Playing devil’s advocate here…
Why allow significant overdelegation? Why allow overdelegation at all? What was the original rationale around overdelegation?
Thinking from the delegator’s perspective, it seems to me that overdelegation is overly punitive to a delegator’s returns - especially for existing delegators who cannot be expected to project when an indexer is going to hit their cap nor trust whether an indexer is going to add more self stake. This leaves delegators in a catch-22 when an indexer is approaching their capacity.
As an indexer (with capacity) I am fine with overdelegation because I benefit from the absence of the overdelegated funds from the indexerRewards distribution, however in the interests of the overall ecosystem I would explore single-digit percentage cap on overdelegation, the lower the better, unless there is a critical reason for overdelegation to exist that I am not aware of.
Edit: I’ve just seen your reasoning around overdelegation on another thread @Brandon and think I understand the rationale better now - hands off approach, let the markets find equilibrium, minimise offchain interference. I still think this number should be conservative given the impact on delegators. Do overdelegated indexers suffer in the same way i.e. lower yield?
Quoting your rationale below for reference:
Source: Delegation Feedback Rollup Thread
Allowing Indexers to become overdelegated creates uncertainty for Delegators
Allowing Indexers to become overdelegated provides an important market signal that they should either deposit more of their own stake or make their delegation parameters less attractive. This serves the purpose of a more efficient delegation market, while satisfying a design principle we had while designing the network, which was to not require off-chain coordination for mission-critical protocol functionality., This principle is intended to reduce centralization vectors and is also why the protocol has a curation market.
All that being said, we agree it would be better for Delegators to have more clarity around the rewards they should expect to earn. A relatively simple option here would be to allow Indexers to become overdelegated but only by up to a certain amount, for example by only up to 25%. More complex solutions might involve dynamic bonding curves.