[PROPOSAL #12][ACCEPTED] Are validators charging 0% commission harmful to the success of the Cosmos Hub?

• Moderator edit to add link to on-chain proposal: Mintscan This governance proposal is intended to act purely as a signalling proposal. Throughout this history of the Cosmos Hub, there has been much debate about the impact that validators charging 0% commission has on the Cosmos Hub, particularly with respect to the decentralization of the Cosmos Hub and the sustainability for validator operations. Discussion around this topic has taken place in many places including numerous threads on the Cosmos Forum, public Telegram channels, and in-person meetups. Because this has been one of the primary discussion points in off-chain Cosmos governance discussions, we believe it is important to get a signal on the matter from the on-chain governance process of the Cosmos Hub. There have been past discussions on the Cosmos Forum about placing an in-protocol restriction on validators from charging 0% commission. [Governance] Limit validators from 0% commission fee This proposal is NOT proposing a protocol-enforced minimum. It is merely a signalling proposal to query the viewpoint of the bonded Atom holders as a whole. We encourage people to discuss the question behind this…

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My point of view is that we can think of the Cosmos Hub as having a “security budget” and that security budget is best expressed as the “stake weighted average” of validator commission.

When delegators chose 0% commission validators, they are effectively moving the aggregate amount Cosmos is willing to pay it’s operators to secure the network towards 0.

This is not in the interest of atom holders.

I think it’s a great property of the Cosmos system that we are constantly negotiating the security budget of the system.

As an Atom holder, it’s in my interests to do everything I can to persuade Atom holders that a security budget > 0 is in their interests. I believe it is.

First, I would strongly advocate that Atom holders should not delegate to 0% commission validators because they are harming the formation of a healthy equilibrium security budget.

Second as iqlusion, I can deploy plans to start competing more heavily to demonstrate to my delegators what value they getting for spending on security.

yes, I think it’s harmfull. The commission designs for balance the validator delegate amount. If commission is 0%, some validators may produce more and more blocks because there will be more delegators, and other validators earn smaller, so they may leave the network, it will cause bigger corner the network, and it’s unsafe for the network. It’s reasonable for 5%-15% for commission.

Long term: maybe.
Now: not really.

Unless we have a descent model to simulate the dynamics of delegation and fee, the long term effect of 0% fee (or even 100% fee) is hard to predict and should be observed/studied as we go along.

Also, until IBC, I think Cosmos Hub isn’t generating the proposed intrinsic value (providing the global optimum for channeling communications), so I am open to validators exploring all possible combinations of parameter setting, at least until IBC comes around and changes the optimum state of system.

Are validators charging 15% detrimental to the success of Cosmos ? Are these validators forcing delegators to go to the lower commission based validators ?
Will 15% validators lower their commission fees when 0% validators increase their fees as many have signalled ?
When atoms increase in price will 15% validators lower their commission ?

0% is not healthy in the long term and most running at this level have stated they will raise commission. When will those 15% validators state their intent to decrease commission ?

3%-10% is the target area.

I personally consider 0% commission has a negative impact both on short term and on long term for the ecosystem. For the short term because it transmits a wrong message to the non technical community members, they are getting confused and are asking themselves what is the purpose of the commission if some validators are running with 0%. Also non-technical people are not aware of the security, hardware and human resources that are required to setup, run and maintain a proper infrastructure and 0% is not increasing the awareness of these aspects. For the long run because it gets out of the game the smaller validators, it’s an indirect way of affecting the decentralisation of the HUB and encouraging validating to be an activity dedicated to large player who have a large self owned stake. Regarding the healthy minimum commission rate, this is not a question that can be answered by simply taking the answer “out of a hat”. It depends on multiple aspects of the validator. Some validators may run with lower commission rates (eg: maybe they already have the hardware and human resources from other businesses they run and they can allocate them for validating and there is no need for…

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yes , 3% was just based a quick look of the < 10% validators of which there are quite a few.
edging around 10% may be a current target , but as I say when atoms hit say $20 will validators still justify high commission fees ?

I also think 0% commission is harmful to the success of the Cosmos Hub. 0% commission validators destroy other validators by absorbing delegation from positive commission validators. Continuous migration to the 0% commission validators will lead to the domino of bankruptcies of quality validators with relatively small delegation, especially during low atom price. 0% commission from tendermint employee is especially harmful because it can mislead delegator community that they might become thinking that the validating service should be free. (because delegators have respect and trust on the activity of employees of tendermint) So, Sikka’s 0% commission is not only directly harming the network, but also impact a lot of psychological, and philosophical reasoning of 0% commission rate, lead by Sikka’s activity. Those invisible impact can be much more harmful because it can accelerate the migration of delegation to 0% commission validators. We have to think that many validators are private corporation, and it costs a lot. Currently funding of validator corporation is not very easy especially from traditional VC industry. Those corporations are so fragile that I think many of even…

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A valid question, but a little early to have an answer for that. I think the “market” may force validators to lower their commission at some point. For now with a 10k ATOMs staked one makes around 3 ATOMs/day. It might not make a difference to him that much if he pays 0.3 or 0.45 commission to a validator at 4 usd/ATOM, however that may change at 20 usd/ATOM. On the other hand, this proposal seems a little funny to me both in formulation and in purpose as it may put validators and delegators in two opposite sides. What I wrote in my upper answer is my perspective from a validator point of view. If I would be a delegator I must say that I would think it from profit and saftiness of funds and if I will be able to decide between paying a commission or not and have my funds safe enough with 0% commission I would go for this choice and I would care less for network security or decentralisation on the long run. Also lets not get tricked by the higher ideals where ATOM holders are thinking for the long term network health, as they are not, this is specific to only a very very small percentage of active players in any dynamic market. As an example I know a few ETH “lovers” that were…

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`Forbole` has voted `NO` in the `proposal 12`. The transaction can be found here . My partner @terence has posted an article explaining our views on the downside of setting up a minimum commission fee at this stage. Medium – 6 Jun 19 Downside of minimum commission rate - Forbole - Medium Rethink the business model Reading time: 3 min read I would like to add some more points here why we don’t think 0% commission is harmful to the success of Cosmos Hub. • It should be a free market. 0%-100% is all business decisions any validators. Even if we don’t allow 0% commission, or have a non-protocol guideline of a suggested minimum commission, validators can always have some kind of rebate or even have a negative commission for their delegators. The minimum commission will just be the new 0%. • Inflation is not reward, it is a punishment to the ATOM holders for not bonding their ATOMs to the network. At the current stage of Cosmos Hub, there is no transactions between networks and it is not generating any economic value. Why we have to dilute the value of the ATOM of the holders? All those so-call yield, staking rewards, etc on…

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Hey @sunnya97, glad to see that you’re addressing this. Perhaps it’s more than just 0% commission that’s harmful to the network, in terms of decentralization.

Strategies that concentrate delegated stake may include having 0% commission, but also consider that validator reputation (ie. being a Cosmos/Tendermint insider) coupled with having 0% commission may have led Sikka to dominate a few different delegation metrics.

Perhaps it’s worth considering what might happen to the distribution of voting power if other known Cosmos/Tendermint insiders began staking with 0% commission as well.

Exactly, it’s been sort of a soft policy of Iqlusion to keep our commission relatively high and our marketing efforts fairly minimal to prevent our relative stature from resulting in excessive delegation to us.

It’s pretty clear that a lot of Atom holder will preferentially delegate to project insiders.

I guess where my head is at is that it’s probably time to keep iqlusion’s commission on the high side. But start competing more on the marketing side.

The question about ATOM/USD exchange rate was relevant. A healthy equilibrium average stake weighted commission.

It’s really important to realize that in emerging market if everyone just acts in their rational self interest you may never find a stable equilibrium.

The shift from validators thinking in the collective interest to purely rational self interest needs to happen gradually to optimize the chances of a stable optimal equilibrium emerging.

I don’t understand the premise for the original post. To me the underlying question is not whether validators charging 0% commission are harmful but rather whether the parameters defined by the protocol (or whatever layer you want to attribute it to) that allow for 0% commission create the incentives that the builders and community are currently favoring for short and long term growth and sustainability. Phrasing this as “validators are harmful” makes this personal - when in reality the validators are operating within the context of the incentives provided to them.

Prior to the hub launching there was not a lot of real world deployment to look at for inspiration on how staking would play out. Now that the hub has launched, delegations made, and markets open for trading there is a lot more information. With this new information - maybe the incentives should change - maybe they shouldn’t.

Focusing on the system incentives can help shape fundamental behavior shifts - but being upset with validators who are operating within the bounds of the system does not properly highlight the system as being the thing that needs changing - not the validators and people that operate them.

Ztake hasn’t voted yet but leaning towards voting “NO”.

There are a lot of good points brought up and discussed but here are a few more points that I want to remind everyone.

1. We haven’t seen that many large companies getting into validator business yet. Ztake can’t compete with Sikka’s 0% commission + employee advantage but Sikka won’t be able to compete with Coinbase resources when they join.

2. If we introduce on-chain minimum, 3% validator could still pay back the fee collected to its delegators via smart contract.

3. Commission rate was supposed to be one of a few on-chain mechanism where validators could “signal” lack of interest in more delegations.

I think that it is might not necessary to introduce in-protocol minimum at the moment but CRUCIAL to work on in-protocol decentralization incentives.

@roman
I think we have two kinds of guideline, rules by protocol, and moral responsibility. Those two might have different guidelines. Allowed by rules of protocol does not necessarily mean it is moral and responsible.

The word harmful is relatively closer to the moral concept. It is allowed in protocol, but “is it moral for entire network?”

Humans running the validator, humans develop blockchain software. Although this blockchain environment is purely rule-base and does not have any moral sense, person who runs the validator should have such good sense of moral and responsibility. And I hopely think those good sense of moral and responsibility should have effect on delegation.

I believe protocol rules are not the only reason for humans to change their mind. We are not computers. Discussions and communications without protocol forcement also change self-motivated humans’ minds.

I see that 0% fee can lower the persuasiveness of the security narrative. I also see that Sikka might have attracted delegators by being an insider, on top of offering 0% fee. I disagree with the argument based on the ethics though. We don’t want to go down that road, because if we start restricting what we can do on cosmos hub based on a set of ethics we will be bound by that set of ethics and become just another representation of “-isms”.

In order to achieve the full potential of cosmos as a human coordination framework, I think we should accommodate a whole spectrum of morality. Perhaps the bottom line might be set for some ideas that attempt to harm the global system for the local self interest.

So it would be great if someone can demonstrate how 0% validators are compromising the security of cosmos hub. Or can non 0% fee validators explain how the fees are being put back into achieving higher security and How it is difficult for 0% fee delegators?

Gavin: Perhaps it’s worth considering what might happen to the distribution of voting power if other known Cosmos/Tendermint insiders began staking with 0% commission as well. bharvest: I hopely think those good sense of moral and responsibility should have effect on delegation. zaki: It’s pretty clear that a lot of Atom holder will preferentially delegate to project insiders. I agree that it is a problem more than 0% commission and at the end it all controlled by the people who execute the validator nodes. If it is more on a moral and responsibility issue, we may have some kind of `The Code of Validators` which is publicly written by the validators. If it’s an issue about the project insiders, I think it depends on how AiB communicate with their employees. There are a few project insiders running validators and obviously `Sikka`, `Iqlusion` and `jackzampolin` have more delegations over the others as they are more on the community end. I don’t see low commission brings any benefit to other project insiders. Both cases will lead to a vote of `No` and we should look for defining the real problem first. roman: but rather…

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i am writing this tl;dr type of post as a newbie to blockchain. also, i have been involved as a delegator in the cosmos hub only since june, so this is written with all due respect to the more knowledgeable and experienced members in the community first, while i understand that this proposal is only for signaling purposes and will not effect a protocol-enforced minimum, it is in my view a discussion on censorship – a hindrance to self-expression, which 0% commission is. this would be anathema to the ethos of disintermediated, permissionless, borderless and censorship-resistant transactions of blockchains. second, validators and delegators are undertaking their respective activities for economic gain. they are in engaged in business; they are cognizant of risk. should there be a protective floor for validators (or delegators for that matter?), a safety net of sorts? could this be considered cartel-like or at a minimum collusion? alternatively put, would it be inappropriate for a validator to make the following business case to potential delegators: (a) the economics during this bootstrapping phase of the cosmos hub is barely tenable; (b) we will pass on all scant financial…

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I expect the edge case of all validators operating with 0% commission will be detrimental to network security and availability. Many will not be running a viable business model and are at increased risk of default and/or are relying on the good will of third parties providing free hosting.

It also doesn’t seem like there is any good technical way to force a minimum commission, as validators would be able to reimburse the fees, although it would require some implementation work and likely have tax implications.

However, the network needs validators that are healthy and in it for the long term. One thing we could consider instead of a minimum commission is introducing a stipend for all validators, It could be tuneable through governance and competition will exist between low VP validators to remain in the set to receive the income.

Some of the properties of such a stipend could be:

1. Large enough to be meaningful for “small fish” validators
2. Small enough to so that large validators are not incentivised to change behaviour
3. Paid out continuously to validators in the validator set
4. Sourced from community pool
5. Managed through governance

IMO this propo looks like spam and auto promote or free publicity.

Menawhile Sikka maybe needs start charge fees now bc is in top 5?
And see others every day winnings Atoms for pay bills…

Who can be forever 0% commission?

Imagine be a miner and for free in PoW.

Why not ask about that or how they plan charge fees? Or road map?.

I said for melea 0% is ok.
Im not planning vote this propo because looks and is spam.

Ok

I urge that 0% commission is harmful. (though I think 0% commission is a good strategy for small validators to promote themselves) However, I think security is not the main point of 0% commission problem. Even 0% commission is forbidden, there are lots of incentives which makes validators invest security less before we solve the asymmetric information between validators and delegators. (So I think the proper solution of security problem is slashing.) Nevertheless, I think there are 2 possible negative effects. One is that could make the non-technical community members ignore costs of node operation. (It is the problem which @syncnode mentioned ) I think this problem is not a big deal, because it could be solved by simple nudging, for example, prompting (community tax rate + commission rate) in place of (commission rate). The other and more important problem is that 0% commission is very strong disincentive that (especially whale) atom holders start to operate their own new validators. As @kwunyeung says, inflation is a punishment to the atom holders not bonding their atoms to the network. Likewise, commission could be a good punishment to the (especially whale) atom…

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IMO we should not penalize validators who are operating legally within protocol boundaries. The free market should decide which validators survive and which ones should be eliminated. There are many workarounds even if in-protocol restrictions are set for 0% commissions. We should look more into how we can incentivize delegators to not just look at fees, though I think that most delegators will just opt to delegate to validators who participated in GoS and/or part of Tendermint team because they are deemed safer. Middle-range validators who did not participate in GoS are probably in the worst spot, but that’s another topic lol. I’m particularly fond of stake-based slashing (where higher ranked validators get slashed more than proportionately as compared to lower ranked validators, suggested by @sunnya97 ) and stake-based unbonding (where higher ranked validators have a higher unbonding period as compared to lower ranked validators, suggested by @asmodat ): • It forces validators to be more transparent about their setups and security policies in order to attract delegation; • It forces delegators who values liquidity to think about bonding to smaller validators with proper…

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Valid points, I basically calculated this security budget for Cosmos and Tezos for this post we published in April. The stake weighted average commission rate at that time was 9.7% for the Cosmos Hub, it probably went down since then. With $750mn market cap and 71% staked (resulting in 10.13% reward rate), this means the yearly security budget of the Cosmos Hub is probably around $5mn ($5.23mn taking the exact numbers provided). If we consider the security budget for the 100th validator with a stake of currently 40k Atoms (~$160k) taking the weighted average commission rate, current reward rate and market cap, it means that if this validator’s stake is coming only from delegations, his security budget is $1,572 per year. This obviously probably bearly covers the infrastructure cost for a basic setup and in no way justifies any human capital spent on security etc. Using the weighted commission rate here makes sense imo because it is reasonable to assume that this is the maximum a smaller validator can charge and still get delegations. Taking this perspective, 0% fee validators clearly are harmful as they bring down the security budget for the network. There are also some…

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I’ve read all of the comments here and have given the issue some careful thought. Here are my opinions: • Enforcing any kind of minimum or maximum at the protocol level will only harm the free market economy that exists. It’s too easy to “charge” one fee via protocol and then settle out-of-band to get around any kind of “enforced” minimum… very much like how it’s ineffective to “enforce” that no one validator receive more than x staked ATOMs. (They can just create two validators and divide the stake between the two to get around any kind of protocol enforced limits.) • It is a logical fallacy (non sequitur) to conclude that validators who offer 0% fees do not have a secure/redundant setup (or conversely: a validator with high fees is secure/redundant. We saw Polychain (with 20% fees) go offline for long periods of time.) Perhaps a 0% validator makes their money another way that allows them to offer 0% fees. It’s up to each validator to figure out their own economics, their own overhead costs, their own security models and I think it’s a mistake to have the Cosmos protocol meddle in individual validators’ business; they’re independent for a reason. If companies want to pay…

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I need to mention that the free market could be threatened by negative externality.
When it comes to negative externality, governance or regulation could be a good solution.

I agree that some regulation which has perverse incentive could harm the efficiency of free market.
However, we should aware that the free market itself is not always efficient.

I would really like to see some numeric evidence with regards to 0% fee validators doing any observable harm to the system. My cursory inspection of this forum tells me that a 0% fee validator such as Sikka achieves their low running cost by having an access to university server. I am okay with that. I also work at university and I can tell you that securing your spot on university cluster is really competitive for a large university, now that everyone wants to try out their poorly optimized machine learning algorithms. I am sure Sikka worked hard to earn their spot. Also, does a tall person deserved to be called out for making it into the league-A basketball team “just because the person happens to be taller than others”? No.

FelixLts:

Taking this perspective, 0% fee validators clearly are harmful as they bring down the security budget for the network. There are also some implications for what a reasonable validator set size is. In the end it requires education around these concepts and potentially goodwill from delegators (or more and stricter slashings?) to understand the implications of delegating to 0% fee validators.

The argument only valid on validators who are not eager to invest their resources on security. Commission is independent to the whole validator setup. In your perspective, do you mean validator charging 100% commission has the highest security setup?

Instead the flexibility of the current protocol leave us room for creativity, just like our investors support us to run the #PWYW campaign. And I’m happy that our investors and delegators understand 0% commission have no negative implication to the security of our validator setup.

mperklin:

The fees collected by validators do NOT say anything about how secure the validator is.

You are of course right that commission rate is no indicator of a secure setup. My argument is that by charging a low/0 fee other validators are forced to also charge lower rates to compete, thus lowering their security budget, and in turn what the network is spending on security as a whole.

If a system succeeds because of good will of the participants then it is a game-theoretically fragile system. The cheaters will eventually invade. Ideally the system should work regardless of the participants being kind to one another or are at neck and neck to each other. A robust system should be indifferent to this. There’s only a scenario but no evidence that a particular set of validators are harming the system. They are not cheating. If their setups are fragile then they will get slashed.

I don’t agree with this. I don’t see this happening in many existing markets. And I don’t see how you make the direct relationship between commission and security budget. The commission should not be the only income of a validator (currently is as there is low tx fee) and the security budget is one portion of the total budget of a validator. Knowledge on protocol, security setup, contributions to the community are investments before being a validator. The budget should be there before taking up any commission. This is a commitment of a validator. If a validator rely on the variable commission to define their budget, do they change security budget on every delegation change?

In our daily lives, we see how large entities squeeze the small parties to die by using pricing strategy. On Cosmos, I hope it would still be a free market to encourage competition while we think ways to help small parties to survive with their initial small budget. When they become stronger, they can improve their setups and contributions to become a bigger player. I’m one of those who got a lot of help from the community and eventually become confident as a validator.

“The commission should not be the only income of a validator (currently is as there is low tx fee)”

Comission is also applied on the tx fee, so where is the difference to now when tx fees come in? Also what else do you see as the income of a validator? I think it’s pretty dangerous to rely on income from other activities, as that will mean that parties such as e.g. exchanges that can subsidies 0% commission through trading fees will end up maintaining the network.

kwunyeung:

The commission should not be the only income of a validator (currently is as there is low tx fee)

I do mean the income includes commission and tx fee in the above context. I think validators should rely more on tx fee in a long run as the inflation is not a reward and getting more commission from the ATOM holders is diluting their asset.

A suggestion on disencouraging(not enforcing) ultra-low commission rates by top rank validators • min_commission_mandatory_rate : a commission rate that any delegator of a validator should pay(either to the validator or to the community fund) • min_commission_mandatory_rate = 1.0 * validator_power / total_power • block_reward * commission_rate : goes to validator • block_reward * max[0, (min_commission_mandatory_rate - commission_rate)] : goes to community fund When “min_commission_mandatory_rate <= commission_rate”, the distribution is same as now. When “min_commission_mandatory_rate > commission_rate”, the difference amount will be donated to community fund. 1.0 can be a genesis parameter so that governance can decide. We can think that current value is 0. Example) Validator A has 7% of total power, and commission rate of 3%. Then, delegators pay 3% commission to validator A, and delegators donate 4% amount to community fund, resulting in paying 7% as total. Good things about above approach, • It is not an enforcement on commission_rate of a validator. It is a strong disincentive given to validators having ultra-low commission rate. Validator can still…

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@sunnya97 It’s really great for you to put up the proposal,cosmos uses inflation to both punish unbonded stake and incentivise bonded stake.From a delegator perspective I stake because I get rewards and it saves me from being punished.So,lot of delegators would definitely think of getting more rewards and this only increases with atom price going down.In a free market where we see everyone aligning to more monetary incentives,you can’t expect delegators to distribute stake to validators with 10% commission when they have a 0% commission fee validator from cosmos team who has better knowledge.
tl;dr 0% commission may not directly impact network security but over time will make other validators(whose only income is from staking) leave the network thereby making network centralised and weaker

I like the idea, but it still susceptible to the “rebate attack”:

1. Validator sets commission to min_commission_mandatory_rate
2. Validator rebates delegators whatever they paid in commission

Yes I agree. The rebate attack is very universal concept related to most design for distribution. @meherroy introduced a solution something like https://kleros.io/
I think we can research further on this topic(dispute resolution) independently from commission topic, to make each problem modular.

I feel 0% fee validators cause the network to become less secure over time. I’m not sure I would impose a minimum fee floor though, as doing that feels more autocratic than democratic.

Chainflow Staking (ChainflowPOS)

A global minimum isn’t the only option.
The most important part I would like to add is a suggestion of a minimum fee proportional on the amount of ATOM a validator is in control of. So a global minimum fee is not necessary and validators with less than a certain amount of ATOMs staked, let’s say as an example, 1%, would be still able to offer 0% fees.
A linear function or an exponential function could work with a lower boundary at 1% and the maximum amount at 33% which we could all agree it’s bad. The function could look like this.
This is just an example of course, parameters can be changed, but this alternative approach can offer a sensible middle ground between no minimum fees and a global minimum fee.

We hosted a podcast discussion around the 0% fee topic with Michael Perklin from Shapeshift, Sunny from Sikka, Chris from Chainflow and Brian from Chorus One. Give it a listen if you are interested in their viewpoints: https://chorusone.libsyn.com/7-validation-economics-and-the-impact-of-zero-fees

Also, as a side note: the proposal passed today with 63% of ATOMs participating. 59% voted yes, 0% fee validators are harmful to the network (https://hubble.figment.network/cosmos/chains/cosmoshub-2/governance/proposals/12).