Research Briefing Note: Timely Vote Credits on Solana

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The staking landscape on the Solana blockchain has seen tremendous growth, attracting significant institutional interest due to its high throughput and low fees. However, as the network matures, we believe it's crucial to ensure that reward mechanisms are fair and secure for all participants. This article examines a recently approved community proposal that aims to change how Solana distributes rewards to validators, addressing concerns arising from vote lagging strategies.

The proposal has been named ‘Timely Vote Credits’ and is set to improve the voting mechanism on Solana by aligning validator incentives with the needs of the chain. The proposal was voted on in early April 2024 and received 97.1% yes votes out of the total votes cast. It is currently being developed and is yet to be launched on Testnet. Although it has passed the governance vote, it will still be a while until the changes are implemented on chain.

The aim of the upgrade is to ensure highly performant validators, who act in the best interests of the network, are aptly rewarded. Consequently, selecting high-performing validators is now more critical than ever, as their prompt voting will directly impact the rewards and overall health of the network.

How Solana Currently Distributes Rewards

In the Solana network, validators play a critical role by voting on blocks to secure the blockchain. When a validator votes on a block that is later finalized (or "rooted"), they earn "vote credits." These credits are used to determine the portion of inflation rewards that a validator earns, benefiting both the validator and their stakers. Currently, each finalized block earns a validator one vote credit, regardless of when the vote was cast.

Reward Optimisation through Vote Lagging

On Solana, the blockchain progression can often fork, whereby validators can end up voting on the incorrect fork by no fault of their own. These validators are subject to a "lockout period" associated with voting on forks. When a validator votes on a block that becomes part of an unsuccessful fork, they enter a lockout period during which they cannot vote on other blocks. This lockout period is designed to ensure validators commit to their votes and is designed to prevent frequent vote changes that could destabilize the network. Votes cast during a lockout period on an unsuccessful branch do not contribute to vote credits.

Some validators have discovered that by delaying their votes, they can increase their likelihood of voting on blocks that will be finalized.  Validators can wait until it is clearer which fork will be finalized, thus avoiding the lockout period and ensuring their votes are always on the winning fork, hence inflating their vote credits and associated rewards. This strategy involves waiting to see which fork of the blockchain is more likely to be finalized before casting votes.

Vote Lagging Undermines Network Integrity

While this tactic can minimize fees and maximize vote credits for individual validators, we believe it undermines the network’s integrity. This behavior not only creates an uneven playing field but also poses risks to the network's security and efficiency. It negates and disrupts the intended fairness and security mechanisms of the Solana network.

Therefore, Vote lagging leads to two significant negatives:

• Unfair Advantage: Validators who delay their votes can earn disproportionately high rewards without contributing equitably to the network’s security.
• Network Vulnerability: The widespread adoption of this strategy by validators could result in a decrease in timely votes, thereby weakening the blockchain’s resilience and increasing the likelihood of forks and instability.

The Proposed Solution

To remove the attractiveness of vote lagging strategies, the Solana ecosystem has voted to accept a proposal for a new reward system. The vote credit accounting protocol will be modified to award more credits for timely votes and fewer for delayed ones. This change aims to incentivize prompt voting, negating the potential gains achieved by delaying votes.

Vote Latency Definition:

Vote latency is the difference in slots between when a vote is cast and when it is included in the blockchain. For instance, a vote cast in slot 1000 and included in slot 1003 has a latency of 3 slots.

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Votes with latencies less than 2 slots will earn the maximum of 8 credits. Each additional slot of delay reduces the credits earned by 1, with a minimum of 1 credit for very delayed votes. A 2-slot grace period allows validators to include their votes without penalty, accommodating network and geographical delays. This avoids the risk of disincentivizing geographic diversity, which minimizes infrastructure-related delays without compromising the principles of a decentralized system and is essential for maintaining network integrity. This ensures validators worldwide can compete fairly, and be rewarded equally for their contribution to the network.

Practically speaking, the only changes required from validators will be to update their systems to adopt the new vote credit calculations. The Solana CLI will also be updated to display vote latencies, helping validators monitor and improve their voting performance.

Expected APR Impact:

The long-term impact of this proposal is relatively straightforward. Validators who were previously manipulating the loophole and deliberately delaying their votes will no longer be incentivised to do so. This will lead to a healthier network overall and is not expected to affect the overall APR on Solana. Additionally, validators with poor infrastructure who do not vote in a timely manner will now be penalized for their poor performance. Top-performing operators such as Twinstake will likely see slightly higher rewards owing to their quick votes. 

Over the past 6 months, Twinstake has consistently outperformed both the network and our ‘main peers’ in vote credit performance and consequently APR. This is depicted below in the historical APR timeseries. It is expected that with the upcoming changes, this will continue.

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Over the short term it is likely that poor-performing validators will see lower APRs until they improve their infrastructure. There is also the potential for a more lasting effect of higher variances in the APRs between validators. The difference between infrastructure quality will be more noticeable as varying latencies will now directly impact reward allocation. In turn, there will be a stronger need to ensure that a staker delegates to operators with superior infrastructure.

Summary

This proposal aims to create a more equitable and secure reward system on the Solana network by discouraging intentional vote lagging. By aligning incentives with timely voting, the network will become more robust and trustworthy, ensuring that all validators and their stakers benefit fairly. Institutional clients can look forward to a more stable and transparent staking environment, reinforcing their confidence in Solana as a leading blockchain platform.

The upgrade will also pave the way to a larger difference in performance between staking providers with varying infrastructure quality. Institutions will be more cognisant of the need to choose validators with the best performance. At Twinstake, we remain committed to providing our institutional clients with informed insights and strategic guidance, as well as maintaining the high standards of performance required, whilst acting in the best interests of the blockchains we support.

To learn more about the institutional opportunities of staking Solana and to explore how Twinstake can support your crypto asset staking needs, please contact us at [email protected] or speak to your Twinstake Customer Success Manager.

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