Stakers vs. Validators: The Missing Transparency in Delegated Proof-of-Stake Networks
How to do due diligence on Staking Providers
Time and time again, we’ve seen the act of staking delegation come up as a key friction point for staking newcomers, both informationally and financially. Staking is, put simply, the act of lending your network capital to attest to the credibility of transactions performed on the network. In practical Proof of Stake terms, a network user usually delegates his capital to one of a fairly small number of validators (typically 50-500) who perform the computational lifts of attesting to every network transaction.
Network validation has become its own big-money subsector of the asset management industry. The market cap of Proof-of-Stake networks, including the Ethereum Beacon Chain, now exceeds $40 billion; staked market capitalization under management exceeds $25 billion. Validators charge a management fee to delegators (typically 5-10 percent of the gross staking rewards), and in return, are expected to perform services at a basic level of trust and efficiency. Validators who do a poor job are slashed at a fixed or accelerating rate for “bad” network behaviors, such as having significant downtime, or attesting to manipulative or erroneous transactions. Delegators who delegate to poor validators lose out on rewards and also generally carry slashing liability when their validator is a particularly poor network actor.
Additionally, when stakers delegate their capital to validators, they entrust governance responsibility to the validators too. While most delegated proof-of-stake networks allow delegators to supersede validators on specific votes at their own discretion, in practice, there aren’t enough hours in the day for delegators to be actively involved in multiple chains’ governance processes. In times of crisis, when large amounts of information need to be processed in a shorter and shorter timeframe, delegators don’t have the time to understand key issues at play. Unethical validators can then influence governance processes at the severe expense of small-time network participants.
Thus, stakers have both a near-term financial interest, and a longer term governance interest as it applies to their investment returns, in choosing the right validator.
Just like in the asset management industry, a blizzard of on-chain metrics can give an illusion of quantitative certainty regarding a validator’s actual likelihood of being a good citizen of his network who stands up for the interests of small-time delegators at all times.
How to choose a good validator: On-chain vs. off-chain signals
When users are researching which validators to stake on a PoS network, the Staking Rewards asset profile or the applicable network dashboard will typically reveal several relevant quantitative metrics of validator behavior. These metrics typically include:
The validator’s total commission rate (what percentage of staking rewards are reallocated from delegator to validator; basically an asset management fee)
The validator’s voting power (total amount of token staked)
Percentage of validator uptime (usually 99% or greater)
The validator’s percentage of blocks signed over most recent 24 hours / 1 week
The validator’s number of unique delegates
Validators who charge very low validation commission rates, for example, often have ulterior motives for doing so, such as distorting governance on behalf of the network core team (we’ll refer to this as the “Core” going forward), or more frequently, ratcheting up the commission rate on unsuspecting delegators after a large amount of degen staking AUM has been amassed. (This is doubly an issue because many PoS networks effectively penalize users nontrivially for undelegating a validator. Terra v1, for example, had a 21-day cooling-off period, or 6% of annualized staking rewards per de-delegation.) This dissuades users from de-delegating.
Volatility in validator commission rate in the absence of major network changes is thus a significant red flag. A very low validator commission rate is a potential red flag as well. A reasonable commission that allows most staking providers to run a profitable business is between 5-15%. Below 5% is suspicious; above 15% is uncompetitive and unreasonable..
A validator’s total voting power is indicative of network centralization. High network centralization is obviously negative for both network security and egalitarian network governance. If you want to support network decentralization, you will be better off delegating with a validator who has a smaller stake.
Validator uptime means the percentage of time over the previous time interval (usually the most recent 7 or 30 days) in which the validator’s machine was responsive to the network, and validator blocksign percentage refers to the percentage of blocks over the relevant time interval which that node attested to.
The number of unique delegates refers to the number of unique wallets which have delegated tokens to that validator. A high percentile score of unique delegates for one validator relative to other validators is a compelling signal of community trust in that particular validator.
A related metric, self-delegation, refers to the validator’s percentage of tokens which were delegated from the validator-owner himself. A high self-staking percentage indicates “skin in the game” of that validator, giving them a very strong incentive to act truthfully, because their own money is on stake.
Validator Vetting: The Validator Metrics Users Can’t See
The above quantitative metrics are generally made readily available (or most of them are) for any Proof of Stake network. However, they only tell part of the story.
Many validator best practices are qualitative / off-chain. On-chain data gives no visibility into the sustainability of a validator’s operations. These invisible, off-chain factors include:
Governance independence. Validators play key roles in network governance. Additionally, because many PoS networks are relatively centralized (<500 validators), their voting independence is very important for defending stakers’ long-term rights.Validators who demonstrate significant voting independence from the Core, by voting differently from the core nodes, are very often the validators who most effectively stand up for the rights of stakers whenever governance disputes arise between the disproportionately powerful Core and the “normies.”
Community participation (outside of voting). Separate from voting independently, the participation rate in votes is itself a relevant metric. However, because this metric is becoming more commonly tracked, many validators “artificially” participate, to the point of voting “Abstain” on every vote just to show the highest possible governance participation rate. Only “Yes,” “No,” and “No with Veto” votes should be counted. “No with Veto” votes are particularly indicative of high-conviction governance participation, as No with Veto votes come with high slashing risk.
Validators who have been delegated tokens from the network’s Core are likewise much less independent than validators who haven’t been delegated from the Core. Validators who’ve been delegated from the Core assume that if they vote against the Core on key issues, the Core will strip them of delegated assets. So they have a material conflict of interest, and cannot be expected to fully stand up for the interests of smaller tokenholders.
Security. Securing a full node is an off-chain exercise involving many security best practices. Validators with poor security practices are putting their delegators’ rewards at risk. These practices can be subdivided into
key management: Who controls the keys?
alerting systems: Does the validator have an automated response system in place against a DDoS attack? Does the validator have someone on call 24/7 to react to sudden changes?
double signing protection: Automated procedures in place to prevent double-signing of transactions.
on-premise/cloud redundancy. Does the validator have infrastructure redundancy against their cloud service provider having issues, local power outages, or other interruptions of validator service that could result in a slashing?
Accountability/Liability. Staking providers have various means of heightening their accountability to users. These include:
Proof of real-world identity & business address. This is a basic necessity for large-scale validators on account of hardware requirements, power consumption, and other reasons. Tax treatment of business income provides another powerful incentive for validators to have corporate entities. These proof-of-provenance measures are a strong indicator of an enduring, reputable operation.
Track record. More operating history is always a good thing.
Slashing insurance. Does the validator offer any form or extent of slashing insurance to customers, covering certain subtypes of slashing incident or percentage of slashing cost?
Funds return policy. It’s not that unheard of for a user to accidentally send funds to a validator’s wallet instead of the proper asset.
Cash reserves. Does the validator have cash reserves in the event of a sudden market downturn, and if so, how much?
Geographic/jurisdictional diversification. Countries’ legal treatment of cryptocurrency is unpredictable and changing all the time. A validator whose operations are not tied to one specific jurisdiction is a safer bet than a validator who is.
Blockchain diversification. Certain staking brands, such as Coinbase Cloud, stake most/all major proof-of-stake networks. By establishing themselves as a multichain brand, these brands create additional reputational accountability: Their conduct on one network affects their brand perception across other PoS networks, and they are thus more highly incentivized to be the best network citizens possible. Their substantial cross-chain presence also usually connotes significant real-world backing such that their livelihood isn’t dependent on a single chain.
Customer support. Does the validator have a Discord or other customer support interface to deal with customer governance communications and complaints, tutorials, delegator dashboards, or other pro-transparency mechanisms for delegators? Stakers often have to deal with uneven application of airdrops, for example.
Value-Added Services. Value-added services cover the validator’s contribution to public goods, such as open-source repos related to staking, foundation grants, and legal or research contributions to the field. While a staking delegator has no direct stake in a validator’s public goods contributions, public-good contributions are still a very strong indicator of future good behavior, and standing up for a shared network interest (i.e., people like yourself), not just their own narrow interest, or the interest of the network’s Core, whom a validator can often indirectly beholden to.
Visibility into validators’ off-chain relationships, actions, and safeguards is a key blind spot of Proof of Stake networks today, and failures to vet validators has led to severe, unexpected failures of governance on certain protocols. Terra Classic and Solana in particular have seen the emergence of a “dual class” governance system, in which core network owner-delegators’ and validators’ off-chain relationships repeatedly took precedence over the common governance interest.
Announcing the StakingRewards Verified Provider Program (VPP): Enhancing Trustless Transparency of PoS Networks
At the heart of every free market is a sufficient degree of information symmetry, or minimizing the advantages that big insiders have over smaller participants, such that people believe the market is fair. While true information symmetry is an unattainable ideal, as an industry, we need to do whatever we can to push towards it. Additionally, the governance disputes over the past weeks–particularly on Terra 1 and very recently Solana–show that on very significant PoS networks, decentralization only runs skin deep, and network Cores have many tricks up their sleeve to skew the governance process in their favor when they truly desire. And given recent fiduciary failures at Celsius, BlockFi, and other centralized crypto operators, it’s more important than ever for Proof of Stake to live up to its own decentralized governance promises, as opposed to serving as a smokescreen for hyper-centralized network management.
To this end, we’re pleased to announce the StakingRewards Verified Provider Program (VPP), a distillation of our years of experience analyzing and staking Proof of Stake networks. We believe small-time stakers and degens of dPoS networks are often given an illusion of certainty by a blizzard of superficial quantitative on-chain information, and a shortage of truly relevant information, when deciding on which validator(s) to stake. The SR VPP is our own effort to increase “low-trust transparency” across the Proof of Stake industry.
As part of the SR VPP, we engage with validators on an ongoing basis to perform network due diligence on all of the above “under-the-hood” qualitative variables, in addition to the readily-available quantitative network statistics. We use a combination of data integrations, external network surveillance, and due diligence questionnaires (with preliminary or follow-on verification in the large majority of questions) to establish that they’re following industry best practices in their operations and behaving in a safe, transparent, pro-community, pro-governance manner.
Staking at a Glance
Solana's developers unveil web3-focused mobile phone
The team behind Solana is seeking to gate-crash the telecom industry with the launch of an Android phone and a new subsidiary focused on web3 mobile apps. At an event in New York City, Solana Labs CEO Anatoly Yakovenko unveiled the new Android phone, dubbed Saga. The team is developing the device to be purpose-built for web3, which spans NFT marketplaces to decentralized trading platforms.
Hackers Step Up Attempts to Hijack DeFi Websites
Hackers are increasingly targeting the front-end websites of DeFi protocols in a bid to steal users’ funds. Convex Finance, a protocol offering boosted rewards for Curve liquidity providers and stakers, is urging users to be diligent in checking the addresses for contract approvals after its website was hijacked on Thursday.
Ronin Network Relaunch
Ronin Network plans on re-opening the Ronin Bridge on June 28th with all user funds returned after March $622M hack. The re-opening will require on a Ronin hard-fork which requires all validators to update their software.
Tether To Issue Sterling-Denominated Stablecoin
Tether, the issuer of USDT, the largest stablecoin by market capitalization, plans to launch a new stablecoin on Ethereum pegged to the British Pound next month.
Uniswap Labs has acquired NFT marketplace aggregator Genie
Uniswap announced that it has made a new acquisition, buying up NFT marketplace aggregator Genie for an undisclosed sum. The company’s bet on NFT aggregation is a bet on the diversification of NFT marketplaces over time. At the moment, the vast majority of NFT volume takes place in OpenSea though some competitors like LooksRare and Magic Eden are showing signs of chipping away at parts of their market share.
Coinbase Adds Support for Polygon and Solana Simplifying Access to Web3
Coinbase, the largest crypto exchange in the U.S., has enabled transfers on Ethereum competitor Solana and on scaling solution Polygon. The move will make it easier for users to access Polygon and Solana, and will simplify sending assets across networks, a process that’s time-consuming and expensive.
THORChain Mainnet Goes Live on 7 Networks; RUNE Spikes
THORChain's native blockchain went live on seven supported networks after nearly four years of development, developers said in a post on Thursday. THORChain allows users to trade bitcoin (BTC) for any other supported asset without the use of bridges or wrapped assets. Bridges are protocols that rely on smart contracts to exchange coins from different blockchains between users.
$100M Hack, Harmony Offers Bounty For Return Of Stolen Funds Harmony Protocol, a proof-of-stake (PoS) blockchain, today tweeted an offer of a $1 million bounty for the return of $100 million in crypto stolen from the hack of its Ethereum-linked Horizon bridge on Thursday, as well for information on how the hack took place.
dYdX To Deploy Own Blockchain On Cosmos
dYdX chain will be built using the Cosmos SDK and Tendermint Proof-of-Stake consensus protocol. These technologies are part of the Cosmos ecosystem, an interconnected system of application-specific blockchains. The new chain will be released to support dYdX’s fourth iteration (V4).
We launched the StakingRewards Verified Provider Program (VPP)
The program helps investors make quicker and more confident decisions when choosing between thousands of Staking Providers. The following six verified providers make up the first batch of the Verified Provider Program, with several others in the pipeline: Chorus One, Launchnodes, Staking Facilities, Stakin, stakefish, Hashquark.
Goldman Sachs Leading Investor Group to Buy Celsius Assets
Goldman Sachs is looking to raise $2 billion from investors to buy up distressed assets from troubled crypto lender Celsius, according to two people familiar with the matter. The proposed deal would allow investors to buy up Celsius’ assets at potentially big discounts in the event of a bankruptcy filing, the people said.
Nexo threatens legal action against anonymous Twitter account Crypto lender Nexo has issued a cease and desist letter in an effort to silence an anonymous Twitter account. The account, which styles itself in the third person as ‘Otter,’ published a series of tweets on June 26 claiming that Nexo’s co-founders had stolen funds from a charity. The tweets have generated thousands of likes and retweets.
European Crypto Exchange & Lender Bitpanda Cuts Staff by Hundreds#
Austria-based crypto trading platform Bitpanda is slashing its headcount to ensure sustainability, the company said in a Friday blog post. Bitpanda’s founders said the firm needs to let employees go as it scales down due to market conditions. The company said it is aiming for a target headcount of 730. It has just over 1,000 employees, according to LinkedIn.
🔔 New Journal Article about Centrifuge
Read the Journal here.
🔔 New Staking Tutorial for Radix
Learn more about Staking Radix - directly here!
🔔 New Staking Tutorial for Assetmantle
Check out the Staking Tutorial for AssetMantle here!
🔔 In-depth Research Article about AssetMantle
Read more about Interchain NFT in the Cosmos Ecosystem here.
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