Independent validators with low self stake

Independent validators that only have a small amount of coins (e.g. 10k) struggle to get into the Active set often enough to make it worth while to run a node. If it is desired to keep such validators onboard it should become easier for those validators to make it into the Active set.

What’s happening?

Lets consider 2 validators:

  • Validator 1: no TM, 10k self stake, 18% commission

  • Validator 2: TM, 50k self stake, 18% commission

When on the Waiting list, Validator 1 will show up on the Targets list with a return of ~1000%. This attracts nominators that are not aware of the dynamics yet. Let’s say both validators get elected for the next era. The TM node will get elected relatively easy, the non-TM node needs a lot more nominations:

  • Validator 1: 10k self stake, 320k from nominators

  • Validator 2: 50k self stake, 200k TM, 80k from nominators

If both validators have similar performance, they will have a similar amount of points, and a similar amount of xx rewards, lets say 300xx. The actual return for the nominators for this era will be:

  • Validator 1: 82% of 300xx = 246xx. Annual ROI for all nominators (330k): ~27%

  • Validator 2: 82% of 300xx = 246xx. Annual ROI for all nominators (130k): ~69%

Actual numbers will vary of course, but the nominators on a non-TM node typically receive a smaller return than nominators on a TM node. When nominators realise this, they will stop nominating the non-TM node and move to TM nodes. The. non-TM node will sooner or later end up on the Waiting list again for a couple of days, and the cycle repeats. More and more nominators currently are aware of this mechanism, and the time spent on the Waiting list gets longer and longer.

Possible solution

In the calculations above, TM is taken into account when determining the stake for getting elected, but it is not taken into account when distributing rewards. Question: would it be possible to take the TM into account also when distributing rewards? in the example above: instead of distributing the 246xx over 130k of nominations, it would be distributed over (130k + 200k). This would make the difference in ROI between TM nodes and non-TM nodes much smaller, and will make it hopefully worth while for non-TM nodes to run a node.

p.s. This solution has been proposed by various community members on Discord - I have repeated it here but I did not come up with it
p.p.s. A non-TM node with a large self stake (e.g. 200k) won’t have too many problem getting elected. It is only problematic for non-TM nodes with a small self-stake (and even for TM nodes with low TM and low self-stake).

2 Likes

i am linking here the two alternative solutions suggested by clueless on discord:
https://discord.com/channels/491648371556220954/986906963466133564/988007406833373214

  1. One way is for TM to take its reward and burn it. This is nice because then suddenly those of us who have TM would have profitability drop 50% (in my case, 230K TM + 210K stake = 440K on the node, and just under 300xx in node earnings :grimacing: ).
  1. Another way is for Phragmen to ignore TM and just distribute based on “real” nominator stakes, so that a non-TM would get staked by Phragmen up to 210K (same as my current stake, mentioned above).
  • In that case, TM validator would probably ask for my TM to be halved or even removed.
  • may also lead to ™ nodes quitting, which subsequently may lead to a less secure xx network. Instead of burning it all, you could also divide a part of it over TM nodes (based on performance and based on betanetstake still staked). Of course max 18 % commission should become min 2% and max 4% or something
  • Moreover TM taking reward gives new nodes with bad intentions more opportunity to push out a ‘trustworthy’ TM node.
  • Maybe TM takes reward partly, so there still is an incentive for nominators to pick ‘trustworthy’ TM nodes.
  • A disadvantage of this “under-staking” approach is that non-TM would often fail to get elected because TM nodes would have 440K and non-TM around 210K today.
  • The effectiveness of this approach would depend on the number of slots available for non-TM nodes - if it’s not too tight and it takes 210K in “real” xx to get elected, then all non-TM nodes could compete with other non-TM nodes on commission and earnings, while TM nodes would normally have 400+K on them, but the profitability would be same as non-TM nodes (because both would have 210K in “real” nominations, excluding TM on TM nodes). In other words, with this approach nominators of non-TM nodes are no longer punished, but non-TM validators are limited to competing only with other-non-TM nodes.
  • TM nodes are already not in direct competition with non-TM nodes. Which is also the purpose of the TM. More coins would be tied up on the TM nodes in order to adjust the interest rate to the non-TM nodes. So TM nodes are even better protected against a takeover. The purpose of the TM to protect the network becomes even more effective.
    TM nodes are no longer preferred by the nominators because of the higher rewards.

If anyone reading this got confused, “the higher rewards” is commission taken by TM validators (most default to the currently allowed max, 18%). Nominators’ share is then relatively less compared to nodes whose validators charge less, of course.

This is partially correct now that there’s enough slots for non-TM validators (370-350, so 20-ish these days), but hasn’t been the case prior to that (when we had 360 validator slots, for example).

Where it’s true is this (ignoring the 1K validator stake):

  • TM-backed: 215K non-TM coins, 18% commission, 300xx/day = after 18% deducted, 246xx to be split among nominators, profitability 0.1144% (day)
  • Non-TM backed: 250K non-TM coins, 2% commission, 300xx/day = 294 xx to be split among nominators, 294 / 250K = 0.1176% (day)

The thing is, you can’t know how unlucky the non-TM node will get (Phragmen, large individual nominators, etc.), which is why I say it’s still more profitable to nominate those 18% TM nodes.

There are TM nodes with over 250K, and 2% being the minimum, those can’t beat TM nodes with 18%.
Of course, 2% is completely unsustainable, so the above scenario is not realistic, and if a non-TM validator sets commission to something barely workable (say, 5%) and you get in as one of nominators, all it takes for you to get miserable returns is that some other guy nominates the same non-TM node and Phragmen puts his 50K or 100K stake on the guy. Today the guy has 225K on it, the next morning it’s 285K and you have to bail (in fact, everyone does, so the validator doesn’t get elected, and over 3 days his 5% commission effectively becomes 5% * 2/3 = 3%, and that’s when you’re lucky and get elected 66% of the time).

TM nodes, on the other hand, can’t get over-nominated like that (the unlikely chance is there, that one big nominator with >200K nominates just 1 or 2 nodes, which is extremely rare), and can’t go over 18%, so with TM nodes prospective nominator starts with pretty much worst case scenario possible. If it’s 0.1144%/day, it’s unlikely to get worse unless there’s downtime.

For non-TM nodes, thinking that the validator’s 5% commission will help you get the same return that you can get from a 18% TM node and assuming Phragmen doesn’t throw > 230K on the node in next era is almost always wrong.

Edit: I just noticed part I quoted was already conditional upon enough slots for non-TM nodes, so I’m in agreement with that.