At some point in your accumulation of crypto, you’ll realize you want to put it to work. In crypto, this generally means delegating your tokens. While the parallel is by no means direct, those new to crypto can think about how traditional investors shore up the value of the companies they invest in.
In crypto, token delegation is actually how we secure the chain. To understand how this works, you have to understand the role played by validators. Validators have to have enough staked tokens backing up their node so that when they give a transaction a rubber stamp, the action is backed by the amount of value that has been delegated or tied to their particular node. In turn, because you put your money to work as a regular user or a token holder in the economy via that validator, you receive rewards, too.
Not all validators are created equal, which begs the question, how do you select the validator that is right for you? A good way to start considering validators is to poke around block explorers and do a bunch of Googling. There’s no Yellow Pages or LinkedIn for validators. There are, however, validator profiles in GitHub, where folks who receive delegation from chains share some information upfront. And since validator-seeking remains a bit of a hunt, here are eight best practices:
1. Ask Yourself What You Want to Get Out of It All
Don’t forget to ask yourself what you’re in it for. What is your own appetite for risk? What are your expectations in the business relationship with a validator? Technically, the business relationship is mediated by the chain (i.e., it’s not, “I’m signing a contract with so and so”). But you still have to make a decision about which validators to stake with, and those decisions do inform a kind of relationship. It remains difficult to always know whom you’re putting your faith in — the term “trustlessness” exists in DeFi for a reason — but if you follow these best practices, and put the time and effort in, you’ll make informed decisions. And you’ll also be an important part of the chain.
2. Remember That Commission Rate Isn’t Everything
As a token holder, you need to decide which validators (note: plural — more on this later) to stake with. You might look at each validator and see what their potential commission rate is for you as a reward. Typically, return can be a top driver for people who just want to get it done with and go: look for the highest yield and call it a day. That being said, commission isn’t always the best way to make your choice.
Operating a node is a pretty intense job. Whether a validator is a one-person shop, which means they’re overburdened, or 100 people, they have overhead to pay. There’s hardware to buy, engineers to pay, connectivity fees. Going with the best return — the lowest commission rate — from a validator can also mean short-changing the validator. It’s recommended when looking at commission rates, or a staking reward rate, that you do so with an understanding that you want to enable the validator to have a livable operating income.
Web2 has gotten us hooked on free software, and on services that don’t necessarily have a price attached to them. As Google and Facebook have taught us: there is a price, and the price is our privacy. All too late, we’ve realized we are the product. The interesting thing about Web3 is that with these decentralized ecosystems, we can set our own parameters for rewards. If you see a validator that doesn’t charge a commission fee, that means they just pass on all of the rewards to you. But ask yourself: how are they paying the bills? Is that sustainable? Totally not. A validator may have a higher than average commission rate, but they also may live in an area with a higher cost of living. Take things like this into consideration.
3. Beware the Original Sin of the Top 10
Most people might just look at the top 10 validators on a chain and call it a day. There’s a little bit of an original sin in this idea of the “top 10” validators. Once you’re in the top 10, you’re more visible, and that alone can keep you in the top 10. Such a scenario isn’t great for the goal of decentralization that we’re aiming for at all. It’s worth digging deeper — both into the list of validators, and into those validators’ activities.
4. Maintain a Diverse Validator Portfolio
Decentralization is as important for your portfolio as it is for crypto in general. It’s better for you and for the world when you spread your tokens around a bit, and you help some of these small but mighty validators on the network build a business.
5. Keep Your Eye on the Chain
It helps to look through a validator’s performance history on a given chain. You may find out that a new-seeming validator with a low commission rate used to be called something else and they got tombstoned: they broke the roles and got kicked out. In particular, you never want to see a validator double-sign a transaction. That’s a terrible action that gets them jailed. Double-signing can mean they’ve faked being multiple parties, or they’ve designed their validator in a way that their process for signing isn’t secure, or their management of key material isn’t secure.
6. Look for Who’s Doing the Hard Work
You don’t always have a way to know how a validator is set up. Either they provide you with diagrams and technical information, or they don’t. The validators who are using the best in the business solutions for actually securing their key material are the ones who are least likely to double sign something, or commit some other infraction. The ones doing the hard work are going to be using an HSM, or hardware security module or perhaps they’re using TMKMS, which is Tendermint’s key management. Look to see who’s using such tools, and if they’re commenting on GitHub for projects around those tools. If they are, it’s a vote in their favor.
7. Look for Operational Maturity
Does the validator have a website? Do they have a web presence that isn’t just a GitHub account? Do they talk about what they do and why they do it and how they do it? Are they active in community spaces? If so, they’re likely going to be a good service provider, because you have evidence of engagement.
See if you can sort out how large a team is. And if they have a large team, make sure they’ve got more engineers than marketers. You’re not always going to find proof on LinkedIn. Some folks might not, for many reasons, actually put their legal name on their validator. They might operate under a pseudonym. Just because someone’s named Frilly Bear 302 doesn’t mean they don’t have the experience to deserve your tokens.
8. Value-Add Has Come to Crypto
Some services realize how much of a burden it is to file your taxes and to handle staking. As a result, some of them now actually offer tax reports. Some services that have been around for a while offer an insurance policy, so that if they get slashed, you as a delegator won’t lose your tokens. It’s like a money-back guarantee in the event that something bad happens.
**With special thanks to Jessy Irwin (Director of Security, Agoric), for her valuable insights during the creation of this post.**