Fuse holders can delegate their tokens to a validator. Current Fuse contracts allow validators to specify a % fee that delegators pay from their Inflation Reward earnings to their validator. The setting is 0-100%.
There are a maximum number of validators allowed in a particular cycle, currently 100. The 100 nodes chosen are those validator nodes with the highest combined stake (validator stake + delegator stake).
Therefore there is a benefit to gain delegators to stay in the top 100 staked validator nodes.
If a validator themselves owns 1% or more of the circulating supply (~120M by 2021 - therefore 1.2M tokens) then they are guaranteed a place in the top 100 nodes.
Once a validator has secured 1% they will only grow their % (unless they sell tokens) as the network inflation rate is 5% of all tokens (~330M) which results in an effective ~15% growth rate.
Therefore a validator in such a position has no requirement for delegators, unless there is a financial benefit.
These validators could easily drop their own fee% to 0 to attract delegation, thus starving other nodes who need delegation from obtaining it, and/or driving all nodes to setting delegation rewards to 0%.
It will quickly become “a race to the bottom” where the individual validator fee becomes irrelevant as all nodes set their fee to 0%. Anyone with 1+% will not be delegated to.
With the low hardware overheads and stable software of the fuse network, there are no (or very limited) hardware/software optimisations that delegators need to pay for to ensure stability in their node.
Therefore delegators will stake with the lowest fee nodes.
At 0% fee, there is no financial benefit to having delegators, and no capital generated from them to create financial products (fixed term rewards, abstracted tokens, investment bonds etc).
This effectively stifles the potential for secondary markets in Fuse and limits the potential of validators to grow and diversify their business. The validator fee becomes redundant.
A solution to this is to set a fixed network level validation fee.
Voted on by validators every year, potentially along with the network inflation rate and max transaction fee as well. The idea here is to look at current global economic conditions and set these variables to meet market conditions.
I won’t discuss the Inflation Rate or Maximum Transaction Fee in this topic.
Fixed Validator Fee
By fixing the validator fee there is no competition between validators on the easy to change contract level fees.
Validators by default will receive a good return. Delegators by default will always get a known return whichever node the delegate to.
However, validators can offer a better fee through token abstraction, smart contracts and other financial products built on their nodes. Better fees will bring in delegators. And different products will appeal to different people. A whole financial market can grow from the Fuse validator network.
E.g. Network Validator Fee = 35%
Node 1 offers 25% fee for 12month lock in
Node 2 offers 20% fee for 36month lock in
Node 3 offers -2% fee for the first 500k delegated to it.
Node 4 offers -1% off fee for every 10k delegated up to 1M
Node 5 offers 15% of its tx fees back to delegators who stake for 12 months
Node 6 offer 3 abstracted tokens that mature after 12/24/36 months offering fixed returns.
There are limitless financial products that can be built on nodes where delegation brings capital into the validator. This could be a large and interesting part of the network as it grows, and bring dedicated companies who specialise in these investments into the validator network.
None of this is possible if validators can chose their own fee directly on the contract.
Please comment and discuss the pros/cons of such a proposal.
FIP8 does not contain a fixed fee, so individual validators will still be able to set their fees at present.
A change to the network would require voting by the validators, which after FIP8 (October 1st 2020) will be weighted by their stake.