PIP-3: Increase the Minimum Commission for all Validators

Status: Draft

Abstract: A large number of total stake and delegators are clustered around validators with 0% commission. This leaves validators that have a >0% commission (either by choice or necessity) a harder time to bring on new delegators. By increasing the minimum commission, the validators, delegators, and the network can benefit:

  • Validators will be able to afford more performant hardware, increasing their uptime and decreasing latency between nodes on the network.
  • Delegators who stake with more performant validators will receive more rewards compared to those staking with validators that miss many checkpoints (and therefore do not receive that reward).
  • It can encourage delegators to look at more than just commission when choosing a validator, thus making the network more decentralized.
  • With a higher average uptime among validators, the network stability will improve, giving all users a better experience when sending transactions over Polygon.

Motivation: Running both a validator and sentry node, especially with the correct CPU and RAM specifications to keep pace with the network, is not a cheap task. Not only will a Validator need to invest in proper hardware and dedicated uptime, but they will also need dedicated bandwidth, which many cloud providers charge for. Setting a minimum commission allows Validators, both big and small, to still compete by having a low commission relative to the other Validators, while also having additional income to spend towards professional hardware.

The impact on delegators is not taken lightly, but both delegators and the community as a whole can benefit from an increase in commission. As stated in the Abstract, can have an effect on decentralization. Delegators who might usually shy away from a validator due to a higher commission, will no longer need to decide between a 0% commission validator and one that aligns more with their views. A decentralized network is also more secure, leading to safety of funds both for delegators and funds on Polygon. Another benefit is greater uptime. Every checkpoint that is missed, both the validator and its delegators miss out on rewards. A properly funded validator with performant hardware should be able to keep a greater uptime percentage, which may pay for the decrease in rewards by itself.

Specification: Currently, there is only a MAX_COMMISSION_RATE set to 100 in the Matic Stake Manager contract. A new contract would be required to include a MIN_COMMISSION_RATE, possibly as a configurable variable for easy update in the future. In the below code, this MIN_COMMISSION_RATE is created, along with the code enforcing the new minimum.

uint256 constant MIN_COMMISSION_RATE = 5;

uint256 constant MAX_COMMISSION_RATE = 100;

...

function updateCommissionRate(uint256 validatorId, uint256 newCommissionRate) external {

...

require(newCommissionRate >= MIN_COMMISSION_RATE, "Incorrect value");

require(newCommissionRate <= MAX_COMMISSION_RATE, "Incorrect value");

validators[validatorId].commissionRate = newCommissionRate;

}

A minimum of a 5% commission was selected as enough room for the average validator to maintain their servers, but not too much that it starts to cut into delegators rewards. This is also in line with many other PoS blockchains, where 0% commission is not as common. Tezos’ bakers average 8-15%, Harmony One validators average 2.5-10%, Persistence One validators average 5-10%, and Solana validators average 10%, to name a few.

Rationale: All validators are required to have hardware that can handle the performance, uptime, and bandwidth requirements of the Polygon network. This comes at a cost, however, and some validators with lower stake do not have the option to choose the best performance or multiple sentry nodes for uptime while still breaking even.

Other options to this include:

  • Putting a max cap on the total stake each validator can have
  • Decreasing rewards if a validator’s total stake surpasses a threshold
  • Requiring a validator to stake a percentage of the total stake to incentivize good behaviour among larger validators

Backwards Compatibility: There are no backwards compatibility issues in terms of functionality, as having a validator change their commission is already built in. However, the current contract would not be usable as there is no way to enforce a minimum commission, so a contract would need to be deployed.

Security Considerations: Although there is not much risk in implementing a minimum commission, any modification or new deployment of a contract inherits risks of bugs. Issues with the updateCommissionRate should only be limited to allowing validators to choose any number for their commission, and should not extend into other parts of the contract or Polygon ecosystem.

FAQ:

1. Any alternatives considered? Yes, we looked at other blockchains to see how they handle the decentralized approach; if we could rebalance delegators across the validators, commission would have a higher impact for lower-staked validators.

a. Tezos requires a minimum amount of self-stake that corresponds to the total-stake (a validator would need 1 token for every 10 total-staked tokens). Validators would need to put up extra capital or start turning delegators away.
b. Cardano starts reducing rewards to pools over a ‘saturation point’, thus punishing pools with too much stake.
c. Harmony caps the maximum stake of the validator.

Will this take away too much from the delegators? It shouldn’t, as this means delegators will still receive 95% of their current rewards. For example, using today’s reward of 13.7% APR, a user delegated to a 0% commission validator with 10,000 Matic and receives 1,370 Matic per year. If the validator changes to 5% commission, they will then receive 1,301.5 Matic per year; a difference of 68.5 Matic, or 0.685% of their total delegation. To note, many delegators have chosen a 5% commission or higher validator, in which case this PIP will not have any impact on their rewards.