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In the rapidly evolving world of blockchain technology, Shardeum stands out with its unique approach to network incentives through a dynamic APY and tokenomics model. This article explores Shardeum’s innovative reward system that governs how active and standby nodes, as well as archiver nodes, earn rewards on the network. It further delves into reward distribution, staking and the impact of the S:A ratio (Standby nodes: Active nodes ratio) on validator earnings, illustrating how Shardeum’s capped elastic supply model and rewards issuance influence overall node rewards in conjunction with network security and performance.
This blog provides a high-level overview of the key elements underlying our node reward system, a core component of our overall tokenomics model. To maintain clarity and brevity, we will not discuss other intertwined features in this blog such as no MEV, fee markets, or the fee burning mechanisms on the network that support SHM as a deflationary asset. Moreover, official information regarding staking requirements and the hardware needed to run a node on the Shardeum mainnet will be released in the near future. With that out of the way, first things first!
Table of Contents
Shardeum’s Dynamic APY
Shardeum uses a special type of tokenomics called capped elastic supply model, which gives the network control over its token issuance rate. By controlling the token issuance rate, Shardeum also can control and affect the APY for active nodes allowing the reward system to be as beneficial as possible for the nodes.
Reward Policy for Nodes on Shardeum
Active Nodes
Active (validator) nodes earn rewards for participating in consensus and validation on Shardeum. Rewards earned by active nodes are based on their duration in the active set and not the amount of transactions successfully processed or validated. Node rewards accumulate hourly but aren’t distributed per hour as the total active time of any node may or may not be longer than one hour. In fact, it varies based on the overall amount of time spent in the active set until rotated back into the standby set. So how to claim the rewards earned? We will find that in one of the upcoming para.
Active nodes are responsible for processing transactions, securing the network, and maintaining the ledger’s integrity – tasks that require a certain amount of computational resources. By focusing rewards on active nodes, Shardeum incentivizes direct contributions to the network’s core functionalities, ensuring that any node that expends resources and upholds network operations will be fairly compensated.
Standby Nodes
Standby nodes do not earn rewards on Shardeum. Standby nodes, while unique and crucial for network resilience and scalability, do not directly participate in the consensus process or transaction validation in the same way active nodes do. Rewarding standby nodes without active involvement in network operations could inadvertently create vulnerabilities in the reward system. This approach might further lead to imbalances and reduce the overall efficiency and fairness of the system.
That said, standby nodes are used not only to handle surges in network throughput, but also as part of the regular node rotation process to enhance security and decentralization. Therefore, standby nodes can expect to transition into active node set quite frequently and will have opportunities to earn rewards when auto-selected by the network. Remember, standby nodes are selected randomly by the network, not in a FIFO (First In, First Out) manner, to enhance security. Therefore, how often a node transitions to the active set depends on the network demand, node performance among few other factors.
Archive Nodes
Archive or archiver nodes are eligible for rewards. As highlighted in the Shardeum whitepaper, archiver nodes, due to their critical role in preserving the network’s history and their substantial hardware requirements, can expect to earn significantly more than validator nodes. Details about hardware requirements, active duration specifications, and other important information will be officially announced as we approach the mainnet launch.
How Nodes on Shardeum Collect Rewards?
Rewards begin to accumulate immediately after a standby node transitions into the active set, marking the start of its reward accrual period. The node continues to earn rewards throughout its active phase until it is rotated back to the standby set. However, rewards are only distributed when validators, now back in the standby set, submit both unjoin and unstake transactions. Additionally, any node that has been rotated out of the active set must wait for 2 or 3 cycles before they can submit an unstake transaction. This delay ensures compliance with network rules, allowing for the penalization and slashing of nodes that violate these rules.
Unlike some networks where rewards are automatically distributed, Shardeum requires validators to manually claim their rewards. They do this by sending an unstake transaction request as mentioned above.
The ROI Reward formula for active nodes (to calculate potential rewards): Node reward allocated per hour x amount of hours spent as an active node.
To explore your potential earnings under various scenarios, visit the simulations section on the tokenomics page of our website. Feel free to experiment with different settings to see how they might affect your returns.Staking SHM
In terms of staking SHM, Shardeum is similar to Ethereum as the minimum stake is also the maximum stake. Therefore, we will refer it to minimum stake for the purpose of this blog. There are a few key differences though when compared to staking on Ethereum. One major difference is that Shardeum’s minimum stake is denominated in a USD amount rather than in SHM, but must be staked in SHM. For example, on Ethereum the minimum stake amount is 32 ETH. On Shardeum, the minimum stake will be set at ‘X’ SHM, equivalent to ‘Y’ USD. Alongside this, another major difference is that required stake amount can be adjusted on Shardeum – unlike on Ethereum where it remains 32 ETH.
Another key difference is that the Ethereum protocol only accepts exactly 32 ETH per validator instance for staking. If a node operator tries to deposit more than 32 ETH for a single validator, the protocol does not support accepting the excess amount. Unlike Ethereum, all validators and would-be validators (standby and active nodes) on Shardeum should stake more than the minimum requirement as a precautionary ‘top-up.’ This means they will have enough stake if the staking requirement changes or, in the unlikely scenario, they are slashed. It’s also important to note that any SHM staked beyond the required amount does not yield additional rewards.
Due to Shardeum’s staking and rewards design explained above, rewards are not automatically compounded or even capable of being compounded as the minimum and the maximum SHM requirement is the same. Also, any additional stake above the minimum SHM requirement does not earn or give any additional rewards.
S:A Ratio and Its Impact on Node Rewards
The S:A ratio is the number of standby nodes to the number of active nodes on Shardeum. This ratio illustrates how often a validator is actively participating and earning rewards in a network. A higher S:A ratio implies that active nodes are validating and earning for a smaller fraction of time due to the increased number of standby nodes compared to active ones. This relationship is probabilistic; as more standby nodes are available relative to active ones, any single node’s chance to be active—and thus earn rewards—decreases.
For example, with an S:A Ratio of 1:1 and a fixed APY (Annual Percentage Yield), each validator would, on average, be active about 50% of the time (with certain distributions on each end). However, if the S:A ratio shifts to 2:1, indicating twice as many standby nodes as active ones, a validator’s active time drops to approximately 33.33%. This dynamic underscores how the S:A Ratio affects validators’ participation and reward opportunities within the network ultimately impacting the overall return on the staked assets.
However, as mentioned previously, since Shardeum controls the token issuance rate and the APY for active nodes, the network’s rewards rate is directly linked to this controlled issuance and hence can be expected to be profitable for validators.
A Hypothetical Illustration
Please note the following are hypothetical examples to explain the concept for you.
Let’s imagine a node has 100 SHM (hypothetical minimum) staked as a validator. Let’s also assume there’s a 10% APY. Ideally, you would earn 10 SHM over a year if your nodes were active 100% of the time. However, the S:A Ratio affects your node’s active time and, consequently, your actual earnings.
With a 1:1 S:A Ratio, your node is expected to be active about 50% of the time over the year. This means you would earn approximately 5 SHM instead of 10 SHM, as your node is only validating and earning rewards for half the year.
If the S:A Ratio changes to 2:1, your node’s active time decreases to about 33% over the year, given there are now twice as many standby nodes as active ones. Under this scenario, your annual earnings would reduce further, to around 3.3 SHM, reflecting the decreased time your node spends in an active state.
This example illustrates that as the S:A Ratio increases, validators will experience reduced active time, directly impacting their rewards from the fixed APY. Higher ratios mean more competition to be active, leading to less time validating transactions and earning rewards, which affects the overall return on staked assets.
Having said that, Shardeum manages the token issuance rate and APY%, creating a favorable environment for validators. Additionally, factors like fee burning and minimal hardware requirements work harmoniously with the tokenomics model with an objective of ensuring that operating a validator node on Shardeum remains profitable. Refer to this section of our whitepaper for a comprehensive explanation of how the SHM supply is strategically designed to benefit validators.
Conclusion
Shardeum’s approach to staking and rewards offer a distinctive model that contrasts sharply with traditional fixed-supply networks like Ethereum. By adjusting the token issuance rate and thereby controlling the APY, Shardeum ensures a dynamic equilibrium between issuance and node rewards. This flexibility not only incentivizes nodes to maintain active participation for optimal network performance but also strategically aligns their compensation with their contribution to network integrity and security.
As Shardeum continues to develop its protocol and refine its reward mechanisms, it will be crucial for node operators/validators to stay informed about these changes to maximize their return on investment and support the network’s overall health and scalability. Through such innovative mechanisms, Shardeum is set to carve a unique niche in the Web3 ecosystem, potentially setting new standards for how nodes are incentivized across decentralized networks.
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