Cosmos Delegator and Validator Economics

As the Cosmos network gets closer to launch, a key question is how the Atom delegation system for Validators will work. What percentage of Atoms will be delegated? Will there be the maximum of 100 active Validators? How will the commission rates be set? Where will Validators be geographically located?

These questions will largely be driven by the Atom delegators, who will stake their tokens with one or more Validators. In exchange for picking Validators, delegators have the ability to earn a percentage of network transaction fees and also receive additional Atoms from continuous inflation called block provisions. However, staking with a Validator carries the risk of losing Atoms via slashing from things like a Validator going offline, double signing transactions, or failing to vote on governance proposals.

If an Atom token holder chooses not delegate to a Validator, they will not receive a percentage of network transaction fees nor block provisions, and their percentage of total Atoms will decrease over time from inflation.

When evaluating Validators to stake with, you can think about three distinct buckets of questions: missed earnings, slashings, and commission rate.

With missed earnings, you don’t lose any money but you don’t make as much as you could.

With slashings, you lose money.

With commission rate, you receive more or less from the Validator.

How can I minimize missed earnings?

  • Will the Validator always be online and ready to vote?
  • Will the Validator always respond in time when it is its turn to create a block?

How can I avoid slashings?

  • Is the Validator infrastructure secure enough to avoid remote hacking?
  • Does the Validator have a proven and trustworthy team who won’t lose their private key?
  • Does the Validator have appropriate monitoring, alerting, backups, and disaster recovery to respond to outages?
  • Will the Validator participate in all governance proposals?
  • Is your Validator located in a stable and progressive legal jurisdiction with appropriate rules of law, property rights, and basic levels of corporate transparency?

What is a fair commission rate?

  • How can the Validator keep enough to invest appropriately in infrastructure and security and still offer a return for delegators?
  • What is the Validator doing to help grow the ecosystem?

To help answer these questions and figure out hypothetical delegator returns, we created a spreadsheet model of how we think the Cosmos system operates and the costs of running a Validator. This is not an official spreadsheet and it could be wrong. The Input numbers are uneducated wild guesses and not indicative of anything.

Cosmos Delegator and Validator Economics Spreadsheet Model Instructions

  1. Click File -> Make a Copy.
  2. Fill out Inputs 1–13 on the Summary sheet
  3. Note: Input 12 is an entire row on the 12 Month Model tab
  4. Input 13 models your return as a hypothetical delegator if you delegate a fixed amount on Day 0 and redelegate earned Atoms throughout the year
  5. Fill out One time Costs tab
  6. Fill out the Monthly Recurring Costs tab
https://docs.google.com/spreadsheets/d/1bPTnFi6R_yAqJXmRUvmaytRDGniUopzaAQaY6-hJcVk

Things may change over time and assumptions will need to be updated, but we think this is a good starting point for the discussion about what commission rates are required for Validators to create a sustainable long-term operating business that avoids missed earnings and avoids slashings.

Hubble and the Figment Networks Validator

If you’d like to study more about Cosmos Validator operations and analytics, we created a tool called Hubble to help. You can track historical performance and also sign up to receive alerts for multiple Validators.

https://figment.network/cosmos/hubble/

If you’d like to learn more about the Figment Networks Validator and our unique approach, please email at contact@figment.network