Types of Validators
Validators can encompass three overarching categories: Public, Public Anonymous, and Private.
Public validators include the widest range of entities from individuals acting as influencers to institutions. Public Anonymous validators are usually a group of individuals that have come together to offer validator services, but their identities are unknown. Private validators are best represented by institutions such as a fund, which validates its own assets, but does not accept delegations with the exception of its LPs.
Within these categories, the types of groups that validate include: exchanges, investment funds, companies, infrastructure providers, specialists, others, key influencers, and individuals.
Exchanges: Coinbase, Binance, Kraken
Investment Funds: Polychain Capital
Companies: Figment Networks, Staked, stake.fish
Infrastructure Providers: Bison Trails
Specialists: Tezos Foundation, Cryptium Labs, Iqlusion
DAOs/Other: Stake Capital
Key Influencers: Sikka
Current State of Operations
Exchanges entered the staking space in 2019. Coinbase, Binance, and Kraken were the most notable operators to enter. Coinbase and Kraken solely support Tezos today while Binance is providing services for over a dozen assets. Exchanges tend to er on the side of caution on assets added given the reputation they have built, but it is likely that they will become comfortable with an accelerated pace of additions. For users, exchanges offer ease of use and in early December, Binance initiated a race to zero after introducing a 0% fee for staking Tezos. Investment funds are largely under the radar as they primarily only stake assets, which hold a place in their portfolio. Today, most funds do not run staking operations internally, but instead delegate their assets. Those that do stake internally often deploy significant human and monetary capital to stake their investments. Companies usually represent well-funded, VC-backed startups where the business model is staking-as-a-service. Companies currently navigate an environment rifled with margin compression so they seek opportunities to grow through volume. This is portrayed through the continuous addition of assets to their universe, but they all seek to provide additional methods of differentiation from community to financial incentive. Infrastructure providers offer a packaged product to launch staking-as-a-service so that a team can focus on marketing. These providers aim to offer the best possible service through rates that cover their operations and create a free option for exposure to the PoS space. Specialists represent teams with deep expertise in a particular network. These operators aim to differentiate through educational materials, technical development on the network, community development, etc. In the DAOs/Other category, unique use cases exist such as DAO-like models where the servicer creates an alignment of financial incentives when an investor delegates to the servicer. Key influencers, smaller validators, and even an individual can move faster in onboarding riskier assets if there is a defined interest in them. They can also focus on an alignment of values. These values mostly relate to decentralization or anonymity, but can encompass other reasons.
Assets Under Consideration
Large cap PoS assets naturally drive the most interest and today, these assets include: Tezos, Cosmos, Decred, and Algorand. Other large cap assets expected to go live in 2020 include: Polkadot, Cardano, Celo, etc while further out we expect to see Ethereum transition. Large cap assets are available to delegate across most validators while smaller cap networks have sporadic availability across validators. Smaller cap networks include: Loom, Harmony, etc.
Considerations Across Validators
Individuals seeking a place to delegate their assets to should keep in mind various factors. These factors include, but are not limited to: fees, performance, jurisdiction, reputation, AUM, number of delegators, operational longevity, customer support (availability + communication platforms), assets supported, and network-specific considerations.
Fees: What % of the rewards is the validator charging as a fee? Fees should be below 20%.
Performance: Is the validator actively approving blocks and generating rewards? Is the validator responsible and therefore avoiding slashing/penalties? Uptime and performance should be as close to 100% as possible.
Jurisdiction: Where is the validator’s country of business and can delegators seek legal remediation in the event of a dispute?
Reputation: How involved is the validator? Do they participate in governance, create tools, educational materials, etc? Otherwise, has the validator shown itself to be trustworthy thus far?
Security: Is the validator open about the various partners it uses e.g. cloud partners, data centers? Has the validator released an audit of its operations or open sourced its code?
AUM: How much has been delegated to the validator? AUM is a weak-form of trustworthiness.
Number of delegators: Are there numerous parties delegating to the validator instead of just 1 or 2 whales? Number of delegators is another weak-form of trustworthiness, although a better one than AUM.
Operational longevity: How long has the business been around?
Customer support: Is there someone available 24/7 for technical support? Is this via email and/or other channels like Telegram?
Assets supported: Does the validator focus solely on one asset or support multiple PoS networks?
Capacity: Can the validator efficiently use my delegation?
Bonding Period: How long is the asset locked up for?
Slashing Penalty: What % of the staked value can be slashed?
Minimums: What is the minimum value required to individually validate?
Complexity: How technically complex is it to validate/delegate?
…and so on
Bringing it all together
For individuals, what may generally matter most centers around fees + reputation + ease of use. An example of an individual optimizing for these three factors is at exchanges. Individuals have generally had a good experience with an exchange like Coinbase or Binance so this covers the reputation consideration. These exchanges also demand no effort from their users to stake and generate rewards and therefore checking the ease of use box. Finally, an exchange like Binance is charging 0% in fees for an asset like Tezos, satisfying users across all three factors. Note: Security is crucial, but most users lack technical expertise and substitute reputation in place of security as a factor for consideration.
While all of these factors are important, some crypto participants have noted the trend toward centralization of staked assets. If an exchange controls a significant ownership of a PoS network, then the network’s security is potentially compromised. This calls for users to weigh in smaller validators in order to protect the long-term health of their investment. Smaller validators may have unfavorable fees or resources given the size of their business, but they may have a more personal touch to customer support and interest in the development of the network, its community, and values.
In continuing the conversation around supporting smaller validators, we scratch the surface of incentive designs. Incentive designs model for penalization of larger validators, subsidies for smaller validators, and subsidies for users. Penalization of larger validators occur through longer lock-up periods and decreased reward payouts. Subsidies for smaller validators occur through eased participation requirements while subsidies for both smaller validators and users occur through higher rewards when a user delegates to a smaller validator.
Paths to Innovation
While we’ve covered what the industry largely looks like today as well as today’s most important considerations, we think it is prudent to dig deeper into future innovations and how they enable validators to remain competitive. The first and least complex path is to build out interest e.g. volume in an options and swaps market to remove price risk and potentially, reward rate risk or slashing risk. This is not a novel thought and most validators are constrained by a lack of liquidity from the supply side. Outside of hedging programs, networks and validators can begin to explore liquid staking designs.
Liquid staking designs are currently being explored by several teams across the world through various implementations. These implementations in their own complex form begin as either network native products or non-native, but both seek to create a synthetic of the network’s token.
For further information, we’re working with Chorus One on a larger publication to explore liquid staking designs.
Overall, the PoS industry continues to mature and we at StakerDAO expect to contribute through multiple PoS staking products, including synthetic PoS network tokens.