Node Operation Incentives

Overview

Node Operators have two income sources: the rewards from their self-delegation, and the fees collected from 3rd-party delegations to their Arx node. In most cases, as the Network grows, fees collected from delegations will likely become the lion's share of Nodes' incomes.

The Self-Delegation

To operate an Arx node, a Node Operator must make a self-delegation of at least the MINIMUM_SELF_DELEGATION_PER_1000_CLUSTERS constant amount of stake in order for their node to become active. This constant amount is defined as the required minimum threshold of self-delegated stake, and it enables the Arx node to be a member of up to 1000 Clusters — since this amount of stake covers the costs of potential migrations for up to 1000 Clusters.

Node Operators may self-delegate stake beyond the MINIMUM_SELF_DELEGATION_PER_1000_CLUSTERS amount, up to any value, and this additional self-delegation enables the node to be a member of more than 1000 Clusters. If z represents the total current self-delegation amount of a given node, then we can calculate x, the current maximum number of Clusters that a given node can be a member of, as follows:

$$x = \frac{1000z}{\text{MINIMUM\_SELF\_DELEGATION\_PER\_1000\_CLUSTERS}}$$

Fees

A Node Operator can opt to set a fee that is collected from the rewards paid to delegators of the Arx node (taken from the curve-adjusted amounts, if the curve is applied, see the Sub-Node Delegation Rewards Distribution section). This optional fee is necessary to incentivize node operation over pure delegation.

When an Arx node is created, the fee to be collected is defined as the fee_rate parameter that will be applied to that node's delegator rewards. A max_fee rate parameter is also defined during node creation that represents the immutable maximum value that the fee_rate can ever be set to (after creation, this maximum value can never be changed). Fee rate modifications by Node Operators only take effect after a delay of 2 full epochs. This means that if a fee rate change is requested in the current epoch, once it ends and 2 full epochs pass, only then will the new fee rate become active. This is done to ensure that even if an Arx node modifies its fee at the end of an epoch, delegators will have time (in the next epoch) to either redelegate or undelegate in order to adjust their stake if they are dissatisfied with the new fee rate — both the redelegation and undelegation operations enforce a 1 epoch delay themselves, hence the need for a 2-epoch delay when changing the fee rate. The fee_rate and the max_fee are both defined in basis points (meaning that a 5% fee rate is represented as 500).

Optionality of 3rd-Party Delegations

A Node Operator can optionally disable 3rd-party delegations, effectively only permitting their own self-delegation to their Arx node. While the usage of this feature may be rare, some Node Operators may prefer to make a single large self-delegation to their node, rather than collecting additional rewards via fees from 3rd-party delegations (e.g. large institutions that prefer to only have slashing-liability for self-custodied collateral). In such cases, they may prefer to prevent 3rd-party delegations, since their self-delegation may be large enough to exactly unlock the entirety of their available hardware, and additional 3rd-party delegations would be under-incentivized due to the sub-linear rewards curve (see the Sub-Node Delegation Rewards Distribution and Self-Claimed Hardware Specification sections for more).