☑️Staking Rewards - Unpacked
Overview on the staking ecosystem.
Last updated
Overview on the staking ecosystem.
Last updated
There are two main sources of $SOL rewards that come from a voting validator, there are other sources of "MEV" but its important as a staker to understand the two main Solana native sources.
Solana's built-in inflation.
Block rewards & priority fee's
Lets start with inflation as this is the current validator rewards meta and the largest source of $SOL for stakers.
Solana has a protocol level built-in inflation mechanism. It started with mainnet-beta launch in March 2020 at 8% and decreases every year by 15% until the protocol has a fixed inflation rate of 1.5%.
The current inflation rate (as of August 2024) is around 5.1% and within one years time it will be around 4,33%.
A key thing to note is how these newly minted tokens are distributed. These tokens only go to stake-accounts with $SOL delegated to a voting validator. The amount of $SOL that is delegated to that validator and the number of vote credits a validator gets every epoch ties directly to how much $SOL the stakers receive.
The more active and successful a validator is in voting on blocks, the more vote credits they earn, which in turn leads to higher rewards. This is why it is important to go with a performant, ethical validator who is aware of how their hardware, network and management of their validator affects their stakers.
It is interesting to see how some of the larger institutional validators do not maximize their performance and uptime and in most cases do not even have a hot fail-over server to switch to if something goes wrong, which is inevitable at some point in the validators life time. Without proper management these validators can experience downtime which may last up to 30 minutes and in some cases hours. To quantify this, a validator votes roughly every 400ms. That is a lot of missed vote credits!
As discussed only staked $SOL is receiving inflation rewards and as not all $SOL is staked and the inflation is based on the total supply of $SOL, the entire supply's worth of inflation goes to only staked $SOL making up the extra percentage. Also the APY percentage calculation takes into consideration the compounding effect on your stake every epoch for the year.
It is important to note validators can choose to take a percentage of the inflation rewards via a commission they set.
As you can see inflation rewards will drastically reduce over time as disinflation takes place and more and more $SOL is staked. These facts directly impact the potential rewards to the stakers.
Block rewards are the transaction fee's users pay validators to confirm and include their transaction into a block on the Solana block chain. Note: if a transaction fails the user does not pay the fee.
Block rewards are made up of two parts:
Base fee's
Priority fee's
The Base fee for any transaction is currently 5000 Lamports or 0.000005 SOL.
Prioritization fees are an optional fee users or developers can add onto the base fee for a transaction. This additional fee incentivizes validators to schedule these transactions as priority giving them a higher chance of being included in the block. When blocks become saturated with priority fee's validators will drop transactions that do not have a priority fee attached.
An important fact to know is that at the current time of writing (August 2024) 50% of all fee's per transaction are paid to validators and the other 50% is burned.
However recently in a controversial vote, validators voted to remove this burn making it so that only 50% of the base fee is burned and 100% of the priority fee's are paid to validators. More on this in The Situation. This change is estimated to roll out roughly in Q4 of 2024. These block rewards are the secret sauce that unfortunately very few Solana enthusiasts and stakers understand fully.
Validators are assigned leader slots every epoch based on how much stake they have. Slots put in simple terms are an amount of time the validator assigned has to produce a block. The amount of time given to a validator to complete a slot is 400ms (now you know one of the reasons Solana is so fast!)
On successful completion that block will be confirmed and added to the block chain and the validator will receive all the block rewards associated with that specific block. If the leader fails to produce the slot, it is considered "skipped" and the validator gets no block rewards.
These block rewards depending on the amount of stake a validator has can be astronomical and will only continue to increase over time as Solana gains more adoption and the network usage increases.
Currently there is no way to natively share these block rewards with stakers. Some validators share their block rewards via LST's as we will, however these extra rewards are not felt by stakers as validators often make these rewards back via Inflation commission, Stake pool deposit or withdrawal fee's etc. More on this in the next section.
At Guardian we will structure our validator towards the community first and foremost and with our technical ability we will always find the best way for stakers to earn their fair share, after all its your $SOL securing our beloved network. By far the best way to get block rewards is our Guardian NFT's. These will represent a direct share of our block rewards and are limited to a fixed supply of 300. This means your rewards are not linear with how much stake you have but rather with how much stake our entire validator has.
