Case Study: Validator Governance Frameworks and Their Impact on Networks

Authored by Alani Kuye , Technical Program Manager at Overclock Labs

A key question for blockchain-powered networks is whom to regulate when governance and authority are decentralized. This paper examines current and historical issues surrounding validator programs. These issues include operational, technical, and procedural aspects of onboarding, managing, and holding validators accountable where no standards currently exist. We will also examine the impact of governance, transparency, and engagement by validators.?

While this paper does not cover the entirety of the validation process, it will serve as a starting point in a longer series of papers that aim to push for global governance standards for validator programs across blockchains.

A "Validator" on a Blockchain is analogous to a financial institution or bank that is charged with verifying every transaction. Verifying, in this case, means "Validating." Perhaps the term?"Validator" holds more substance than the term "Verifier," though they connote the same meaning. Each transaction will only be completed on the blockchain when it has been verified?by the validator for that blockchain. It’s common for validators to verify transactions on multiple blockchains. As part of their responsibilities, validators are charged with verifying transactions whether or not they are legal and accurate. These records are referred to as being on-chain, hence all transactions are immutable and final once on-chain.

A validator node is a machine (physical or virtual) that stores a live copy of the blockchain’s history while verifying new transactions. Most blockchains are public and are not controlled by a central authority or group. They are controlled via a community consensus mechanism primarily based on validator nodes. This is the core foundation of decentralization. For this to work, all network transactions must be validated via a well-distributed validator set. The more distributed a blockchain's validators are, the stronger the network will be, and resiliency makes it harder for an attacker to double spend tokens, reverse transactions, or attack the system.

A quick disclaimer: The intricacies of running a validator node are beyond the scope of this paper. This paper examines governance and frameworks for Proof of Stake mechanisms.

Proof of Stake Explained

Proof of Stake uses an elastic network of validators to secure a decentralized network. Validators receive rewards in the form of transaction fees including newly minted tokens in exchange for validating transactions for the network. While the barriers to becoming a validator are low, the responsibilities can be highly technical.

Unlike Proof of Work networks, Proof of Stake networks simulate the energy-intensive process of mining of Proof of Work in a more efficient and cost-effective manner. It also eliminates the cost-prohibitive barriers to entry such as hardware and energy capital requirements. This decouples the capital and operating expenditure (CapEx/OpEx) associated with producing new tokens, the associated commodities. Inversely, the cost is tied directly to the token price instead.?

For this reason, token holders with the largest positions earn the highest rewards and exercise the most control over the network. The problem with this mechanism is that it may become inequitable and potentially erodes decentralization. On the contrary, when people stake their tokens with a validator, they earn part of the rewards. Staking allows individuals and entities to stake their tokens with validators not only to earn rewards but to also exercise governance on the network. This democratizes participation, ensuring that a few entities don’t socialize the network costs while privatizing the gains. Staking does not have minimum staking requirements, which ensures participation is accessible to anyone interested in profiting from Proof of Stake networks.

Concerns with Proof of Stake Networks

Oversight and Governance

Proof of Stake networks are not without problems. Historically, most validators are early blockchain adopters that were onboarded by chains with little to no oversight or protocols in place to manage their validators. In many cases, these validators were globally distributed technical individuals and entities without a verifiable identity. Some use avatars or a wallet ID, in some cases, pseudonyms are only recognizable via their activity on social media platforms. Though many have grown to become well-known operating entities like Forbole, Cosmostation, and Citadel to name a few, most still operate as individuals or loosely managed entities.

Furthermore, this early approach meant networks operated in a trustless, permissionless and truly decentralized capacity among a few select groups with a shared sense of purpose.?

However, increased adoption has also increased risk vectors inherent in decentralized ecosystems, which means blockchain networks had to come up with ad-hoc rules for how validators are selected to create blocks and remedial action against those acting in bad faith. In the near future, as regulatory constraints get implemented across the industry, KYC will be applied to validators. Perhaps in this case "KYV" (Know Your Validator) measures will be required protocols for onboarding or reboarding validators. This inherently drives networks towards a governance model closely aligned with legacy industries. This bridges the gaps in a collaboratively competitive manner that drives cross-platform innovation. It also increases public trust in an industry many still view in a jaundiced manner.?

It’s no coincidence that countries with established institutions based on the Rule of Law and governance frameworks are the safest havens for investments, and multiple asset classes tied to those countries. On the contrary, no one invests in countries plagued by lawlessness, corruption, and criminality. As the industry grows, so will the need to ensure validators and key participants evolve in unison.

Security and Centralization

A single entity that controls over half the supply of a Proof of Stake token is effectively in control of the network. It’s not uncommon for some validators to collude on proposals that drain a treasury or community token pool. This is the fundamental difference between Proof of Stake and Proof of Work networks.?

Analogous to mining for gold or precious metals, the infrastructure, skills set, and resource commitment required to successfully run a Proof of Work system is what creates scarcity and upward price elasticity. Proof of Stake and its lower barrier to entry inherently create a financial engineering risk underlaid by security and centralized coordinated attacks.

Validators with the largest stakes will always reap the highest rewards in Proof of Stake networks. By implementing frameworks that emphasize equitable distribution that takes into account visibility, engagement, governance participation, and qualitative contribution to the network, validator programs can ensure their validators attract delegations across the community instead of a select few.?

Many validator programs today increasingly bear semblance to emerging oligarchies. A few “whale validators” may alter the direction of an entire project, community funding pools, or project structure via their voting power. If token holdings are directly proportional to power over the network, this inches towards a permissioned centralized system. In essence, does Proof of Stake mean “Proof of Wealth?”

The decentralized design of blockchains ensures the protocol defines the rules of engagement. Notwithstanding, validators may rebel against networks via governance proposals, or branch off to create alternate chains, among other actions in rebellion. Proof of Stake networks requires a maturity model that ensures validators do not break consensus.

Qualitative Engagement on Relevant Channels?

Social media platforms like Twitter have been the primary engagement channel for most validators. Other channels like Discord and Telegram play a role as well. However, these channels primarily cater to micro-messaging and quantitative engagement. Twitter for example places emphasis on vanity metrics like the number of views, likes, and retweets. Discord creates channel sprawl often plagued by bots, spam, and miscommunication, Telegram being similar to Discord and Slack in an equal measure of pros and cons.?

Though these platforms are a communication avenue providing short-form messaging benefits, if not well structured and policed they become cumbersome to manage.

Furthermore, as the industry approaches maturity, the need for diverse qualitative information for multiple audiences becomes necessary. These audiences include academics, regulators like the Securities Exchange Commission | SEC, Legislative bodies like the US Congress, Senate, Department of Energy, The EU, Tertiary Institutions, and other stakeholders to name a few. Tweets and social media innuendo are not enough.?

Delegating tokens with a validator is akin to opening a high-yield savings account with a bank. When your validator is a faceless entity with no substantive or verifiable engagement within the community, we can conclude the optics as concerning.

Equally important to note is that regulators and interested legislative parties are often two to three generations removed from blockchain technology. Hence, their understanding of what they are crafting regulations for is pedestrian at best. Networks must increase their efforts towards qualitative engagement across their validator programs, including but not limited to validator profiling, proposal analysis, incentivizing validator engagement, and full accountability.

Validator Spread and Rewards

To reiterate, a blockchain contains records of information, which are stored in blocks that users can add to, which forms a chain of blocks in abbreviated time-stamped versions of previous blocks like transaction data, etc. With each subsequent block, the previous blocks become harder if not impossible to alter, which provides a secure ledger of transactions. Blockchains that utilize an associated cryptocurrency and information about cryptocurrency transactions are stored on the blockchain ledger.?

Validators who verify transactions are responsible for appending transactions to the blockchain. Once transactions are on-chain, they are final, settled, and immutable. Validators play a key role in this process. Validators are analogous to modern-day high yield savings accounts, in the case of blockchains with attached cryptocurrencies, delegation, and staking.

However, validators are largely passive on many networks beyond the core function above. It’s not unusual for top validators to abstain or participate very minimally in governance proposals or other functions beyond the aforementioned transaction validation function.?

Yet, smaller validators have historically been disincentivized to increase their full participation due to the perception akin to George Orwell’s Animal Farm: “All animals are equal, but some are more equal than others.” This has placed the burden on mid-range validators who have historically been more visible and engaged with their networks.

If a validator charges zero commissions, that validator will automatically attract more delegations. This could also be used as a mechanism to exercise voting power on the network. Though a delegator may override their validators' vote, this is very rare as most governance participation rarely includes full community engagement.?

Foundations of each network must work on delegation programs that incentivize more active validators with their community. By these means, governance vote, community activity, and network support are the best practices to increase engagement, make decentralization happen and increase activity between the delegators and validators.

“The challenge is who should be able to append the next block of transactions to the blockchain, because if I have the ability to declare something common knowledge, I have a lot of power. Who should have that power?”

Silvio Micali, Founder of Algorand

The Akash Validator Program Framework

Akash Network introduced a Validator Program Framework in Q1 2022 to address the strategic governance issues examined in this paper.

The Akash Validator Program Framework emphasizes the following areas applicable to validators, both new and existing:

1. Visibility: Akash validators must maintain visibility across the Akash ecosystem.
2. Qualitative Engagement: Validators should engage the community in a qualitative manner beyond social media soundbites.
3. Governance and Participation: Validators must participate in governance proposals at least 70% of the time.
4. Leadership by Example: Validators should deploy all or part of their infrastructure on decentralized web3 platforms. For this reason, we implemented an intake process based on the five main stages for incoming validators.

Initiation

• Validators complete an application followed by an interview.?
• 14-day due diligence by the Akash team (would be great to set a timeframe here).
• Validator Tiering and infrastructure requirements completion.

Planning

• Validator team structure and communication channels.
• Capabilities and delegation specifics including timeline and schedule.
• KPIs for 30, 60, 90-day plans with the validator in agreement.

Execution

• Validator activation (Sentry nodes, frontend, backend, etc).
• Delegation specifics (amount, timeframe, schedule).
• Joint community communication and marketing efforts.
• 30, 60, and 90-day plan calibration.

Control

• KPI reporting and engagement feedback.

Continuity

• Joint Case Studies with validator and community engagement initiatives.
• Whitepapers: Including technical, functional, and operational analysis.

The Ideal Akash Validator Profile

1. Verifiable and visible profile.
2. Has used Akash Network for many deployments.
3. Votes on all Akash ecosystem-related proposals.
4. Upgrades correctly and on time.
5. Support during the time of upgrades.
6. Optimized infrastructure.
7. Participation in white papers and case studies.
8. In collaboration with Akash Network and Overclock Labs.
9. Joint marketing and community engagement efforts.
10. Basic infrastructure configuration.
11. Voting participation in analysis and proposals.
12. Ecosystem visibility on social media. Twitter, Discord, Medium, etc.
13. Qualitative ecosystem input.
14. Auxiliary efforts.
15. Implements best security practices.

Validator Security Level and Best Practices

Validators that are practicing high-level security with continuity plans are considered more professional thus having fewer situations where the network might be vulnerable.

The following things should be considered when running a validator:

1. Sentry nodes.
2. Validator operating type and location/premises where it is running and include any information about redundancy, disaster control, or physical security measures that are in place.
3. The type of technology languages, platforms, stacks, and components.
4. HSM and/or remote signer.
5. How validators are securely storing and rotating secrets (Including tokens, API credentials, certificates, etc.)
6. How logs are being analyzed using analysis tools.
7. Fully synced node back-up.

Conclusion

An increase in regulatory involvement via a coherent regulatory framework will legitimize and accelerate the industry by attracting new users and incentivizing entrants that pose a risk to traditional incumbents' operating models. Those regulations, if balanced, will allow for more permeability between the traditional centralized platforms like finance (TradFi) and decentralized platforms like DeFi. However, until qualitative governance frameworks are in place, this will continue to be a tale of two cities.

Connect with Overclock Labs and Akash Network

To learn more about Overclock Labs and Akash, visit https://www.akash.network??

Collection: Overclock Labs, Akash Case Studies on Validators, and Web3 Adoption

Citations & References

Proof-of-Stake Is a Defective Mechanism, Vincent Sus International Association for Cryptologic Research (IACR), March 24, 2022

Trusted Third Parties Are Security Holes, N. Szabo, Nakamoto Institute, 2001

Compounding of Wealth in Proof-of-Stake Cryptocurrencies: Fanti, Giulia; Kogan, Leonid; Oh, Sewoong; Ruan, Kathleen; Viswanath, Pramod; Wang, Gerui. Carnegie Mellon University, Massachusetts Institute of Technology, University of Illinois Urbana-Champaign

Acknowledgment

This case study is the first in a series of case studies on Web3, Blockchain Validators, Governance Frameworks, and User Adoption from Overclock Labs.