New Reward Sharing Mechanism and Dynamic Rewards Module
We want to take a moment to explain two new features in Lisk v4 that make up some fundamental changes to Lisk’s consensus with the upcoming v4 mainnet launch. These innovative protocols aim to transform the Lisk network’s reward system, making it more transparent, equitable, and incentive-aligned.
LIP 0070 establishes a new Onchain Reward Sharing Mechanism, allowing validators to seamlessly share block rewards with their stakers. LIP 0071 introduces a Dynamic Reward Module, refining block reward allocations among validators based on their network weight, encouraging greater commitment and contribution to the network.
Together, these LIPs promise to elevate the Lisk ecosystem to new heights of security, fairness, and collaborative participation.
New Onchain Reward Sharing Mechanism
LIP 0070 introduces a reward sharing mechanism that will allow validators to share their block rewards with the LSK accounts that are staking with them. This collaborative model seeks to make the network more secure, provide smaller holders with a piece of the action, and enable true transparency when it comes to staking rewards.
Why Are Onchain Rewards Needed?
In the past, validators who wished to share block rewards with stakers had to manually send them. Not only was this time-consuming, but it also cost additional transaction fees. Furthermore, stakers had no guaranteed way to know if they'd receive their accurate share of the rewards.
Now as part of the Lisk protocol, this new mechanism automates the reward-sharing process, making it 100% transparent in the process. Stakers now have the guarantee that they'll get their promised share, while validators benefit from not having to send rewards manually anymore.
How Do These Onchain Rewards Work?Validator Commission
When a validator registers, they initially set their commission at 100%. This commission is the percentage of total rewards that they will keep for themselves. However, validators have the flexibility to reduce this commission later, making it attractive for stakers to support them.
For instance, if a validator sets their commission at 10%, meaning they will keep 10% of the total rewards and share the remaining 90% with their stakers. If the validator earns 100 LSK, they will keep 10 LSK, and 90 LSK will be distributed among the stakers.Transparent and Fair Rewards
Whenever a validator earns a reward, a predetermined part goes to them based on their commission, and the rest is distributed among the stakers based on how much they have staked. All of this is done automatically, thanks to the updates in the Lisk protocol.Keeping Things Secure and Fair
To prevent validators from suddenly hiking their commissions and thereby reducing the stakers' rewards, there are restrictions. A validator can only increase their commission by a maximum of 5% at a time and must wait for 28 days before making another increase.
Summary of the Benefits of Onchain RewardsFor Stakers:
- Guaranteed rewards.
- Easy to choose which validator to stake with based on their commission rates.
- Smaller LSK holders can still participate.
- Reduced workload by having an automatic reward distribution system.
- A transparent reward distribution.
- More LSK staked means higher overall network security.
New Dynamic Reward Module
LIP 0071 introduces a New Dynamic Reward Module designed to refine the allocation of block rewards among validators. This will establish rewards more closely with validator weight. This in turn will motivate validators to contribute more to the network.
Why Are Dynamic Block Rewards Needed?
Historically, rewards were static and didn’t take into account the various weights of validators. This meant that validators were not motivated to stake more tokens, as their rewards would remain the same. By implementing a dynamic module, validators are now incentivized to commit more to the network due to the potential for increased rewards.
How Do Dynamic Block Rewards Work?
- Minimum Rewards for Active Validators: Every active validator will receive a baseline reward of 0.1 LSK.
- Weight-based Rewards: The remaining rewards are distributed based on each validator's weight.
Example: Let's say there's a total of 90.9 LSK left in the reward pool for active validators. If Validator A has a weight of 10% in the network, they would receive an additional 9.09 LSK (10% of 90.9 LSK) on top of the baseline 0.1 LSK.
Benefits Of Dynamic Block Rewards
- Fairness: Validators with higher contributions or stakes receive proportionally higher rewards, aligning rewards with individual contributions to the network.
Example: If Validator A has 10% weight and Validator B has 5% weight, then for a 90.9 LSK reward pool, A would get 9.09 LSK and B would get 4.545 LSK.
- Network Security: The more validators stake, the more they have to lose, promoting honest and secure network participation.
Example: A validator staking 1000 LSK faces more potential losses from network penalties compared to one staking 100 LSK, enhancing network security due to increased stakes.
Collectively, these two new modules greatly enhance Lisk’ Consensus Algorithm. The Onchain Reward Sharing Mechanism democratizes reward distribution and boosts network security by ensuring transparent and guaranteed rewards.At the same time, the Dynamic Reward Module promotes fairness and motivates increased participation,which greatly enhances network security. Together, they create great strides towards a more robust, secure, and equitable Lisk ecosystem.