Solana, known for its fast and scalable blockchain, combines Proof of Stake (PoS) and Proof of History (PoH) to keep its network running smoothly. This article takes a closer look at Solana's Validators and Fee Economics, explaining how validators work with these consensus methods. We'll simplify the complex details to help you understand the hurdles validators encounter, why they're key to keeping Solana secure and efficient, and how Solana's approach to fees helps maintain a blockchain that can grow and last.

Solana’s PoS mechanism allows validators to validate transactions and add them to the blockchain based on the amount of SOL tokens they have staked. PoH is a cryptographic technique that allows validators to prove that they have waited a certain amount of time.

In Solana's PoS system, there are two main participants:

1. Delegators: These are regular users who stake their SOL tokens to validators. In return, they earn staking rewards.

2. Validators: These are node operators that run voting nodes and have stakes delegated to them.

In-Depth Analysis of Solana Validators

Validators are nodes in the network that validate transactions, and they are rewarded with transaction fees for their work. They play a crucial role in the Solana network by adding new blocks to the blockchain and contributing to the network's stability and growth.

The Role and Significance of Validators

By staking SOL tokens, validators help secure the network and facilitate consensus. Having a decentralized set of validators is important for maintaining the censorship resistance, security, and integrity of the Solana blockchain.

As more validators join, the network becomes more decentralized and resilient against potential attacks or collusion. Some key points about validators:

• Role: Validators validate transactions, produce blocks, and participate in the consensus process.

• Participation: Involves staking SOL tokens to earn the right to vote on the blockchain's state.

• Requirements: Validators must stake at least 1.0 SOL, meet specific hardware requirements, and ensure high uptime.

• Rewards: Validators earn transaction fees and additional SOL tokens for their participation and performance.

• Risks: Poor performance or downtime can lead to a loss of staked SOL.

Types of Validators

There are two types of validators on the Solana network: Consensus Nodes and RPC Nodes.

Overall, consensus nodes are vital for the security and decentralization of the Solana network. In contrast, RPC nodes offer convenient access and services for applications and users. The RPC node aids Solana developers and others in interacting with the blockchain, but due to performance concerns, it cannot vote. Therefore, a reference to a validator in Solana generally points to a voting or consensus node, not an RPC node.

The Current State of Solana Validators

Since the initial launch of Solana's mainnet beta in March 2020, the network has expanded significantly to secure the blockchain. As of now, there are over 3,400 active validators supporting Solana, of which over 2,400 participate directly in the consensus process to produce new blocks.

Let’s dive into a case study focusing specifically on Consensus Validators, highlighting their impact and challenges within the Solana ecosystem.

The Case Study of the Bitoku Validator

Problem Statement

As a new fresher validator in the Solana ecosystem, Bitoku Validator needs to quickly establish himself by gaining stake and trust in a competitive landscape dominated by larger, more established validators.

The objective of the Bitoku Validator

Bitoku Validator offers stakers an attractive opportunity to earn high staking rewards, with a remarkable 7.9% APY for those who delegate directly through Bitoku Validator. This contrasts with the lower rewards offered by other platforms such as Coinbase or Kraken, making Bitoku Validator an appealing choice for stakers looking to maximize their returns.

About Bitoku Validator

Bitoku Validator also known as Xandeum Labs, was established as a Solana validator with a vision to provide staking opportunities for Sol holders.

The validator has quickly gained momentum and reached an impressive stake of over 466,221 SOL, over the nine months showcasing confidence and trust from the Solana community.

Validator Ranking and Performance

In the Solana Network, Bitoku Validator has achieved a prominent position, currently ranked number 7th out of 2,400 validators at the time of writing. The validator consistently demonstrates top-tier performance, evidenced by its high yield and overall ranking within the network.

• Vote Success Rate - This measures the percentage of votes that a validator can successfully cast in the network. A higher rate indicates better technical capabilities and infrastructure reliability to participate in consensus. Target rates should be above 90%.

• Skip Rate - The lower the skip rate the better, as it reflects missed opportunities to produce blocks. Very low skip rates below 1% demonstrate excellent uptime and infrastructure. This metric must stay low over longer periods.

• Commission - Validators can set varying commission fees up to 100%. Lower commissions, like 0-10%, can help attract more stake from the community. But higher commissions also allow reinvesting more into operations. An optimal rate balances both.

• Operating History - Longer operating history spanning months or ideally 1+ years demonstrates technical competence and stability. New validators have a higher risk of performance issues or shutdowns.

• Stake Weight - The total stake delegated to a validator drives block production chances and rewards. Higher stake weights signal greater community trust. Most aim for at least 1% network stake weight.

• Withdraw Authority - Separate withdrawal authority minimizes security risks. This ensures validator keys compromised won't lead directly to loss of staked funds.

• Concentration Metrics - High concentration in terms of location, network, hardware, etc. reduces decentralization and exposes validators to correlated failures. A good validator will score low on concentration risk.

• Uptime - Sustained high uptime of 100% for long periods ensures reliable validator performance and avoids missed blocks which can incur slashing penalties.

• Version/Penalties - Validators running outdated software or incurring superminority penalties pose security issues and lose trust. Up-to-date validated software is a must.

The scorecard shows that it is a reliable, secure, and community-supported validator on Solana.

Challenges faced as a Validator

As a new validator establishing itself in the Solana ecosystem, Bitoku has to overcome the following difficulties:

• Hardware Requirement for processing transactions and data storage

• Gaining recognition and trust as an unknown validator in the beginning

• Competing against established validators with much larger stakes

• With zero commission, There’s no profit.

• Maintaining consistently high-performance standards expected of top validators

• Optimizing infrastructure and operations to keep pace with Solana's rapid growth

• Adapting to policy changes like the initial restriction for US validators in the testnet

Strategies Used for Growth and Earning Passive Income

Let's look at how Bitoku Validator grew its stake and earned income, offering insights into successful strategies within Solana.

• It started with a 5% commission went down to a 3% commission and then to a 0% percent commission, where top APY's were given to the stakers which helped increase the stake.

• Bitoku Validator’s zero percent commission approach had attracted stakers with the promise of superior APY. They are currently ranked 15th according to Stakewiz. However, it is considering increasing the commission once there is a 1M SOL total stake.

• Bitoku Validator earns a small amount through MEV Maximum Extractable Value by running the Jito Mev client. This results in earning rewards through Jito, but the amount is currently less than 100 dollars a month. It believes that as the stake continues to consistently increase, in a matter of month or year, there is a possibility to reach a million SOL or even two and a half million SOL.

• Currently, its profits are derived from the incentivized test net. It was previously closed to U.S. residents for a period, but it has now reopened to people in the U.S. It is actively running that TestNet validator.

• It has to purchase or rent the hardware through a provider that is nominated by the Solana Foundation. “Enterprise-grade Antsle Two Plaid hardware, top tier datacenter with 10 Gbps connections" - This refers to using high-end, enterprise-level server hardware from a manufacturer called Antsle to run the validator node. The validator node is hosted in a state-of-the-art, top-quality data center facility with fast 10 Gigabit per second internet connectivity.

• In its case, the provider is Edgevana. It rents the server through Edgevana for 850 a month but gets paid twice the amount in the form of SOL. The SOL tokens are locked for 12 months, but he receives them every month. So it's like paying 850 in cash but receiving 1,700 in locked SOL, which is a nice source of passive income.

• Gain recognition within the Solana Community by engaging with members on Discord and participating in community meetings to increase visibility.

• Believe in the future of the Solana chain. It is the fastest smart contract blockchain, so at some point, every chain will need to demonstrate its scalability. The validator believes Solana is still well-positioned to be the most scalable smart contract platform.

Plans for Future Scalability and Profitability

Looking ahead, Bitoku Validator is poised for future scalability and profitability. With a focus on building a storage layer to power the Web3 and ongoing engagement with the Solana community, the validator is positioning itself for continued growth.

Furthermore, the introduction of an incentivized test net has provided additional avenues for earning passive income, enhancing the potential for sustained profitability.

Conclusion

Bitoku Validator's journey in the Solana blockchain has been marked by strategic decision-making, a commitment to excellence, and a clear vision for growth.

As Bitoku Validator continues to establish itself as a leading validator within the Solana Network, its ability to attract stakes, provide lucrative staking opportunities, and navigate the evolving landscape of blockchain technology positions it as a compelling player in the ecosystem.

By presenting the experiences and achievements of Bitoku Validator over the past six months, this case study sheds light on the opportunities and challenges present in the world of blockchain validation and staking, providing valuable insights for prospective validators and stakers alike.

Challenges Faced by Solana Validators

Operating as a Solana validator comes with certain technical and financial challenges.

1. Hardware Requirements: Validators need to meet minimum hardware requirements for processing transactions and data storage as the network scales.

   • As a high-performance blockchain capable of 50,000+ transactions per second, Solana has demanding hardware requirements for validators to process transactions and add blocks quickly. Minimum recommended specs involve running multiple high-performance GPUs or CPUs with substantial RAM. Validators need the required hardware specifications.

   • Additionally, redundancy is required via multi-node server setups across different data centers to ensure 24/7 reliability.

   • Meeting these specs allows validators to quickly validate proofs and vote on state transitions. As Solana aims for further transaction throughput, hardware requirements may evolve.

2. Slashing: Validators also face the risk of slashing if their nodes go offline or fail to validate properly. Maintaining consistently high uptime and block production requires substantial investment in infrastructure and monitoring tools.

   • Slashing refers to a penalty that Solana validators face if their validator node goes offline or fails to validate and vote on new blocks properly.

   • Validators are required to have consistently high uptime and block production rates to help secure the network.

   • If a validator misses votes or goes offline temporarily, their staked SOL tokens can be slashed (deducted) as a penalty. This helps incentivize good validator behavior. However, the slashing on Solana is only temporary - if the validator comes back online and resumes proper functioning, they start earning rewards again and can recover the slashed amount over time.

   As per the Solana Health Report 2023, despite general network health being strong with 95.8% median validator uptime, the report identified 63 validators that failed to meet minimum uptime or performance standards in March. They will face slashing or suspension based on severity.

3. Opportunity Cost: When staking, a validator is locking up capital to secure the network. In doing so, they are forgoing other rewards. For instance, a validator has 10,000 SOL tokens that they could potentially stake to secure the network. However, by staking these tokens, they are locked up and cannot be used for other potential investments. Let's assume there's an attractive investment opportunity that could yield a return of 10% over the same period. By choosing to stake their SOL tokens, the validator is effectively forgoing the potential earnings from this investment, thus incurring an opportunity cost.

Potential Solutions

1. Optimizing Hardware: Validators can optimize their hardware to high-performance servers with more memory and faster processors. This optimization improves the block production rate and reduces the risk of slashing.

2. Implement Redundancy at every level by running multiple validator nodes in different data centers and using automated failover systems to ensure uninterrupted service,

3. Managing SOL holdings: Validator service providers could offer SOL Management features to help validators optimize staking rewards by rebalancing stake accounts to maximize returns. and collaborate with other validators.

4. Joining a validator collective/alliances: Be a part of the delegator’s program where a group of validators can work together to improve the network’s security and reliability for best practices and emergency support can also help validators manage risks and costs.

5. Ongoing Research and Development: Solana’s ecosystem developers can work on making hardware and bandwidth optimized for validators which would make it feasible for individuals and smaller entities to participate in the validation process.

Overall, validators play an indispensable role in Solana. As the ecosystem matures, supporting and retaining qualified validators will be key. Both technical and community efforts to make the validator role more sustainable will strengthen Solana.

Exploration of Fee Economics and Spam Reduction

Solana has a crypto-economic system designed to create long-term sustainability and incentive alignment for network security and decentralization.

The main participants are validation clients. They contribute to validating network state and transactions. Also to participate as a validator, their primary expense is the upfront capital for the hardware, on-chain voting, and opportunity costs. However, to prevent validators from making heavy investments, Solana Foundation has created a server rental program in partnership with Edgevanna, Equinix, Lumen, and Stackpath.

Solana validators earn rewards from the following:

Protocol-Based (inflationary) Rewards: These are generated from newly created SOL tokens through an inflationary process. The network has a predefined schedule for gradually releasing new tokens into circulation. Validators receive rewards at the end of each Solana epoch. These rewards are a commission on the annual inflation rate, calculated based on the following:

• Initial Inflation Rate: The network starts by creating new SOL tokens at a rate of 8% per year. This means if there are 100 tokens at the start of the year, there will be 108 tokens by the end of the year.

• Disinflation Rate: Each year, the inflation rate decreases by 15%. So, if the inflation rate is 8% in the first year, it will be 8% - (15% of 8%) = 6.8% in the second year. • The model was activated on February 10th, 2021 with the payment of 213,841 SOL.

• Long-term Inflation Rate: The yearly decrease continues until the inflation rate reaches 1.5%. After reaching this point, new tokens will be created at a stable rate of 1.5% per year. As of February 2024, Solana's inflation rate is at 4.94% and the staking yield is equivalent to 7.09%.

• Inflation Reward: Solana's inflation model assumes 400ms block times, during which a validator has the opportunity to produce a block. [Epochs are periods that are used to calculate staking rewards and block rewards. An epoch is defined as 432,000 slots. A slot is an opportunity for a validator to produce a block. An epoch is typically 2.5-3 days in length]. However, the difference in slot times can directly affect the economics and business viability of running a validator on Solana. Longer block times will lead to smaller rewards, as there will be fewer epochs in a calendar year, reducing the amount of SOL distributed to network participants.

• Commission Rate: The commission rate is an important factor for stake owners to consider when choosing a validator. Validators on Solana can set a commission rate between 0% and 100%. If a validator changes their commission rate during an epoch, the new rate will be applied to the rewards for the entire epoch. A higher commission rate means that the stake owner will earn a smaller portion of the inflation rewards. However, stake owners may be willing to pay a higher commission rate to a validator that they trust to provide reliable and secure service.

  For example, if a stake account earns 100 SOL in rewards and the validator has a 5% commission, the validator will receive 5 SOL and the stake account's active stake will increase by 95 SOL. Stake owners should carefully evaluate the commission rate, as well as other factors such as uptime, performance, and reputation, before making a decision.

• Engagement: Validator’s engagement encompasses uptime and the proportion of slots in which the validator effectively voted, impacting their overall earnings.

Transaction Fees: When transactions occur on the Solana network, a portion of the transaction fees is distributed to validators. The percentage of the reward is at 0.79% as of February 2024.

• Token Burn: Currently, 50% of the transaction fee is burned (permanently removed from circulation), and the remaining 50% goes to the validator leader of the respective slot (a slot is a unit of time on the Solana blockchain).

• Validators earn a share of the transaction fees based percentage of stake: This means that validators with more SOL staked will earn more because the number of slots that a validator is assigned to produce blocks is based on the validator's proportional stake.

To conclude, validation clients play a key role, in receiving rewards from protocol-based inflation and transaction fees. The protocol-based rewards, driven by a predefined issuance schedule, are the initial primary incentive for network participation. These rewards, distributed among the active validator set, are based on a disinflationary schedule, providing long-term stability.

Transaction fees, essential for network interactions, also contribute to economic stability and forking protection through partial burning. The design includes features for validation-client economics, inflation schedule, transaction fees, validator delegation opportunities, and storage rent economics.

A Comparative Analysis

Here is a comparative analysis of Solana validator economics with Ethereum and Polygon:

Architecture: Solana is known for its high throughput and monolithic chain, while Ethereum and NEAR have modular designs. Avalanche emphasizes a heterogeneous approach with multiple custom blockchains, and Polygon offers layer 2 scaling solutions.

Consensus: Solana and NEAR use Proof-of-Stake, Ethereum 2.0 also Proof-of-Stake, Avalanche utilizes a consensus protocol called Avalanche, and Polygon has a combination of PoS and PoA (Proof-of-Authority).

Active Validators: The number of active validators in Ethereum is 941,287 for Epoch #263,085. However, some node operators may run multiple validators, leading to uncertainty regarding the total number of node operators. In contrast, Solana has more active validators as compared to other POS blockchains like Avalanche with 1996 validators, Cosmos with 180 validators, NEAR with 202 validators, and Polygon with 105 validators.

Rewards

• Solana: Validators receive 0.79% of the total transaction fees.

• Ethereum: Validators receive a portion of 3.0 % per year.

• Polygon: Validators receive a portion of 4.95 % (In the first year, most tokens will be given as staking rewards to reduce their dominance over time.).

• NEAR: 12% of the amount staked

• Avalanche: 8.5%

Inflation Rate

• Solana: initial rate 8%, presently 4.9%

• Ethereum: 0.52%

• Polygon: 5%

• NEAR: 5%

• Avalanche: 22.21%

Minimum Stake

• Solana: 1.0 SOL.

• Ethereum: 32 ETH.

• Polygon: 1 MATIC.

• NEAR: 180,687 NEAR

• Avalanche: 2000 AVAX

Rewards

• Solana: Validators earn rewards based on their voting power and the number of blocks they produce.

• Ethereum: Validators earn rewards based on the number of blocks they produce.

• Polygon: Validators earn rewards based on the number of blocks they produce and the amount of MATIC they have staked.

• NEAR: Validators earn rewards based on the number of blocks they produce and the amount of NEAR tokens they have staked.

• Avalanche: Validators earn rewards based on their staked amount of AVAX tokens and the number of blocks they validate.

Risks

• Solana: Validators face the risk of slashing if they are offline or malicious, which could result in the loss of some or all of their stake.

• Ethereum: Validators are penalized for misconduct or negligence. The risk is high due to the value of the staked ETH.

• Polygon: Validators risk being slashed for downtime or malicious behavior, similar to other PoS networks, but with lower financial risk compared to Ethereum due to reduced stake value.

• NEAR: If a validator is caught misbehaving, then they get "slashed", meaning that their stake (or part of it) is burned.

• Avalanche: Staking AVAX has no slashing risk, only withholding rewards for slow performance or incorrect validation. Unbonding period for AVAX is 2 weeks to 1 year.

Here is a table summarizing the key differences between Solana, Ethereum, and Polygon:

Ultimately, the best platform for validators will depend on their individual needs and preferences.

Challenges & Implications in the Solana Network

Let’s explore how Solana's fee economics affect its overall network performance, user experience, and validator incentives.

Network Performance

Solana faced many widely criticized network issues in 2022 and 2021, including bot-caused disruptions overwhelming the blockchain.

• In September 2021, bots flooded a token sale on the Raydium exchange, causing Solana to crash and go offline for 17 hours, impacting its network performance, user experience, and validator incentives.

• To address the issue, Solana has introduced "priority fees" over "first-come-first-service." Yet, St. Gnu observed spam issues persist due to low costs despite new fees. More measures are needed to deter spam economically, as Chorus One's analysis shows spam will continue while MEV opportunities exist.

• Economic incentives still enable wasteful bots to congest the network.

• Solana has upgraded RPC transaction pricing and hardware improvements to mitigate spam. Solutions like Jito's bundling mechanism help create spam filters. For validators, maximizing MEV capture is crucial for optimizing revenue and ensuring that the incentives align with the interests of the network participants.

User Experience

• Network Downtime and Delays: The direct impact of network disruptions on users is significant. Downtime and transaction delays degrade the user experience, eroding trust in the network's reliability for both simple transactions and complex DeFi interactions.

• Priority Fees: The introduction of priority fees to skip the transaction queue can improve the experience for users willing to pay more for faster processing. However, this could also lead to a two-tiered system, disadvantaging users unable or unwilling to pay higher fees.

• Also, Firedancer, a next-gen independent validator client for Solana, is being developed by Jump Crypto to enhance performance and scalability, introducing diversity to the ecosystem.

Validator Incentives

The economic incentives that make spamming profitable, particularly through MEV (Maximal Extractable Value) opportunities, can discourage validators if the cost and effort to process spam outweigh the rewards. This could potentially lead to a reduction in validator participation or investment in the network.

Costs vs. Rewards: The balance between the costs incurred by validators in processing transactions (including spam) and the rewards they receive for their efforts is crucial. Measures to deter spam need to ensure that validators are adequately compensated for their role in maintaining network performance without imposing undue burdens. Below are some of the actions taken by the Solana Foundation:

• Voting Cost Coverage: Cover validators' voting costs for the first year with a decreasing support structure: 100% for the first three months, 75% for the next three, 50% for the following three, and 25% for the last three months. This will end coverage after one year. Initial voting costs can deter new, smaller validators, so limiting this support to one year encourages validators to reach sustainable stake levels.

• Stake Matching: Match external stake 1:1 up to a cap of 100,000 SOL from the Foundation. To support validators in attracting external stake and to foster engagement with the broader Solana community.

• Base Delegation: After the matching process, allocate the remaining SOL evenly among program participants as a base delegation. To ensure validators have the minimum stake required to participate in block production.

• MEV: Validators are incentivized to include transactions relayed to them via RPCs and other validators in the form of priority fees. However, there is no strict requirement for a validator to include these transactions. For validators, maximizing MEV capture is crucial for optimizing revenue and ensuring that the incentives align with the interests of the network participants.

  • Currently, the majority of MEV extracted on Solana is obtained by searchers. When the leader is operating the native Solana client, searchers' only methods to strongly indicate inclusion preferences are spam and priority fees, both of which are non-deterministic. Furthermore, half of the fees are burned, placing a strict limit on the amount of MEV the leader can capture at 50%. This presents an inefficient means for validators to secure the MEV under their control.

  • When the leader is running Jito-Solana, searchers can transfer value more efficiently through Jito bundle auctions. As seen below, 100% of bundle tips go to the validator and their stakers.

Source: Umbra Research

However, Validators must meet specific baseline requirements and maintain acceptable performance levels, including vote credits and skip rate performance, to qualify for the above support.

While the steps aimed to mitigate these issues, ongoing adjustments and innovations are necessary to ensure the network can run efficiently.

Negative commission rates can occur when network and Maximum Extractable Value (MEV) fees are high

In scenarios where network and Maximum Extractable Value (MEV) fees become sufficiently high on the Solana network, there is potential for negative commission rates and criticism. This means that validators could charge delegators a fee to process their transactions, rather than paying delegators a portion of the fees they earn.

• Selective Staking and Centralization Concerns: Negative commission rates might lead to a scenario where only delegators willing to pay the fees or those with significant stakes can afford to participate. This could inadvertently promote network centralization, as smaller delegators might be priced out or choose not to participate, concentrating stakes among fewer, larger entities.

• MEV Opportunities: If MEV opportunities become more lucrative, validators may prioritize their own MEV strategies over processing transactions for delegators, leading to higher commission rates.

Sustainability and Future Outlook

Looking ahead, we assess the sustainability and prospects for Solana validators, considering the evolving economic landscape. Here are several key considerations:

1. Reduced Inflation Rewards: As the inflation rate stabilizes at the long-term rate of 1.5%, the amount of new SOL issued as rewards for validators will decrease compared to the initial years. This means validators will earn less from inflation rewards over time as the rate decreases to its terminal value. Validators may explore diversifying their services, such as offering additional value-added services or participating in other network activities that generate revenue. Validators should aim to build resilience in their revenue streams, balancing transaction fees, inflation rewards, and potentially new revenue sources as the network evolves.

2. Increased Importance of Transaction Fees: With the reduction in inflation rewards, transaction fees will become a more significant source of income for validators. As the network grows and the number of transactions increases, the total amount of fees collected could offset the decrease in inflation rewards. The economic viability for validators will then depend more on the network's usage and less on the inflation schedule.

3. Network Growth and Validator Costs: The long-term economic viability will also depend on the growth of the Solana network. Increased adoption and more on-chain activity can lead to higher transaction volumes and, consequently, more fees for validators. However, validators must also manage their operational costs, which include hardware, bandwidth, and energy consumption. The validator needs to ensure that the increase in income outweighs the increase in costs. The overall health and participation of the Solana network will play a crucial role in sustaining economic stability for validators. Network governance, security, and performance will impact validator economics.

4. Staking Dynamics: As the inflation rate decreases, the dynamics of staking may also change. Validators with a higher stake can potentially earn more rewards, creating an incentive for the consolidation of stakes. This could impact the decentralization of the network. For example, a validator with a stake of 1,000,000 SOL will earn more rewards than a validator with a stake of 100,000 SOL, even at a lower inflation rate. Therefore, validators will need to attract and retain delegators by maintaining high performance and reliability, as well as competitive commission rates.

5. Adjustments and Governance: The Solana community and governance mechanisms may adjust parameters in response to economic conditions, technological advancements, or changes in network usage. The inflation target could lower the minimum amount needed to break even for validators of all sizes. Validators will need to stay engaged with the community and governance proposals that could affect the economic model of the network.

In conclusion, the long-term economic viability for Solana validators as the inflation rate reaches its terminal value will depend on a combination of factors, including the growth of the network, the balance between inflation rewards and transaction fees, operational costs, staking dynamics, and potential adjustments to network parameters. Validators that can efficiently manage their operations and adapt to changing conditions are more likely to remain economically viable in the long term.

Potential Solana validator sustainability models during low inflation periods

1. MEV Revenue Pool: Redistribute a portion of validator MEV revenue into a protocol treasury to fund projects supporting sustainability. For instance, if a Solana validator identifies a profitable MEV opportunity and earns extra revenue, a predetermined percentage, such as 30%, is allocated to a communal treasury. This treasury can then provide grants for developers working on energy-efficient validator hardware or software optimizations, indirectly bolstering the network's sustainability.

2. Value-Added Staking Models: Stakers who provide extra value, such as running public RPCs, nodes in specific regions, or building tools, receive incentives. For example, a validator in a region with fewer nodes gets extra staking rewards to encourage them to maintain their service and prevent geographic centralization. Another validator offering a highly reliable public RPC service receives bonus rewards from network fees, promoting the provision of valuable infrastructure beyond block validation.

3. Cross-Chain Reward Bridging: Pooling interoperable rewards across multiple chains improves yield sustainability even if one chain has declining inflation. For example, a staking platform aggregates yield from validators operating not only on Solana but also on other chains like Ethereum and Polkadot. Stakers on this platform receive a diversified yield stream, mitigating the impact of lower rewards on any single chain. This model uses cross-chain bridges to pool and distribute rewards, enhancing yield sustainability for participants.

4. Contribution-Based Rewards: Transitioning over time to more activity-based rewards (such as validated transactions, provided storage, etc.) rather than passive staking could be beneficial. For instance, Solana might introduce a new reward mechanism, allowing validators to earn extra rewards based on their active involvement in the network beyond staking. This could encompass rewards for validators processing a substantial number of transactions, providing storage solutions, or actively engaging in network governance. Using a points-based system to monitor and reward these contributions could foster a more engaged and robust network.

The optimal path likely involves a combination of mechanisms - capturing multiple revenue sources while aligning incentives towards the behaviors and contributions most valuable for the Solana network in the long run. The community can iterate on various models through research and data-driven analysis.

The importance of fees and incentives for Solana validators

The role transaction fees, staking, and other economic mechanisms play in ensuring ongoing validator incentives on Solana.

Transaction Fees

• Fees directly reward validators for processing and validating transactions, blocks, and smart contracts.

• As inflation drops over time, fees take higher proportional importance to cover infrastructure costs.

Staking Rewards

• Staking rewards incentivize validators to remain online and actively participate in consensus by slashing for downtime.

• Provides baseline revenue stream separate from variable transaction flow. Acts as a reliability incentive.

Other Economic Mechanisms

• MEV revenue sharing - rewards validators for quick settlement of DEX arbitrage and on-chain operations.

• Tipping contracts – users add priority fees to incentivize validator performance for specific transactions.

• Reward multipliers for decentralization contributions like running public RPC endpoints.

• Redistribution of burned supply or fee treasuries to active validators.

The combination of direct fees per validated unit of work, staking rewards for uptime, and extra incentives for providing value to the network stack together to directly align validator success with Solana's growth and sustainability. This design helps mitigate risks as inflation drops over time.

In conclusion, Solana validator economics face evolving dynamics. Sustainability hinges on diversifying revenue streams, managing operational costs, fostering network growth, and adapting to governance changes. Adapting to these challenges is crucial for long-term economic viability and network resilience.

References

• Solana Validator Guidebook: What is a Validator

• Solana Doc: Solana Validator Requirements

• Solana Validator Economics: Chorus One

• Solana Staking Rewards & Validator Economics — how does it work?: Michael Hubbard

• Solana Foundation Validator Health Report: March 2023: Solana Foundation

• Solana Has a Spam Problem. Can It Be Fixed?: Blockworks

• MEV on Solana: Umbra Research

• Solana Validator Economics: Helius