a lot of the communication is lost in text. I was not alone in noticing that low or near-zero fees creates a non-sustainable situation and a race to the bottom. Concerns had been rising and conversations outside the forum had indicated as much. I am happy Secure Secrets realizes this and started the conversation.

Point I was making still stands as it relates to the content of the conversation. It would create a barrier to entry as it eliminates a potential leverage point for competing and attracting delegations and has other negative implications as I consider that to be price fixing which I adamantly oppose. I think we all are more creative and can come up with sustainable solutions.

After my “backpedaling” I did truly try to contribute constructively to the conversation. I want you to know that the “backpedaling” was sincere and I think Secure Secrets is a valued validator and members of the community. You’ve shown great initiative and effort.

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Brendan,

I totally agree with your points. I am glad Ericb linked the COSMOS thread and thankful that you brought up 5 other alternative options versus a commission rate floor. I think there are better options than the commission floor so we are in agreement there. I had not thought about the fact that there would be no way to differentiate between a new validator node and the established nodes if there was a commission rate floor.

No hard feelings, glad we can have the discussion :slight_smile: I just want to make sure everyone doesn’t think Secure Secrets is some big bad wolf. Just here to start a dialogue :stuck_out_tongue:

I have read with interest all the different concerns, arguments & proposals. Factors for any business is passion & effort towards a project doing well & being something to be proud of which Yes in time can make you well paid for your efforts.
I have read also with interest Cashmaney Validators & if I am reading correctly, to the amount of self investment in each fund. This is known as " Skin in the Game " & most private business carry a large amount of skin. That is upfront capital then ongoing reinvestment.
So if the community was looking to see who to support, a key indicator for passion & effort towards success could be those with a large relative % of "skin in the game "
Note those with larger self investment would be generating their own returns whilst they build their business model which does make it sustainable.
Not the only thing to consider but worthy of consideration all the same as part of your solution

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I absolutely think self delegation is something to look at. I’m curious how validators view this currently as the self delegation wallet keys have to reside in the node however which presents a security risk. I know some were working on ways to use a ledger for this wallet, but at network upgrade it was not possible.

Actually your validator node does not need to have a hot wallet. secretd never uses the secretcli keychain, so you can keep that on a separate machine. You just need to send your attestation der file to the machine that has your keys so that you can register the node from there

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Yup check this video on how to sign transactions offline so your private key never needs to be exposed.
@Brendan

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That makes sense. The upgrade was just short notice for some and setups are still a work in progress!

It’s understandable. All the set up guides I have seen outline the simpler process of having your secretcli keys on the same machine as the node/validator. When I first tried setting up a validator that didn’t have any wallet keys, I wasn’t even sure it would work. Just wanted to try it since I never want to keep control of funds on a machine in a datacenter somewhere

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