Can you please elaborate on the following statement from the economic adjustment proposal?:
For a node operator, it seems easy to jump to the conclusion that not having their full stake backing the validator directly could put it’s place in the validator set at risk, however this is not true. We note that if a node operator always nominates their own validator as one of the (up to 16) nominations, if the stake is needed in the validator, Phragmen will ensure it goes there.
I think I don’t fully understand that sentence. How does Phragmen know, for instance, that my nominating non-validator wallet belongs to my own validator, so that it protects this validator of not falling out of the active set, even if I nominated 15 other validators that also do not want to fall out of the active set?
What comes to my mind is, why not hard-code this 18% fee for everyone and make it non-adjustable? This would also immediately cancel the fee race to the bottom, which can be seen in most other PoS blockchains. Having adjustable fees always only favour the big validators, as they are not dependent on income from fees as are the small, independent validators. VC backed validators often set their fee to 0% to attract nominations by at the same time out-competing the small validators, who cannot sustain running on 0% long-term.
Moonbeam, a Substrate-based parachain to Polkadot, is pioneering this fixed fee system (set to 20%), and it is working well so far.
It benefits the network, the independent validators, and the nominators, because:
If you look at other PoS networks, validators with a 0% or 1% fee often attract the highest number of delegators/nominators. With the hard-coded fee in Moonbeam, attracting delegators through fees is no longer an option. Because of this, delegators primarily focus on APY, with APY being a direct function of the number of blocks validators make over a period of time, like 1 era, 7 eras, or longer. Although an important factor of making many blocks is luck, a constantly low APY suggests low quality hardware, poor configuration and poor or no monitoring.
Validators on Moonbeam know of the importance of a good APY to remain in the active set and invested significantly in good hardware and have a good monitoring system in place, which overall benefits the performance of the network.
Investing in good and performant hardware and a good monitoring system is costly and time consuming. However, the revenue stream from being in the active set is significant due to the 20% fixed fee. So validators are doing anything they can to remain in the set. Not doing anything they can will put them at risk losing the seat in the set and access to that revenue stream.
Moonbeam just fully launched a few weeks ago and is thus still very young. Although the focus of delegators currently is on APY, I foresee that a good APY will not be sufficient to attract many delegations long term. I believe that other contributions will be required, like the development of tools, community outreach and education, etc, to stand out and receive delegations, which will ultimately benefit the entire ecosystem.
So the point I’m making is, as it was statistically determined by the xx team that a 18% fee benefits the validator community, why not hard-code this fee to make it accessible to all, not only TM recipients, thereby cancelling the race to the bottom?
As the example of Moonbeam has shown, hard-coding the fee does not necessarily result in degraded performance, as the focus of delegators shifted to APY. While APY is a performance metric, fee is not.
I argue that a general low fee is bad for a network, as a validator community that operates on low or no fees does not run their clients on high-performance hardware to save on costs, or are out-competed by VC-backed validators, who tend to run several validators, which is ultimately bad for decentralisation.
I admit, however, that the conditions are different in xx, as there are stricter hardware requirements (especially GPU) as in most other PoS networks (maybe excluding Solana), the xx team also targets an increasingly large validator set, and did a great job to develop a committed and decentralised validator community.
Thanks for taking time to make your points, they will be helpful to the xx Team and I hope they answer questions meant for them.
I’ll just add my own views.
It’s always a race to the bottom, though. I imagine the first ones to drop are “amateur validators” (by this I mean a validator who has a day job and runs one residential node), so it’s the same effect as POW.
Guess who’ll make it in the Moonbeam system:
Amateur validator vs. Professional validator (person who runs half a dozen xx nodes, or maybe 1-2 nodes on half a dozen chains)
Pool (group with own servers and maybe even data centers) vs. Professional validator
I think having a fixed minimum commission only ensures that a chunk of every validator’s earn goes to a cloud provider.
Maybe it doesn’t because amateur validators are getting replaced by professional validators and pool validators.
We don’t have such analytics available for xx network and the number of slots is limited, so I can’t say I notice any trends yet, but once such statistics become available I think we’ll see that high minimal commissions encourage centralization in both pools and hyperscaler environments which increases long-term risks of losing significant capacity at once or getting Parler’d.
Those risks are hard to estimate and measure, so it’s anyone’s guess whether this concern is misplaced or real.