Validator Auctions, Bonds & Rewards
Let's dive into how Validators win auctions and earn rewards.
The Validator slots are granted based on a rolling Auction, whereby the highest bidders that complete Keygen at the end of each Auction are selected as the Authority Set for the next Epoch. On Perseverance, this is 3 hours long, but will be longer in production.
Auctions begin halfway between the start and the expected end of an Epoch. During Auctions:
- Bidding Validators commit their FLIP balance to the auction for its duration and may not change their state to Non-Bidding.
- Non-Bidding Validators (without a current bond) can redeem funds as normal, but can change their state to bidding during the auction
- All Validators can add extra funds at any time
In order for a node to retire, it must enter a Non-Bidding state before the next Auction begins. See Validator Types & Statesfor more information.
Validators place their bids on the Ethereum network with the ERC20 token FLIP. These bids are recorded by the current Validators via the witnessing process. Bidding is a passive process, with Validators encouraged to lock the maximum they’re willing to pay for the slot with a single transaction.
To resolve an Auction, first, the Minimum Active Bid is determined by finding the 150th best bidder from the Auction (Or, if the Authority Set Size Cap changes, whatever that number is, for example the 300th). Where the previous set size is smaller than the Authority Set Size Cap, the growth of the set size is limited to an additional 50% of open slots.
If a Validator’s bid is higher than or equal to the Minimum Active Bid at the conclusion of an Auction, that Validator is a part of the Primary selection group for KeyGen. Validators that fail this KeyGen are then replaced by the next best bidders in the Secondary group (Backup Validators) until a successful KeyGen is reached. Note that to be considered as a Backup validator that can be included in this secondary set, the bidding Validators must also bid to a value of at least 1/2 of the MAB as determined by the Auction Resolution.
If no successful KeyGen occurs with the Authority Set Size Cap, the set size will continue decreasing until a successful KeyGen is achieved.
Explaining Auction Resolution
During the ensuing Epoch, all successful Authorities are Bonded to the value of the Minimum Active Bid for that auction. Any amount staked in excess of the Bond at the conclusion of an Auction can be withdrawn by the bidder between Auctions.
Validators selected from the Secondary set or who have been slashed may have a balance lower than the bonded amount. This means they will not be able to make any withdrawals until they have a balance in excess of their bond, or the bond expires.
The balance of bidders with our without a bond will be considered as an implicit bid in the next Auction, including any rewards the Validator has earned from their node. This still means that current Validators might have to top up their bid between auctions to keep their slot, but if it’s high enough, do not need to do anything extra to succeed in each subsequent auction cycle.
The most lucrative form of rewards are paid to the current Authority Set. These rewards are distributed to each Validator in the set each time they author a block on the State Chain.
Every Authority member earns equal rewards during an Epoch, regardless of their stake.
A fixed reward (much less than the Active Set reward) is split between the Backup Validators each Epoch. So long as a Backup Validators is Qualified (see Validator Types & States), rewards will be paid to it each heartbeat interval based on their stake, proportional to their share of staked FLIP in the total number of FLIP staked in Backup Validators. However, Individual Backup Validators can't earn more than Authority Validators.
Instead of paying an equal reward to the Backup Validators, a fixed reward is distributed proportionally to Backup Validators based on their stake size. This is because we want to incentivise these Backup Validators to have the highest amount they can for the next auction, in which the highest bidding backup nodes would be included first if any Authorities drop out, and also to incentivise the nodes to hold onto their stakes and await the next auction if they don't make it in.
For Backup Validators, we also allow bids to be placed outside of the normal auction cycle, and immediately reflect increased bids for Backup Validators in the rewards they are paid. This provides a direct and immediate incentive to stake as much as possible as soon as possible, both increasing total bidding and increasing the likelihood that these more active and collateralised Backup Validators will be included in the next set.
The rules for Backup Validators are as follows:
- A fixed reward of FLIP (much less than the Authority Set reward, 1% compared to ~7% of annual supply given to Authorities) is divided among the Backup Validators for a given Epoch.
- System limits prevent individual Backup Validators from earning more than Authority Validators, disincentivising self-exclusion from ceremonies with high stakes.
- There is a limit on the number of Backup Validator slots - 1/3rd of the current Authority Set size. Any bidding node outside this limit will not be a Backup Validator.
- So long as Backup Validator remains Qualified (including being Online), rewards will be paid to it based on their stake, proportional to their share of staked FLIP in the total number of FLIP staked in Backup Validators.
- Any Backup Validator that goes offline will no longer be Qualified and therefore gives up a Backup slot to another online Bidding node. However, they can come back online at any time, and provided they are still bidding enough to win back their Backup Validator slot, can immediately begin earning rewards again after the first successful heartbeat interval.