Best Practices for the Delegator Profile
It’s been a good year, you managed to buy the dip, and now your digital wallet has some weight to it. Some time passes, and the market seems to polish its bullish horns, ready to set new records. What do you do? Well, you have multiple options at your disposal, but the safest bet is to make your crypto work for you, using it to generate additional revenue.
Somewhat similar to traditional fiat investing, you can use your crypto to make more crypto. The advantage is that compared to the former, the entry barrier in crypto is much lower and easier to understand if you do your own research. We intend to lend you a hand with the research part by offering tips and best practices for delegators.
Proof of Stake (PoS) systems allow crypto owners to do more than simply store their digital assets in a wallet. By delegating a part of their tokens to validators, crypto owners become delegators and contribute directly to keeping the network up and running, ensuring key factors like governance, security and decentralization. So, it’s pretty clear that delegating your tokens is not just about generating a passive income. Although it’s undeniable that is one of its perks.
Validators are tasked with securing the network and ensuring everything is working correctly. Their job is to run a validator node and participate directly in the consensus of the network by broadcasting votes. This is where delegators come into play, as the weight of a validator’s votes is determined by the number of delegators who are backing him. To make things short, the higher the voting power, the higher the chances of a validator producing a new block and earning a reward. In exchange for locking some of their tokens to a validator, delegators receive a percentage of the block rewards earned by the validator.
Operating a validator node is no easy task. As blockchain technology has matured and increased in complexity, being a validator has become a full-time job that requires specialized hardware and extensive tech skills. Regardless if we are talking about a single individual or a full-blown team, validators need to be active and viable participants in the network, ready to guarantee they are trustworthy and have what it takes to execute this important role.
Taking these aspects into consideration, it becomes even more difficult to answer the question — How do I choose the best validator for me? Well, certainly, validators aren’t created equally, and as far as we know, there isn’t a Tinder-like app to help you get a match with your ideal validator, though looking at validator profiles in GitHub is a good place to start. Even so, there are a series of best practices and recommendations that can aid you in your search for a suitable validator.
Before looking at more technical aspects, potential financial gains and so on, it’s good to take a couple of minutes and ask yourself what you want to gain from this relationship. You need to acknowledge that even though neither of the parties involved signs a binding contract, there is a relationship between you and your validator and like all good relationships, it needs to be built on a foundation of trust.
Of course, the blockchain network and the consensus protocol already cover the business aspects, which have mechanisms in place to sanction validators who perform poorly or try to cheat the system. So, trust is guaranteed by the blockchain. Even so, risks still remain, and it is your duty to calculate your risk levels and adjust your expectations accordingly.
We’ve all done it at some point, and in some situations, like when you want to buy a TV, laptop or shiny new toaster, it’s not a bad strategy. But like with many things blockchain, it’s not quite that simple or straightforward. You can search for the top 10 validators in a blockchain and go with the number one or number two spot, but there are drawbacks that you need to consider.
Choosing a well-known validator likely comes with the benefit of higher levels of visibility and a higher chance to add the next block and reap the rewards. A concerning disadvantage is that it contravenes the philosophy of decentralization promoted by blockchain.
Blockchain is designed to be a democratized distributed network, and concentrating voting power in two or three validators raises serious security concerns and usually means the network has failed. A better approach is to look a bit deeper and check the activity and performance of a validator and then make your decision, regardless of their popularity.
As the adage goes, don’t put all your eggs in one basket. This also stands true for validators. If you have the funds, no one is stopping you from delegating your tokens to multiple validators.
Spreading your tokens between multiple validators will give you better chances of winning a passive income while also supporting smaller validators. Furthermore, by raising the voting power of multiple validators, you help ensure network decentralization.
One of the biggest advantages of Web3 is the transparency it enables, which allows users to access information like validator activity records and commission rates. As we previously mentioned, running a validator node is hard work and isn’t cheap. To earn revenue and cover overhead costs, validators charge a commission for their services which is a percentage based and taken from the delegator’s reward. Keep in mind that even if you’re looking to turn a quick profit, choosing a validator based on commission rates alone isn’t the best idea.
A blockchain network relies heavily on the infrastructure and hardware provided by validators. As such, validators need to earn a steady stream of revenue to pay for upkeep costs and also to enable them to scale their hardware to meet the increasing demands of the network.
Validator commission rates can vary depending on multiple factors, like the cost of living in their area. A red flag is a validator who has commission fees close to zero. Good validating doesn’t come cheap. 0% commission rates are an unhealthy market practice that ultimately hurts the network because it forces other validators to operate at a loss while also posing the risk of centralization by attracting uninformed delegators.
Check the validator’s track record
Making a background check to see a validator’s activity on a blockchain is highly advisable. You may encounter cases where a seemingly new validator with reasonable commission rates isn’t what he appears at first glance. An older validator can change his name to hide a shady track record dotted with downtime, double signing and jail time. These types of unwanted behaviours lead to sanctions like slashing that affect not only the validator but also the delegators who supported him.
Transparency from validators is always a good sign
A good sign that shows a validator is honest and reliable is his openness to offer technical information about his hardware setup and validating strategy. Bonus points should go to validators who use the best technical solutions in the industry, like Hardware Security Model (HSM) or Tendermint Key Management System (TMKMS). If a validator is active on GitHub in projects that employ these types of tools is usually a good indicator of their knowledge and expertise in the area.
Keep an eye out for validators who are going the extra mile
Is the validator active on Discord? Do they write blog posts about their work? Do they have a website? Have they contributed to the blockchain network by creating tools, block explorers and smart contracts? Do they have a dedicated customer support service? Do they write tutorials and guides to help inform and educate the community? If a validator engages in one or more of the above-mentioned practices it shows that the team or individual is striving to do more than the bare minimum. This type of dedication can indicate that the validator is a good service provider.
Keep in mind that not every validator does this type of stuff. However, this doesn’t mean that validators who don’t do these things are necessarily subpar. It’s just a big plus for the ones that take the time and effort to do this type of work.
Slashing insurance is a plus but not mandatory
In recent years some validators have started to offer slashing insurance which protects the delegators in case the validator is penalized and gets the tokens slashed. This type of insurance means that in case of such events, the validator will cover the losses from his pocket. For credibility reasons, validators should at least inform their delegators about the availability and origin of the funds used as insurance and a detailed description of what the insurance covers and its limits. When a validator offers slashing insurance, it’s up to the delegator to make his due diligence and verify if the validator in question has the necessary liquidity.
Self-delegating validators share the same risks and rewards
As the name implies, self-delegation is the practice through which validators take funds out of their pocket to secure the network. Putting themselves in the same position as their delegators offers a sense of confidence because the validator shares the same risks and rewards as his delegators and is incentivized to do a good job or lose his own funds.