Delegators rewards should be withdrawable to a separate address

Research & Development
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This post is meant to educate both Indexers and Delegators so they understand the whole picture of each others situations. Starting with describing the Indexers situation.

Some technical details and a bit of history:

  • A good question - why is there a 28 day period in the first place? Without going into too much detail - it is for network security. This is known as the thawingPeriod and is set to 28 days. This parameter exists so that Indexers stake can still be slashed for a period of time, so that they could be caught for providing incorrect queries or Proofs of Indexing (POIs).

Now let’s discuss token lock wallets:

  • It was intended that rewards could be withdrawn from the token lock wallets. It was not intended that the only way to do so would be by removing all tokens from the Staking contract and having them in the token lock wallet. It was an oversight that was missed, and in retrospect we see it is not desirable. Which is why many Indexers are pushing for this upgrade - right now they can access no rewards unless they shut down for 28 days, and this is not desirable for the network.
  • That is why we have the indexer rewards proposal to change the core protocol

Let’s discuss the core protocol:

  • The protocol enforces 28 days of Indexers locking their stake before withdrawing. But it does not matter if the rewards are locked, because the rewards aren’t already staked, and thus at risk for slashing
  • What does matter for rewards is that an Indexer should not be able to immediately exit rewards, while doing no real work (i.e. providing fake POIs), and have it be profitable. As long as the slashing and fees, and opportunity costs are high enough, exiting rewards immediately is fine from a security standpoint

Some side notes:

  • An added note is the tax considerations - some jurisdictions tax Indexers when the token is minted. So allows indexers to get them immediately is a plus.
  • A downside mentioned is that immediately available rewards will create sell pressure by the indexers now being able to sell their rewards on the market. This is true, but in the same respect, if a fix like this is never implemented - it means we continue to build up the sell pressure for a potential huge sell off. Eventually, many indexers will have to unstake and sell. And it would be likely that this would be around the time that Indexers token lock wallets begin to unlock, which is 1 year from network launch.

Now let’s discuss the main topic of this thread - should delegators also be able to withdraw their rewards immediately? Let’s think through how the delegation works in the protocol

  • The main reason for the delegationUnbondingPeriod is to prevent Delegators from “double delegation” - where they are rotating their tokens between indexers to get a portion of the rewards right before the indexer claims.
  • If they withdrew their rewards immediately, this wouldn’t effect double delegation.
  • In fact - it actually provides a slight disadvantage for a delegator to withdraw their rewards immediately. When rewards are immediately deposited in the delegation pool - they are never subject to the delegationTax - which is currently set to 0.5%. Thus, they enter the protocol untaxed, and this would compound over time. Said another way, if a Delegator entered 100,000 GRT into the protocol, only 99,500 would be delegated, and 500 burnt. Now if they made 15,500 GRT in the next year from the delegation pool, all of those are entered without the tax. Whereas to get another 15,500 GRT into the protocol by depositing, they would actually have to deposit 15,577.9 GRT.

Now let’s discuss the practicality of doing the Indexer rewards proposal and the Delegator rewards proposal:

  • Technically speaking the delegation upgrade is a bit tougher than the indexer upgrade because of the way the smart contracts are implemented. And will take a bit more time because we are just beginning to think of it, whereas the Indexer requirement was noticed within the first few days of launch.
  • The Indexers are in a bind, as they have been paying infrastructure costs since testnet, and can’t get access to their rewards.
  • Delegators are in less of a bind. They have no infrastructure cost, and can undelegate their tokens and get access to them in 28 days. Also if an indexer unstakes because they need to realize their rewards in a token lock wallet, they actually screw over all their delegators, who will now be earning 0 rewards.

It would be good for Delegators and Indexers to discuss the following points, now that they have more facts laid out in front of them and understand each others situations :

  • Discuss each separate proposal and hopefully get a majority of each party to agree with each other on what is good for the network, by thinking from the pespective of themselves, as well as the other party
  • Understand the practicality of how each proposal could be implemented, and come to agree on a timeline that seems appropriate for each
  • Please bring up any other facts or questions that have not been answered thus far to drive more discussions
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