As previously mentioned, validators can achieve the best risk-reward ratio by joining a network at genesis, which allows them to secure their position in the validator set and establish a revenue stream to cover infrastructure costs. Therefore, this economic motivation is crucial when selecting validators and creating an incentive scheme that attracts suitable validators to ensure that the network remains decentralized and secure.
Regardless of the approach you take to create a meaningful reward system, for which a few ideas are mentioned below, it's essential to keep in mind the core variables that determine a validator's economic opportunity:
- Staked Value: Network value (FDV), Circulating Supply Change, Validator Delegation Share Versus Delegated Stake (together all those parts express the relative strength of the “staked value”)
- Staking Rewards: Total Amount Staked, Reward Source (Inflation), Total Staking Ratio
- Commission: Validator Competition
- Infrastructure Cost: Network Requirements and Load Management in Peak Periods
- Personnel Expense: Network Maintenance Level and Governance Activity
One of the main goals of validators is to secure a high stake compared to other validators, ensuring their position in the active set, while as a protocol you’re looking to create better long term alignment. One way to achieve both outcomes is by offering validator rounds during your project's fundraising phase. These rounds can help raise additional funding but also increase validator revenue expectations and incentivize alignment with your project. An essential factor of these rounds is the ability to self-stake their investment.
To determine the appropriate timing for a validator round, it's recommended to include it in your seed capital raise, close to the go-live of your mainnet. Your project will be known, proven over the testnet and thus, validators have a good insight as to whether they are a good fit. However, additional rounds may be added later if there is high interest from additional validators.
To proceed with a validator round, you should have a clear understanding of the validators you wish to have in your genesis set (see section "Finding Validators"). You may also need to establish a process for performing KYC and AML with your validators, sharing a pitch deck, a roadmap, information on cliff and vesting, and a forecast of validator income/cash flow.
- Ensures primarily high-quality professional validators joining your set
- Alignment of mid-term protocol goals with invested validators
- Another fund-raising tool, although likely not a significant amount
- Risk-Reward Ratio for the validator is high
- It might not be possible for Community Validators to join due to the financial or KYC requirements, creating a potentially adversarial scenario
Another tool that is more likely relevant for you after your mainnet has been launched is the Delegation Program. With a delegation program, you can allocate stake from the treasury to reward specific technical or community-driven contributions on an ongoing matter. Delegation sizes should be adjusted dynamically, enabling a constant reward stream for new validators.
Of course, this can only be facilitated if your project team has access to a foundation that controls a significant network stake in its treasury fund. Alternatively, consider reviewing the possibility of using the community pool, although this effort is connected to a more complex and slower governance process.
Delegation programs might also be an excellent opportunity to create partnerships with community validators to create educational content and share insights about the network on social media.
Key points for a successful delegation program are:
- Transparency: Create a policy for the delegation program to outline contributions that qualify for the program.
- Communication: Have a webpage in place to share information on requirements to qualify. Share continuous updates on the status of the delegations and inform the community ahead of time for upcoming application periods.
- Amount of Stake: Ensure that the delegations have an impact on the set and ensure reasonable financial income to cover costs.
- Amount of Validators: Ensure that enough validators can reap the benefits of the program so that voting power and rewards are evened out and your network enjoys greater decentralization.
- Delegation Cycle: Decide on the runtime of a delegation.
- Voting Power: Decide how the voting power is applied with the staked tokens. In order to increase the decentralization of the network and reduce the power of the foundation, it is recommended for the treasury fund not to actively vote on proposals. This way, the validator’s vote prevails.
Defining a fair process for delegating tasks or responsibilities is typically challenging, and successful programs or organizations often utilize a combination of quantitative, data-driven evaluations (as uptime and governance participation) and qualitative, subjective evaluations (as content creation) to determine which individuals are best suited for specific tasks or roles.
See below a few references for successful and interesting delegation programs:
- Enables a mechanism to distribute voting power within an existing set
- Delegates stake to smaller validators
- Rewards contributing validators
- High effort in maintaining the program
Incentivized testnets are an effective and sustainable way to reward validators and encourage other users to participate in testing your network. These sophisticated programs offer a gamified approach to facilitate testing by offering native tokens or even stablecoins.
When planning an incentivized testnet, defining the purpose, participation requirements, and reward mechanisms is essential. In addition, please note that incentivized testnets require significant operational overhead and active engagement, especially if tailored to a broader audience.
Make sure to have a look at our Testnet Checklist.
If executed correctly, they can help validators gain valuable experience and knowledge of your network, support the process of a fair and transparent genesis allocation, and bootstrap quality community members overall. However, if designed poorly, they may attract unwanted attention from inexperienced validators that require more support than your team can provide.
- Purpose: Testnets are often designed to focus on infrastructure performance and security. To attract high-quality validators, creating a specific stage to test their capabilities and reserve explicit rewards for them may be beneficial. Additionally, it might be interesting to explore whether the testnet should be adversarial or cooperative. Adversarial programs are highly competitive and allow participants to coordinate attacks within specific boundaries to test the network's durability against bad actors.
- Requirements: To ensure high-quality participation, it is essential to establish minimum eligibility requirements, such as specific hardware necessities or previous validator experience. Depending on your jurisdiction, it may also be necessary to develop processes to perform KYC and AML. Furthermore, it is crucial to address whether there are certain limits to the number of participants. A proven form to check on requirements is an obligatory submission form.
- Reward mechanisms: A well-designed reward system ensures that validators comprehensively test all network functionalities. Testnets are commonly divided into phases to enable focused testing of various network components based on your defined purpose. As a best practice, rewards are accrued by receiving points for missions like completing tasks, identifying critical issues, or achieving specific performance results. These points determine the share of the reward pool, ensuring a fair and transparent way for all participants to allocate resources efficiently.
It’s important to note that validators are not the only potential target group in an incentivized testnet. You can establish bug bounties and reward contributions towards marketing and education as well as many other potential categories you wish to incentivize.
Over the past few years, various projects have demonstrated the effectiveness of incentivized testnets in testing and enhancing network performance, security, and functionality. Moreover, as a strong side effect mentioned earlier, these programs proved to foster strong communities of validators and users (click to expand them):
Cosmos Hub - Game of Stakes
Cosmos Hub - Game of Chains
Solana - Tour de Sol
Sui - Incentivized Testnet
Evmos - Mars Meteor Missions
Sei – Seinami Incentivized Testnet
- Amazing tool to identify highly-invested and high-contributing validators
- Excellent way to distribute genesis delegations fairly
- Great tool to improve network performance
- Great tool to create an engaged community before mainnet launch
- Extreme high effort in maintaining the program
- High complexity to execute