Solana’s competitive advantage is low fees. Currently, the base fee is set at ~0.000005 SOL per signature, with an optional priority fee that increases the likelihood of transaction inclusion within a given block.
This leads to a logical question – How can Solana sustain such a fee validator set structure without external subsidies? This article aims to provide a comprehensive overview of Solana’s validator scheme, covering the incentives, roadmap to become one, potential costs and revenue, and general policy of the chain towards validators. To grasp a better understanding of the chain the piece will explore as well incentives for users, examine Solana’s comparative advantages, and discuss ideas that could economically benefit the network.
Let’s start
Solana’s Operational Model
Economics behind low fees of the chain. How can Solana have such low fees?
- Proof of History. Solana uses Proof of History, which allows the network to process transactions in a highly efficient manner. PoH creates a historical record that proves that an event has occurred at a specific moment in time which reduces the time required to reach consensus
- Scalability and High Throughput: Solana can handle over 65,000 TPS. High TPS reduces the demand for block space, keeping fees low even during periods of high activity
- Efficient Validator Network: Solana has an efficient network of validators. Validators use high-performance hardware to maintain the network, and their operational costs are spread across a large volume of transactions
- Local fee market. Solana uses a unique “local fee market” where fees are isolated to specific high-demand programs or contracts, such as popular NFT mints or DeFi applications. This prevents fee spikes from affecting the entire network, ensuring that regular transactions remain affordable
How to become a validator?
- Stake SOL Tokens. There is no strict minimum amount of SOL required to stake, practical operation costs involve maintaining a vote account with a rent-exempt reserve of approximately 0.027 SOL and daily transaction fees of around 1.1 SOL for voting activities
- Technical requirements for the equipment which amount apprx. to 2650$
- CPU. 12 cores / 24 threads, or more. 2.8GHz base clock speed, or faster (500$)
- RAM. 256GB or more. Error Correction Code (ECC) memory is suggested (2000$)
- Disk. PCIe Gen3 x4 NVME SSD, or better. Accounts: 500GB, or larger (150$)
- GPUs. Not necessary at this time
How much would it cost to become a validator? How much can one expect to earn?
Hardware Expenses
Hardware Requirements – 2650$
Operational Costs:
- Server Rental: Hosting a Solana validator typically requires high-performance servers often rented from data centers. Costs can range from $500 to $2,000 per month depending on the provider and specifications
- Vote Transaction Fees: Validators pay around 1.1 SOL per day in vote transaction fees, equating to roughly 3 SOL every 2-3 days, which is about $150 daily at current SOL prices
- Total Annual Cost: Including server rental and vote transaction fees, running a Solana validator can cost between $20,000 and $40,000 per year
Income and Profitability
Revenue Sources:
- Commission on Inflation Rewards: Validators earn a commission on the rewards generated from staked SOL. This commission can be set between 0% and 10%. The average annual return for stakers is around 6.8%
- Block Rewards and MEV: Validators can also earn from block rewards and MEV, though these are typically smaller components of their total income
Break-even Point:
- Voting Costs: Annual voting costs are estimated to be around 402 SOL
- Revenue from Staking Rewards: With an annual staking reward rate of approximately 8%, 40,000 SOL would yield about 3,200 SOL annually. At a 10% commission, the validator earns 320 SOL annually from 40,000 SOL staked
Break even analysis for a small validator:
- Revenue from 40,000 SOL: Staking rewards: 3,200 SOL/year. Validator commission (10%): 320 SOL/year
- Costs: Voting costs: 402 SOL/year. Additional operational costs (hardware, personnel): Variable but significant
Given these factors, the break-even point for a Solana validator likely lies closer to 40,000 SOL in a more optimistic scenario. However, given the variability in additional operational costs, aiming for around 50,000 SOL provides a safer margin to ensure covering all expenses and achieving minimal profitability. This aligns with the estimate that smaller validators typically need around 40,000 SOL to break even but may require up to 50,000 SOL to account for variability in expenses and ensure sustainability
Potential Earnings:
Top validators with large amounts of delegated stake can earn substantial profits. For example, a validator with 15 million SOL staked and an 8% fee can make millions annually
While payback period is aprx one week on the operation costs, validator needs to keep up stake investment of at least 50,000 SOL
So! Can actually anyone become a validator?
- High Costs and Technical Requirements: Running a Solana validator is expensive and technically demanding. The annual costs can reach around $44,520, considering server and bandwidth expenses and voting costs.
- Centralization Concerns: Despite efforts to decentralize, a significant portion of Solana’s stake is concentrated among a small number of validators. This is reflected in Solana’s Nakamoto Coefficient, which measures the network’s decentralization level. A higher coefficient indicates better distribution of stake, but Solana’s coefficient, while improving, still indicates some centralization
- Performance and Reliability: Solana’s high transaction throughput and low latency require validators to maintain high uptime and performance, which can be challenging for smaller operators
All in all, the KYC process, tech requirements and financial upside of the process does make it somewhat complicated to become a validator.
Economic structure and pathway for validators
Validators in the Solana network can make money in a few ways. First, they earn rewards from the network’s inflation, which is currently at 5.251%. They also get rewards from base fees (0.016%) and, if they use the Jito client, they get additional rewards (0.42%). So, without Jito, they make about 5.267%, and with Jito, it’s around 5.671%. Validators usually take a commission from these earnings, usually between 5% and 10%. This means they end up with annual commissions ranging from 0.26% to 0.56% of what they’ve staked.
On top of that, validators keep all of the priority fees users pay, which adds another 0.2% to their earnings based on the tokens they’ve staked. So, in total, validators can make between 0.46% and 0.76% of what they’ve staked in a year.
In terms of the bigger picture, users generate a lot of fees—around $189 million a year. Half of that goes towards reducing the total number of SOL tokens, and the other half goes to validators. Validators also benefit from Jito MEV rewards, which adds about $89 million to their yearly income. Combining these with the priority fees, validators can make between $92.3 million and $97.4 million annually.
Inflation also affects validator earnings, adding another $146.5 million to $293.4 million every year. The exact amount depends on the commission rates set by validators.
To break even, a validator needs to stake between $4 and $7 million, or the equivalent in SOL tokens. This varies based on things like their expenses, commission rates, and what client they’re using.
Economic incentives for validators
- Transaction Fees
a. Base fee: Around 5000 lamports (0.000005 SOL) per transaction
b. Priority Fee: Varies depending on network conditions. This base fee can range from 50% to 1000% of the target lamports per signature. The default target per signature is currently set at 10,000. So, it would be from 5,000 lamports to 10,000,000 lamports.
Together fee could be from from 0.000005 SOL (0.0000013 USD) to 1 SOL (153 USD). ETH gas average fee is at 3 USD as of 31.05#
- Staking Rewards. Earned proportionally based on the amount of SOL staked. The reward rate is around 5% annually.
- Commission Fees: Validators can charge a commission on the rewards earned by their delegators as compensation for their service. The commission rates charged by validators typically range from 0% to 10% or higher. Some validators offer lower commission rates to attract more delegators, while others may charge higher rates to cover their operational costs and ensure profitability
- Setting Commission Rates: Validators have the flexibility to set their own commission rates when they register their validator node.
It can be seen that the majority of transaction fees are from the priority fees. A significant portion of users are willing to pay higher fees for faster transaction processing, which. The growth of DeFi and NFT applications, starting with the end of 2023, Solana has likely contributed significantly to the rise in priority fees
Solana Transaction Fee Breakdown as of May 2024
Economic incentives for Users
- Solana provides ability to support highly speculative consumer products with hundreds of operations daily. This level of activity is only feasible on a blockchain that offers high throughput and low gas fees, which Solana excels at providing
- Larger and institutional players prioritize robust applications, valuing security over speed and efficiency. Solana caters to these needs as well, offering a secure and reliable environment for their operations.
- Users can choose validators that align with their own views on governance. If a validator’s decisions do not align with a user’s preferences, the user can switch their delegation to a different validator. This ensures that validators remain accountable to their delegators
- Solana allows users to stake with relatively small amounts of SOL, making it accessible for more users to earn rewards
Why has Solana had more shutdowns than any other chain?
In the past 3 years Solana has been one of the chains with the highest shutdown frequency. 3 main reasons behind it can be highlighted:
- The design of the network. It handles all validator communications on-chain like transactions, leading to high transaction volumes and congestion. This setup can cause instability, particularly when transaction volumes spike unexpectedly. Outrage of February 2024 was due to a bug in the validator software. This bug led to a network halt, requiring a patch and a coordinated restart of the validator nodes to resume operations. These bugs often emerge during or after network upgrades, like the transition from version 1.13 to 1.14, which caused block finalization to slow down significantly.
- Solana has faced issues with its network upgrades. For example, the v1.14 upgrade caused significant block finalization delays and cluster instability, leading to a major 18-hour outage in February 2023
- Solana’s validators and the network’s handling of duplicate transactions have also been problematic. High levels of duplicate transaction packets can slow down the network and contribute to outage
The latest registered large Solana network shutdown
Comparison to ETH
Ethereum and Solana are often seen as rivals. However, a closer examination of their industry positioning reveals that they are targeting different market niches, and neither is attempting to overshadow the other.
Ethereum aims to be a premium and reliable platform, focusing on high-value transactions and robust security features. On the other hand, Solana is carving out a niche as an accessible and affordable blockchain solution, leveraging its strategy of ‘economies of scale’ to offer lower costs and faster transaction speeds. Contrary to mainstream opinion, their rivalry is more about parallel growth in their respective domains than direct competition. Each platform is developing its unique strengths, contributing to the broader blockchain ecosystem without necessarily trying to replicate the other’s approach.
Some final thoughts:
- Solana <> ‘meme coins’. While meme coins can drive a temporary spike in network usage and fees, they do not provide a stable or sustainable basis for economic growth. Yet market for purely speculative products will always exist. For projects focused on these speculative metrics, a Solana-like model is more suitable compared to Ethereum’s model due to its lower fees and higher scalability.
- Solana <> validators 1. Validators are crucial for maintaining the network’s performance and security. Solana’s roadmap includes a reduction in token issuance, with its current annual inflation rate of 5.21% slated to decrease by 15% each epoch-year. This would amount to a decrease of $55 million a month, or $667 million a year. This adjustment is designed not only to curb inflation over time but also to enhance the rewards for those staking SOL, ensuring network security remains robust. Most of this emission is going towards validators to incentivize their work.
- Solana <> validators 2 . May 27th Solana approved to remove 50% priority burn fee (they burn on avg 4,955 a day) and give this money to validators. How this effects users: increased inflation of the network and devalue of sol holdings. The burn fee is a primary mechanism that benefits holders by reducing inflation. The removal of the 50% priority burn fee and redistributing these funds to validators will result in an additional inflation rate of approximately 0.1565% per year. This contributes to the argument of Solana being is somewhat centralized. The core focus of the protocol seems to be on incentivizing their core economic agent: validators. Thus, most of the rewards/incentives are funneled towards them.
- Solana could benefit from Introducing Dynamic Posted-Price Mechanism. The Dynamic Posted-Price Mechanism (DPPM) is a pricing strategy where the price of an ‘item’/fee (in our case) can vary dynamically based on certain conditions such as demand, supply, time, or other factors (creators can adjust to their own project other factors). This mechanism is common in industries where prices need to adapt quickly to market conditions, such as airline tickets, ride-sharing services, and hotel bookings, and lately crypto. Crypto Projects Using Dynamic Posted-Price Mechanism are Uniswap, Balancer, Rarible, Binance Launchpad
All in all, the mainstream approach to evaluating Solana often involves comparing it to other blockchains and highlighting its shortcomings. While this is a valid perspective, it is equally important to analyze Solana’s strengths, as these are the key factors behind its success and will be crucial for its future. So far, Solana appears to be economically sound, but there is no certainty about what lies ahead (which is okay, there is no technology to see the future). By understanding and leveraging its unique advantages, Solana can contribute to its growth an continue the thrive
Article Researched and Written by :
Mariia Stelman
Mariia’s LinkedIn – https://www.linkedin.com/in/mariia-stelman-354722240/