Jul 7, 2021
How to Pick a Validator in the Terra (Luna) Ecosystem
Terra is a Tendermint-based protocol that operates with a delegated proof of stake consensus, meaning that validators are key participants in the network. They are given rewards for verifying transactions and maintaining security. At the same time, Luna holders who do not want to set up a validator node can delegate their tokens to one or several validators on the Terra Station and get staking rewards.
This article provides an overview of the Terra validators ecosystem, describes various criteria that should be considered during the validator selection process, and compares the benefits of running a validator versus delegating Luna.
Validators role in the Terra network
Any participant in the network can create a validator, however, it is required to have special gear and deep technical knowledge related to the node deployment process and maintenance. Validators must run full nodes in order to take turns proposing blocks of transactions and voting on them. In the Terra network, validators also submit oracle prices and absorb the short-term volatility of Terra’s algorithmic stablecoin pegs. They also have governance rights over the Terra treasury and may vote on governance proposals.
The total amount of Luna delegated to the validator plus the amount of self-delegation determines the validator’s voting power and consequently a probability of producing blocks. The Terra protocol elects a block producer from the active set of validators within each block period. Currently, the active set of validators are the top 130 validators with the biggest amount of Luna staked with them. However, over time this number will increase to 300 validators.
Validators receive block rewards for creating blocks, aggregating votes, and achieving consensus. In addition to block rewards, they also get transaction fees and seigniorage rewards which are then distributed among delegators in proportion to each delegator’s stake. There are also stablecoin swap fees that validators receive for swap transactions between Luna and any Terra currency.
At first glance, it may seem that delegators have a passive role in the Terra ecosystem, but this is not true. By delegating Luna tokens, users determine which validator will get more voting power. That is why it is very important to take a responsible approach to staking, make some research before delegating and choose validators carefully.
Evaluation criteria while choosing a validator
The full list of Terra validators is available on the Terra Station under the Staking tab.
At the top of the list, you will see all newly-added validators which are marked New. This is made to encourage users to assess them. By default, all validators on the Terra station are sorted by delegation return, showing the validators with the highest delegation return first.
Each column of the table is responsible for different criteria, such as voting power, self-delegation, validator commission, delegation return, and uptime. By clicking on each of these indicators you can sort the validators accordingly and start your assessment.
Voting power
Voting power shows the cumulative amount of Luna staked with the given validator. This indicator neither reflects the quality of validators services for users nor influences the returns that you will get. There are multiple reasons why some validators have more voting power than others. For example, they could receive genesis delegation rewards from the Terraform Labs for supporting the network from the beginning, developing ecosystem tools, sharing knowledge, etc. There are also Terra investors among the validators who could delegate for themselves as well as whitelisted validators for Anchor protocol whose voting power is growing with the increasing amount of bonded Luna.
Voting power is more an indicator of decentralization but not a validator rating. Moreover, in order to support decentralization, delegators are encouraged to split their stake between several validators and delegate to validators with less voting power. For instance, users delegating to the Top 5 validators by voting power will not get Nedula protocol airdrops. More about this you can find in the article about the state of decentralization on Terra.
Self-delegation
Self-delegation shows what percentage of the staked Luna belongs to a selected validator. By checking this indicator you can assess the investments of the validator and how deeply it is involved in the chain. However, this percentage can be misleading because validators may also delegate to themselves from another address. In order to better understand the distribution of tokens among different addresses delegated to the validator, you can visit its page and check the Delegators tab.
Self-delegation is an informative indicator and does not actually influence the delegators.
Validator commission
Validator commission is one more indicator shown on the Terra Station. There are only several validators that have 100% commission meaning that their delegators will get only the rewards from airdrops. All other validators on the Terra Station have a commission rate of 20% or lower.
It is worth mentioning that the validator commission is a percentage of the block rewards but not from the amount of the delegated Luna. For example, while staking 100 Luna with a delegation return of 12% annually, you are supposed to get 12 Luna. But with the validator commission at 10%, your final reward will be 12–12*0.1=10.8 LUNA. The validator gets 1.2 Luna in this case.
You will also notice that there are some validators that have 0% commission. Although it could be very attractive to delegate to such validators, you should know that low commissions may be implemented for promotional purposes. For instance, new validators usually set zero-commission to grab the attention of delegators. Eventually, the majority of them increase their commissions because it is the only way for validators to cover expenses and make profits. Low commissions are not beneficial in the long term as they drive out the high-quality validators and encourage the cheapest infrastructure possible.
Validator commission is an important indicator as it influences users' rewards, so you should make sure that it is reasonable before delegating. On the validator’s page, you can also check two other relevant indicators such as max commission rate and max daily commission change. They show the max commission that the validator can set and how fast it can reach this rate.
Delegation return
This indicator shows the delegation return during the last 30 days for each validator. Delegation returns are based on transaction fees, the price of Luna tokens, and the performance of the validator. This is obviously one of the important criteria to look at when picking up a validator.
Uptime
Uptime shows the stability of the work of the validator, the higher the uptime the better the chances that the validator will not be offline and you will not miss your rewards.
This is a very important indicator to be taken into account.
Delegate to reliable validators
All the above-mentioned criteria will help you to decrease the selection of validators, but the choice will be still wide. The next step will be to assess the reliability of validators.
This is one of the most important criteria because it determines whether your tokens will be safe and your stake will not be slashed. If validators misbehave, their stake will be penalized, hurting both the validator and those who stake with it. If the validator experiences significant downtime or does not participate in the oracle process, the slash will be at 0.01%. The slash for double signing will be more severe at 5%.
On the Terra Station, you will notice that some validators have checkmarks near their monikers while others do not.
It does not actually mean that the validators with checkmarks are more reliable or more verified than those without them. It shows that they created their profiles at Terra’s validator directory.
In a validator’s profile delegators can find more information about it as well the links to the website or social media accounts. In order to check the profile, go to the validator’s page and click on the badge View profile on Terra Validators.
Another way to check the full list of the validators is by using Terra’s explorer.
By doing their research, delegators can learn the background of the validators and make a full picture of the validators in the Terra ecosystem. Some of the validators on Terra are well-known professional staking service providers that operate in multiple chains. For example, these are Chorus One, Everstake, Figment, P2P Validator, Staked, etc. If you have already had staking experience in other blockchains, you may recognize them. You can check the number of delegators and the total amount of assets staked with them on the Staking rewards website. This information will help you to understand how trusted these staking providers are on the market.
Other validators are Terra community members or investors. While choosing the validator to delegate your Luna, you may also consider its contribution to the community. Of course, it will not directly influence your stake or rewards, but it is good to know that the validator takes an active part in the development of the ecosystem. For example, DSRV — CHAISCAN.com created a popular analytical dashboard for CHAI, an e-wallet for payments in Terra stablecoins in South Korea, and the dashboard showing LUNA whales delegations; Smart Stake is famous for its dashboard for Luna delegators where users can check the schedule of upcoming airdrops as well as the information about the Terra ecosystem and projects; Terra Bites hosts a great Terra podcast and shares all the news on their Youtube channel; Orbital Command publishes daily updates about Terra on dedicated Telegram channel and conducts the Terra ecosystem tutorial sessions for new users.
There are more validators who create useful guides for the Terra delegators and educational content, so make sure to check their websites and social media channels. It is also important to know whether a validator has support channels where you can ask for help in case of any questions or issues.
Becoming a validator
The first thing you should do in case you want to become a validator in the Terra ecosystem is to weigh the advantages and disadvantages.
While running a full node on Terra is more profitable in terms of rewards, it also requires additional investments into the hardware and infrastructure as well as deep technical knowledge. To better understand approximate costs, check out the Staking topic on the Terra research forum where some existing validators have shared the information about their expenses.
Make sure to thoroughly read the information in the Validator Guide and Validator FAQ and learn about all the requirements. Eventually, if you decide to become a validator, you may find this step-by-step guide on how to set up a Terra (LUNA) validator node useful. There are also several validators on the Terra Station who offer their help to new validators. For instance, Bison Trails offers ready infrastructure solutions for running the Terra validator and PFC Validator has some useful scripts for setting up and running a node.
Conclusion
Although validators play a central role in providing security in the Terra ecosystem, thanks to delegation mechanisms everyone can support the network and get rewards by staking Luna tokens on the Terra Station. As Luna is a foundational asset in the Terra blockchain, those who stake Luna literally make a long-term investment in the growth of the ecosystem.
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