We are proposing a new on-chain model for the validator reward system with the goal of creating a more sustainable income for all validators, including the lower-ranked ones. This proposal is inspired by the reward system implemented by Nois Network1.
Current Situation
At present, the rewards for validators on the Secret Network are heavily biased towards the top-ranked validators. This results in significant income disparity and a lack of sustainability for validators further down the ranks.
Proposed Solution
We are proposing a shift from the current inflation-based model to a flat compensation model for all validators. This implies that regardless of the ranking, each validator would receive the same amount of reward. The Nois Network implements a similar model where they allocate a fixed percentage (6%, which we don’t need, we think that 2% is enough here, see below) of the inflation to validators in the active set, and each validator receives the same amount that is not shared with stakers1.
The Implications
Higher-ranked Validators: The income of the higher-ranked validators would decrease, if this proposal passes.
Lower-ranked Validators: The income of the lower-ranked validators would increase due to the flat fee, ensuring sustainable income even for those at the bottom of the active set.
Risk of Sybil Validators: With the new model, there could be an increased risk of Sybil validators as even the bottom-ranked validator would still get the flat fee.
Method of Implementation
The easiest way to add this flat fee would probably be as a tax. This would circumvent the need to add a new inflation mechanism, albeit at the cost of public perception due to the term ‘tax’. However, we believe the long-term benefits of a more equitable and sustainable validator reward system would outweigh this potential drawback. We still need to ask SCRT Labs how hard it would be to implement such a system in practice. Based on the extensive knowledge with splitter contracts with the Terra Builders Fund, I hope we can find a fast and easy solution for it.
Added afterwards: After doing some calculations, we think that 1.5%-2% gives validators a base income of around 10k SCRT yearly, which is enough at current prices to sustain a validator node.
We are eager to hear your thoughts, feedback, and suggestions on this proposal.
While the motivation for a more sustainable income for all validators, regardless of ranking, is a fine goal, I think delegators should understand that the flat compensation model being proposed in this proposal, in its current form, effectively establishes a 6% network tax on all stakers that goes to validators. This would be on top of commission. I’m highlighting this point mainly because the current presentation of the proposal appears to be primarily addressing validators, but the implications for stakers need to be made clear as well.
We might need to add that 6% network tax is just an initial number taken from Nois. After doing some calculations, we think that 1.5%-2% gives validators a base income of around 10k SCRT yearly, which is enough at current prices to sustain a validator node. I added this to the original post.
I think Ian is mostly referring to the fact that this proposal on its own would only increase rewards for all validators, specifically focusing on making low ranked validators more sustainable.
To see the anticipated changes as mentioned in the OP it would need to be combined with a reduction of the inflation, which is currently also being discussed.
Yeah that’s pretty much what I’m trying to say, it really speaks to validators mostly and less so about how it lowers staking ROI. 1.5% is a lot less than 6% though so I welcomed that clarification in the post. I think the implications listed here and in any potential on chain proposal should include that it lowers staking ROI so that’s made more clear to non validators.
Is it a 6% tax from the 15% inflation rate? For example, if a block reward is 100 SCRT, then 6 SCRT is evenly distributed among all validators, 2% goes to the community pool, and the remaining 92 SCRT goes to stakers? What about the proposer reward bonus?
The first one is sybil-ing, which was already listed on the proposal.
The second is I don’t agree with the notion that the protocol needs to make private ventures sustainable. Your own validator is an example of a node thats started late and yet made it high up the rankings. Other people can/should put the same effort.
if this path is taken i think it would make sense to (temporarily) decrease the number of active validators as well. This could potentially allow even a 1% inflation cut to be sufficient.
Additionally i think if this proposal passes it should go hand in hand with an inflation decrease seeing as the impact this might have on the overal chain security than becomes lower.
Id like to see this proposal calculated out with some form of sensitivity analysis before it goes on-chain.
I agree the proposal should go with proper setup into decreasing the inflation of the network and hence making the protocol tokenomics more viable and sustainable for long term investors and users.
I do like that a flat rate is set, alternatively other protocols also implemented a minimum commission of 5% to make it sustainable for validators.
I think it makes more sense to tie a proposal like this to a set size decrease vs an inflation change. Inflation requires a separate and longer in depth discussion.