Update on the proposal (remove the governance slashing in the light of JUNO prop 16) and lowered the flat fee:
Proposal text:
Voting YES for this proposal indicates:
- Support for the addition of a flat staking reward for validators, causing a higher APR for lower ranked validators to promote decentralization.
- Support for reallocating the required $OSMO for this flat staking reward from the overall pot of daily staking rewards.
- Support for development of a new governance type where validators can be penalized by governance vote.
- Agreement that validators who abuse this system by creating multiple small validators to gain maximum profit will be punished by governance up to and including tombstoning.
Voting NO for this proposal indicates:
- No support for adding a flat staking reward for validators
AND/OR
- Disagreement with the penalty terms outlined
Decentralization is key
Decentralization of a blockchain validation network is important to ensure that no one party or small group has excessive influence over the security of the chain and governance decisions.
In August 2021 the top 6 validators held nearly 50% voting power.
At the start of January 2022 the top 8 validators held this 50% voting power.
At the time of writing, 12 validators are required to reach 50% voting power.
To speed up this process and secure decentralization as one of the major strengths of Osmosis additional measures are required.
Proposal
This proposal asks that a fraction of the daily staking inflation be reallocated to provide an incentive of 20 $OSMO to all validators at or above rank 59, and a proportional incentive below this rank to maintain the increased APR of rank 59.
This incentive will be distributed with all other staking rewards, so each delegator will receive a share of this bonus, minus any commission.
This bonus has the effect that the APR of lower ranked validators is increased, and that of larger validators is slightly reduced, (Chart of the expected effect can be found on Commonwealth). The higher APR of lower ranked validators will encourage yield chasers to redelegate their funds from high ranked validators to lower ranked validators, thus achieving a better spread of voting power over the validator set.
To prevent APR from rising exponentially for the lower ranked validators, they will be allocated a lower amount of $OSMO to bring them to the APR of the validator at the midpoint of our validator set, currently number 59. Validators ranked below 59 will all have the same, higher, APR and so will still benefit from yield chasers, but will still have to compete on other metrics to earn additional delegation as in the current system. This is included in the simulation on Commonwealth.
The proposed system would require the redistribution of approximately 5% of the daily staking rewards. With the thirdening in June this would rise to approximately 8%, however this flat reward setting could be adjusted down by a future proposal to prevent the difference between the top validators and smaller validators becoming too large.
Based on current delegations, the APR of the rank 1 validator's delegates would fall from
63,4% APR to 62.9% APR and the APR of the rank 59+ validator's delegates would rise from 63,4% APR to 64.9% APR, with ranks 2-58 being distributed between the two. The smaller the spread in voting power between the top half of the validator set the less this flat reward would affect the APR range.
Risks and countermeasure
There is a small risk that validators with a lot of delegations may sybil their high-ranked validator into multiple small ones, to return maximum profit out of this added bonus. This reduces the number of distinct validators in the active set and has the opposite effect on decentralisation intended by this staking reward bias. The difference in APR has been made deliberately small to make the benefits of splitting up a big validator into small ones smaller than the effort needed.