Defining a validator
Web3 investors see staking as an opportunity to generate passive income on the tokens they hold; from a Proof of Stake perspective, staking is a way to ensure networks’ growth and security going beyond financial instruments. As opposed to the Proof of Work consensus mechanism, in which validators possess machines with great computational power to mine blocks and secure the network, in Proof of Stake the mining power is shifted to validators, chosen in an aleatory way based on the proportion of tokens they hold.
PoS networks randomly select validators to propose and generate new blocks or verify existing ones in a process known as attestation; in return for performing such tasks, they are granted staking rewards. However, not all token holders are necessarily able to act as validators; running can be technically challenging and resource-intensive, or they might not have sufficient shares to act as such, and that’s when delegation comes into play.
When delegating tokens to a validator, Web3 investors increase a validator’s stake in exchange for rewards proportional to the percentage of the staked asset. The best way to do so is to delegate assets to a validator in a non-custodial manner or through a hardware wallet like Ledger. This way, token holders still maintain control of their assets and private keys. Staking doesn’t require moving assets from the holder’s wallet to the validator’s one, as the whole process is being managed and regulated through smart contracts.
The role of a validator
A validator’s foremost responsibility is to run nodes that operate a network. Nodes are software running on computers and connected on a peer-to-peer base. There are three main types of nodes: full nodes that verify and record every transaction on the chain; archival nodes that store the entire transaction history on the chain rather than validating transactions; and finally, validating nodes, necessary to confirm transactions and create new blocks.
Typically, professional validators, such as protocol developers and infrastructure providers like Figment, have access to a diverse and sophisticated node set up to ensure a greater level of security. Instead, exchanges that don’t require token holders to hold their private keys, or else individual validators running simpler nodes on laptops, tend to be generally less secure.
Validators play a crucial role in operating a chain and influencing the way networks develop and evolve; they should also be accountable for community engagement and take part in protocol governance. It’s therefore important to choose validators that, at least in principle, can fulfill their responsibilities in the network and liabilities towards their token holders.
Don’t trust, DYOR!
Delegating can be a wearisome decision-making process. The research might lead to gathering misleading information, and the great number of alternatives available makes it hard to weigh the best option. There are, however, worthy considerations that help investors navigate across a whooping number of validators’ alternatives.
- Validator identity
Validators’ credentials are normally available to the public, but that’s not enough. Verifying validators’ identities implies having access to their historical track record and overall performances. First, is this validator active, and for how long? If so, what’s its uptime? Has it ever been jailed? Have they missed blocks recently? These types of data can be easily sourced through the validator’s website or other dedicated explorer by using its public key address. From a regulatory perspective, being able to verify the jurisdiction of both validator and physical nodes is also crucial. It helps assess the regulatory framework and how it can potentially affect digital assets and staking rewards in the future.
- Tech-savvy
Setting up and managing nodes requires a certain degree of technical know-how that a delegator should consider when choosing where to allot their tokens. Investors should always safeguard their staked assets yet ensure optimal staking returns. This goes back to how a validator manages nodes: how likely a validator’s node will become inactive due to technical issues, and in that case what’s the contingency plan in place? Are there skilled people to help tackle such technical faults? Ideally, a good quality validator has frequent nodes updated, industrial-grade internet connection, sentry nodes, and monitoring systems to ensure 100% uptime, prevent slashing penalties, and protect against DDoS attacks.
- Security
A responsible and trustable validator should put in place hack-resistant systems architecture to protect nodes and the whole infrastructure. It’s therefore important to assess where validators are running nodes and how they are protecting private keys. Every validator holds public and private keys. The first is used to authenticate nodes and verify credentials and can be therefore used to trace and gather information on a validator’s activities and performances. A private key, instead, proves ownership of a blockchain address, as the name suggests, it’s encrypted and not open to the public. If a private key is compromised or lost the staked assets are also compromised, requiring switching to a different validator. Security can be ultimately assured by human capital maintaining operations at all times.
- Delegated assets volume
The volume of staked assets delegated and the infrastructure that helps scale this quickly and efficiently are extremely valuable measures. The greater the amount, the higher the probability such validator will be chosen to generate blocks. Thus, the more blocks created, the higher the rewards. To perform their task, validators charge commission rates that tend to vary significantly.
- Reputation and participation
Delegating tokens is delegating voting power, how is this leveraged by a validator? Are both parties’ goals aligned? Validators are vital to Proof of Stake development; they should have an established reputation within their communities, be involved in governance proposals, and be active contributors to community discussions. Finally, validators should act as evangelists of the networks they support providing token holders with relevant information and educational content that helps investors stay up to date with the ecosystem evolution.
On top of the above considerations, worth to consider splitting funds amongst multiple validators. Diversification can be a strategic choice to mitigate the effect of potential slashing penalties, especially if adequate validators’ credentials are not available. Last, DYOR, a long-time motto within the crypto communities that stands for “Do your own research”. Backing the research with verified and legit information is crucial as checking sources. The world of crypto is, still today, a playground for scammers with malicious intents and amateurs lacking the knowledge necessary to back investors’ decisions. The importance of gathering information from trustable and authoritative sources is, therefore, crucial to safeguard investments.
Figment’s role as a validator
Over the years Figment has become an established validator across 60+ PoS networks. We put great care into operating one of the biggest and fully covered institutional-grade staking infrastructures, running round-the-clock internal and external monitoring and alerting. We combine bare metal infrastructure with a network of public and private sentry nodes hosted in North America, Europe, and Asia offering the most reliable and highest quality enterprise-grade staking infrastructure on the market today.
However, running performant nodes is important but not sufficient. We want to encourage and support institutional investments in the space yet increase staking participation. We also want to be a catalyst for Web3 development offering an application layer that supports developers and entrepreneurs building dApps and services on Web3. Our team of protocol analysts and researchers has built a strong foundation and expertise across PoS projects. They are active community members taking part in governance proposals but also analyzing and recommending structural and design improvements.
We are committed to amplifying our reach beyond the crypto-native community, engaging through our research, analysis, and educational content with individuals new to this space. We are currently trusted by 150+ crypto-native and traditional financial institutions holding over $7 billion AUM.
If you are interested in staking with us or want to learn more about Figment’s role as a validator, contact us below.
Suggested further readings:
Cosmos is vulnerable: Governance and the validator
Track Cosmos Validator performance with Hubble Alerts
Insuring our Proof of Stake infrastructures
