Disparity of the minimum stake requirement (MSR) for entry into the active set
Dear Council,
I write to you in the aftermath of a failed referendum, despite the outcome, a fair majority of the community voted for change. I don’t perceive this as votes strictly for a decrease of the active validator count but votes in principle against disparity of entry into the active set.
With this referendum failed I would like to steer discussion towards determining the root cause of the issue and how it may be addressed. It is my belief that if nPoS receives ‘ideal’ information it would do a better job at levelling stake. This issue, as I perceive it, is that there are barriers towards a natural progression of nominations. If a validator is able to enter the active set with a lower total-stake, their return per KSM would be high and attract nominations, thus helping to level stake. This natural and ideal progression is inhibited by exorbitant commissions, at many times 100% and blocking of nominations.
My suggestions are as follows:
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Establish minimum and maximum commissions on-chain, the values of which can be determined by governance. The establishment of a maximum commission to some reasonable amount like 12.5% should allow fair earning for validators and allow attractive returns for nominators. This change also aids with removing 100% commission duping i.e. fooling a nominator into believing that your commission is lower than it really is. Duping will still exist but it would not be as detrimental.
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Remove blocking of nominations.
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Increase the transaction fee for kicking a nominator and allow this fee to be configurable via governance. This is recommended with the intent to dissuade nominator kick scripts. My suggestion is 0.01 KSM, governance configurable.
Despite having a maximum commission that is <100%, custodial staking services can still make themselves unattractive to nominators by positioning their self-stake higher than average or at average and with maximum commission. Providing that they own their nominated stake (which is generally the case) commission vs staking rewards matter not.
Your thoughts are as always appreciated. I look forward to them. Please see follow up posts with example calculations and suggestions from the community.
I would like to make it abundantly clear that the nPoS system is not making any deliberate attempt to favour any one party. This is just as a circumstance of nominations and the demand on the nPoS system to produce 1000 validators within the 3 nPoS tenets.
Kind Regards,
Will | Paradox
Comments (8)
Comments (8)
Example. A validator is able to enter the system at the lowest entry point, this is currently 3,096 KSM. He is limited to a maximum commission of 12.5%, his returns are now 23.74% APY. This puts him at the top of the nomination list and he begins to attract nominations due to profit. He receives nominations up to 3,600 KSM until his APY reaches 20.42% which is competitive with validators at 4,086 KSM operating at 0% commission. If a minimum commission of 3% is applied then 3,675 KSM will be required to even returns with a validator operating at 4,086 KSM (3% commission). Using a final total stake of 3,675 KSM and assuming the validator owns the starting 3,096 of stake, 579 KSM belongs to community members, the validator has lost ~18% on the return of his total stake. This provides a disincentive to cheating the system. As this natural progression keeps happening with more validators operating at the same parameters there is a natural levelling of stake. While validators on the lower commission end may lose some nominations they can still benefit from a fair minimum stake.
Duping is something that requires some explanation. The commission that a validator charges is fixed for the era. Let us assume this value is 100% commission. The validator can, on the on-set of the era change this to 0%. nPoS has already determined that 100% will be applied but the UI will show 0% for the rest of the era. Nominators will be attracted to 0% and nominate the validator. It will only be after rewards are distributed that the issue will be apparent and that is if the nominator notices. If this is done for each era the validator can collect nominators at 0%, switch to 100% for a period sufficient to be recorded as the applied commission for the following era and then switch back to 0% 100% is a bit extreme but if done with smaller commission changes like 25% it can be overlooked from a rewards perspective as a bad era due to probability. As validators may change for each era it becomes more difficult for nominators to identify an issue.
Example. A validator is able to enter the system at the lowest entry point, this is currently 3,096 KSM. He is limited to a maximum commission of 12.5%, his returns are now 23.74% APY. This puts him at the top of the nomination list and he begins to attract nominations due to profit. He receives nominations up to 3,600 KSM until his APY reaches 20.42% which is competitive with validators at 4,086 KSM operating at 0% commission. If a minimum commission of 3% is applied then 3,675 KSM will be required to even returns with a validator operating at 4,086 KSM (3% commission). Using a final total stake of 3,675 KSM and assuming the validator owns the starting 3,096 of stake, 579 KSM belongs to community members, the validator has lost ~18% on the return of his total stake. This provides a disincentive to cheating the system. As this natural progression keeps happening with more validators operating at the same parameters there is a natural levelling of stake. While validators on the lower commission end may lose some nominations they can still benefit from a fair minimum stake.
Duping is something that requires some explanation. The commission that a validator charges is fixed for the era. Let us assume this value is 100% commission. The validator can, on the on-set of the era change this to 0%. nPoS has already determined that 100% will be applied but the UI will show 0% for the rest of the era. Nominators will be attracted to 0% and nominate the validator. It will only be after rewards are distributed that the issue will be apparent and that is if the nominator notices. If this is done for each era the validator can collect nominators at 0%, switch to 100% for a period sufficient to be recorded as the applied commission for the following era and then switch back to 0% 100% is a bit extreme but if done with smaller commission changes like 25% it can be overlooked from a rewards perspective as a bad era due to probability. As validators may change for each era it becomes more difficult for nominators to identify an issue.