Validator Auctions, Bonds & Rewards

Let’s dive into how Validators win auctions and earn rewards.

Auctions

What is the Validator Auction?

At any given time the Chainflip network consists of up to 150 Validator nodes that form what is known as the Authority Set.

Authorities are responsible for authoring new blocks, participating in threshold signature ceremonies, and witnessing external events such as deposits to the vaults. In exchange, the authorities earn rewards in the form of FLIP token emissions.

Authority slots are granted based on the outcomes of regular Auctions . The highest bidders in the auction are selected to participate in cryptographic ceremonies to generate new shared keys. Upon success, the new vaults are activated and the countdown to the next aucton begins anew.

Each such period between auctions is known as an Epoch. At the time of writing, each Epoch lasts three days.

Participating in the Auction

In order to be considered for an Authority Slot, validators must fulfil the following conditions:

• The Validator must be in a bidding state. The Validator’s auction Bid is equal to their on-chain FLIP balance.
• The Validator’s account balances must be at least 20K FLIP.
• The Validator must be running correctly configured Validator software, including the Chainflip Engine:
  • The Chainflip Engine must be at a compatible release version.
  • The Peer Mappings must be correctly configured.
  • The Session Keys must be registered.
• The Validator must not be suspended for Keygen violations.
• The Validator may not have negative Reputation.

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, and can change their state to bidding at any time, including during the auction.
• All Validators can add extra funds at any time.
• Operators may not update their settings such as commission.

In order for a node to retire, it must enter a non-bidding state before the next Auction begins. See Validator Types & States section for more information.

Delegation

Non-validator accounts can delegate some or all of their FLIP to an Operator. All delegated FLIP will be distributed amongst the Operator’s set of managed Validators to increase their bid during the auction.

Resolving an Auction

The aim of an Auction is to derive a list of candidates for the Key Generation & Rotation stage (KeyGen). The way Auctions are resolved is as follows:

1. Determine the maximum set size \(S\) for the next Epoch (default 150).

2. Gather all Validators that are Qualified to participate, based on the above criteria. These are the auction Participants \(P\).

3. Collect and distribute FLIP from delegated stakers amongst associated validators in \(P\) to increase those Validators’ effective bid.

4. Select up to \(S\) highest bidders from the \(P\), where the bid is no lower than 50K FLIP. The lowest bid in \(P\) is termed the MAB or Minimum Active Bid.

5. Optimization Step: For any losing Operators, their Validators are converted one-by-one into Delegators to increase the effective bids of their remaining Validators. If this optimization raises the losers’ effective bid above the MAB, repeat steps 3 to 5. Otherwise, continue.

6. The remaining set of up to \(S\) Validators determines the KeyGen candidates \(K\).

Performing Key Generation & Rotation after an Auction

Once the set of KeyGen candidates is determined, the KeyGen ceremonies begin. Firstly, all of the KeyGen Candidates attempt their KeyGen ceremony. If this is unsuccessful, the failing candidates from that ceremony will be Suspended and removed from the KeyGen process. This will repeat until a successful KeyGen round occurs.

This implies that the resultant Authority set size can decrease until a successful KeyGen is achieved. For example, if the cap of \(S\) is 150, but 20 in total fail KeyGen through the rounds, the resulting Authority Set Size will be 130 Validators.

There is also a minimum set size, which if reached will cause the KeyGen to be aborted and for another Auction Resolution to take place to repeat the process from the beginning.

Bonds

Once the Auction is resolved, KeyGen is successful, and the Authority Set rotates, all successful Authorities for the new Epoch are Bonded to the value of the Minimum Active Bid of that auction. Delegators are similarly bonded according to their bid contributions. 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 is lifted through retirement or losing an Auction.

The balance of bidders with or 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.

Rewards

Authority Rewards

The most lucrative form of rewards are paid to the 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.

Delegation Rewards

For Validators accepting delegation, Authority rewards are paid out via the Validator’s Delegation set:

• Validators are rewarded proportionally to their contribution to winning the auction (Bid:MAB).
• The Operator takes a commission on the remaining share.
• The remaining reward is split proportionally between delegators according to their contributed bids.

Slashing

Authorities can be slashed for failing to follow the network’s consensus rules. Slashes to Delegations are distributed in the same way as rewards.

Rewards Example

Operator Olive manages two validators Valery and Vanessa, and has received delegated bids from Delegators Denzel, Deena, Daisy and Dermot.

Olive is a reputable Operator and charges a 20% fee.

The respective stakes at auction time were:

• Validators:
  • Valery: 20K $FLIP
  • Vanessa: 10K $FLIP
• Delegators:
  • Denzel: 10K $FLIP
  • Deena: 40K $FLIP
  • Daisy: 40K $FLIP
  • Dermot: 80K $FLIP

The total bid available is 200K $FLIP (Validators total = 30K $FLIP and Delegators total = 170K $FLIP), which can be distributed between 2 Validators, for a bid 100K $FLIP each.

Now imagine the auction completes and the Bond is set at 90K $FLIP.

For a payout of 1500 $FLIP:

• The Validator share is 30K / 90K, so 1/3 = 500 $FLIP.

• Of the remaining 1000 $FLIP, Olive the operator takes her 20% fee = 200 $FLIP.

This leaves 800 $FLIP for the delegators, which is split proportionally:

• Denzel (share 10K/170K) : ~47 $FLIP
• Deena (share 40K/170K) : ~188 $FLIP
• Daisy (share 40K/170K) : ~188 $FLIP
• Dermot (share 80K/170K) : ~376 $FLIP