As a leader in Ethereum staking, Figment has been at the forefront of the network’s evolution. Ethereum presents a multifaceted ecosystem where validators play a pivotal role in maintaining network security and consensus.
In our effort to provide staking services and educate our clients, we’ve compiled this comprehensive guide to understanding rewards on Ethereum. From the intricacies of attestation to the nuances of Maximal Extractable Value (MEV), we’ll unpack the layers of complexity that define what success looks like in Ethereum staking.
Ethereum Staking Performance: Embracing Complexity Beyond Simple Metrics
Ethereum is complicated. Understanding performance means embracing the complexity, rather than relying on a single, simplifying metric.
When thinking about performance on Ethereum it is worth keeping some things in mind:
- Embrace complexity, don’t try to abstract this away by relying on single metrics to summarize performance.
- When looking at any metric, understand any preconceived notions and be very clear about what you are attempting to infer from this metric.
- Rewards are just one part of staking performance. Squeezing every last basis point of rewards out of a validator is no good if you jeopardize your stake.
- Evaluating risks is just as important (if not more) than maximizing rewards.
- Infrastructure and key security are paramount as are operational policy and procedures. These vital aspects of operating a validator do not show up on-chain so they can be ignored to the detriment of stakers.
Rewards on Ethereum
Validators on Ethereum earn two types of rewards
- Consensus Layer (CL) rewards are sent by the protocol to validators to help come to a consensus about the state of Ethereum. These rewards are fairly predictable and are not typically volatile.
- Execution Layer (EL) rewards are paid by users of Ethereum to validators in the form of priority fees, which help to get the users’ transactions included in a block sooner. Compared to CL rewards, EL rewards are much more volatile and can exhibit significant positive skew. Appreciating the difference between the average and median reward rates is important when thinking about EL rewards.
Validators perform three broad duties, which earn them the above rewards – attesting, proposing, and sync committee participation.
Ethereum Validator Mechanics: Understanding Slots, Epochs, and Attestations
Ethereum divides time into slots and epochs. Each epoch has 32 slots and each slot is 12 seconds; there are 225 epochs per day.
A slot is the opportunity for a block but is distinct from a block. Some small percentage of blocks are missed every day. The maximum number of blocks possible is 7,200 per day, but you can see in this chart – rarely is the maximum number of blocks achieved:
(here)
A validator is randomly assigned to one of the 32 slots for each epoch. The assigned slot is when the validator must make an attestation. All validators are expected to attest during their assigned slots, so a perfectly performing validator will attest 225 times per day.
To receive rewards for the attestation it must be correct and it must be received on time. Correct means the data point is agreed to by the majority of the network. Each component has a different time window in which a validator will receive rewards:
- TIMLEY_HEAD (beacon_block_root) – 1 slot, or 12 seconds,
- TIMELY_SOURCE – the square root of 32 slots, or 5.66 * 12 seconds = 67.88 seconds
- TIMELY_TARGET – between 32 and 63 slots 6.4 to 12.6 minutes. Post-Dencun, specifically EIP-7045, the timeliness requirement for the target was dropped. Validators are rewarded so long as they get their attestation with the correct target either in the current epoch or the next.
Failing to attest to TIMELY_SOURCE and TIMELY_TARGET results in a penalty (see section “Penalties on Ethereum”), roughly equal to the reward that would have been received.
Ethereum Block Proposals: Understanding Validator Roles, MEV, and Rewards
For each slot, one validator is assigned to propose a block. Unlike attestations, where all validators are expected to attest every epoch, only a small subset of validators will propose a block during the day. There are 7200 slots during a day, so only 7200 validators will be selected to propose a block per day. Currently, there are 1,074,652 validators. This means that a validator is expected to propose, roughly, once every 5 months.
Validators do two important things when building a block – they add as many attestations and signatures for the sync committee as they can. This activity helps collect important consensus information and collects sync committee data that can be used by light clients (see section “Sync committee” below for more). Additionally, validators create blocks of transactions.
The first activity – packing attestations and signatures in the block – earns validators consensus layer rewards. This is fairly intuitive as these help with the consensus of Ethereum.
The second activity – building a block full of transactions and proposing this execution payload inside the larger block, earns validators execution layer rewards in the form of priority fees, aka tips. The activity of building a block of transactions has largely been outsourced to a group referred to as ‘builders’. MEV-Boost an optional, sidecar piece of software can be run by a validator to effectively achieve this outsourcing; this has also been referred to as (out-of-protocol) proposer builder separation (PBS).
(source)
Importantly, MEV-Boost and outsourcing block building allow validators to participate in the Maximal Extractable Value (MEV) marketplace. MEV is the reward that can be gained by recording, omitting, or insertion of transactions in a block. It often looks like a set of transactions that react to a different set of transactions – like a large order to buy a token on a DEX (decentralized exchange), for instance.
MEV-related rewards are part of EL rewards and look similar to priority fees. It can be difficult to determine whether a given transaction is related to MEV or not. Regardless, MEV-related rewards are a significant source of volatility in EL rewards and can result in “jackpot”-like payoffs:
(Source)
Below is a diagram showing the two aspects of an Ethereum block – the “Execution Layer” refers mainly to the execution payload along with some other data, while everything outside of that refers to the Beacon Chain or the consensus layer of Ethereum:
(here)
What is a Sync committee?
A sync committee consists of 512 randomly selected validators and lasts for 256 epochs (~27.3 hours). During this time, for every slot (12 seconds) validators that are part of this committee must prepare and broadcast a sync message.
Sync committees provide information about the state of Ethereum, and make light clients possible. A light client is a resource-constrained client that does not keep a full copy of the state of Ethereum. But there is enough information contained in the sync message (as above) for a light client to follow the head of the chain. For more on light clients see here.
What are the Rewards for each duty?
Consensus Layer rewards are paid by the protocol – Ethereum – to validators for helping to reach consensus and provide consensus information (sync committee). It’s helpful to imagine that Ethereum has a budget to pay validators to perform this task. The budget comes from newly issued Ether (ETH).
The base reward is the basic unit of this “budget” – validators are paid in proportion to the base rewards.
With the Altair hardfork, validators are paid for each task in the following proportions:
As a rule, the base reward is applied to the above proportions to receive rewards for that duty. You can also apply these proportions to the daily “budget” calculated above to get a sense of roughly how much is paid out network-wide for each duty.
Although a higher proportion of rewards is reserved for attesters (over 85%), it must be remembered that there are many more attesters than proposers, and so this “slice of the pie” needs to be shared among more parties than the slice allocated for proposers.
To make this more concrete, take the amount of ETH paid out through new issuance (i.e., CL rewards only) per epoch: 11.9 ETH. The following amounts are paid out for each duty:
- 10.09 ETH for attestations or about 9,384 gwei per validator,
- 1.42 ETH for proposals or about 44,498,456 gwei (0.044ETH) per validator,
- 0.36 ETH for sync committee participation or about 695,288 gwei per validator and noting that this activity lasts for 256 epochs.
Of course, the more rewarding tasks like proposing and participating in the sync committee are less frequent than attesting. As mentioned previously validators should expect to attest 225 times per day; they should expect to propose a block roughly once every five months; and they should expect to be part of a sync committee roughly once every six-and-a-half years.
Proposals are interesting in that they are the one activity that earns the validator both CL and EL rewards. Since there is luck involved in being chosen for these various tasks, EL rewards add another layer of luck – timing. When proposing a block, in terms of EL rewards, it’s not just that you want to be chosen to propose a block, you want to be chosen at the right time, preferably at a time when blockspace is in high demand and at a time when MEV rewards are especially high.
(Source)
As can be seen in the chart above – “Daily Gas and MEV Revenue” – August 5th was a great day to be chosen to propose a block; it was a day that was an all-time high for MEV rewards paid out to validators.
In other words, luck can play a big role in a particular validator or group of validators’ performance.
Conclusion
As we’ve explored throughout this article, Ethereum’s reward structure and validator performance metrics are far from simple. At Figment, we embrace this complexity, leveraging our deep understanding of the ecosystem to optimize our validators’ performance while prioritizing network security and ethical considerations.
At Figment, we focus on risk-adjusted rewards rather to ensure our customers can optimize their staking rewards while minimizing exposure to potential hazards. While some risks such as security and regulatory risks are well-known, others such as engineering risks can be more nuanced. Our expertise allows us to balance the interplay between Consensus Layer and Execution Layer rewards, manage the variability introduced by MEV, and maintain consistent attestation performance, all while mitigating associated risks.
We encourage you to deepen your understanding of Ethereum staking by exploring our additional educational resources. Our articles on “Penalties on Ethereum” and “Assessing Performance on Ethereum” provide valuable insights into the risks and metrics that shape validator success.
Ultimately, the future of Ethereum relies on a knowledgeable, reliable, and engaged validator community. By choosing to stake with Figment, you’re not just optimizing your potential rewards – you’re benefiting from our comprehensive risk management approach and contributing to a stronger, more resilient network. Schedule a call with us to learn more about Ethereum staking.
