For the purpose of this discussion, any numbers below ignore the addition of a couple of new ‘large’ Indexers who cropped up in the past day, as the effects of their presence has not yet had much chance to play out with stakeholders. These are:
After watching the network grow during the current bootstrap phase for the past 2 months and observing the behaviours of the various stakeholders and members of the Graph community, there’s been a growing indication that we may be hurtling towards a very centralized distribution of GRT across the network.
There’s many reasons and variables that can be attributed to this issue. It may be partially due to how Delegators are behaving and the metrics they are choosing when picking an Indexer. It may be how those Indexers are behaving, the broad gap between cuts/APY on offer, or the amount of marketing/promotion they do.
However, I feel that some core parameters within the network are also contributing to this pattern, and maybe even guilty of steering the behaviours of both parties.
Those parameters being - “Delegation Ratio” and the lack of an “Overdelegation” cap.
Issue #1 - Overdelegation Cap
I’ll cover this one first, as it’s quite simple. The lack of a cap on ‘overdelegation’ allows Delegators to continue delegating to an Indexer that is already above capacity (on their 16x ratio).
This is not a common behaviour, yet, but it does happen. And the reason it may happen, or more importantly why it’s likely to happen more in the future, is because that if an Indexer has a low enough fee, the APY on offer from a Delegator’s perspective can still be very competitive, to a certain extent. This ‘extent’ grows along with the size of an Indexer’s stake, as it then takes more GRT to make an impact in terms of reward dilution.
The ability to overdelegate in the first place, from what i gather, was to allow some kind of free market behaviour. Though the ‘vision’ as i understand it was never for this to become some common tactic as described above, though it may.
Personally, i feel it serves very little purpose, but it’s a smaller aspect of this issue, overall.
Issue #2 - Delegation Ratio
Currently, we can see there’s quite a number of extremely large Indexers/stakes on the network.
The current (16x) delegation ratio means that even the top 3 by stake weight could already accommodate 50% of the fully diluted (10bil) GRT supply, before even worrying about overdelegation/dilution of APY.
There seems to be very little purpose in even allowing this amount of capacity in the first place, because while it may never happen, there’s no scenario in which we should want half of the network to be able to be held under only 3 nodes.
And while a low cut/high APY seems to be what draws in the majority of delegations, a large stake (and possibly brand?) also seems to help get you noticed, with the top 3 by ‘delegated amount’ also being amongst the top 5 by ‘stake weight’.
It seems that delegations trend towards large stakes and low cuts, and hence we see approximately 57% of the current (1.7bil) delegation weight, across those 3 Indexers.
Summary of the Issues
Due to how ratio works, being able to attract delegations allows you to lower your ‘cut’, while still pulling in the same ‘effective cut’ (fee) as you grow. At large scale, this effective % translates in to large amounts of GRT, while overheads remain quite linear.*
*This may change in the future when large stakes need to keep up with the query load sent their way, but the amount of traffic required to offset the incoming rewards would be substantial, to say the least.
And when delegations are concentrating amongst the few, it’s not possible for the many to continue lowering their cut (to be competitive) while remaining profitable. And I believe that if this continues and there becomes only a marginal difference between running a ‘small’ indexer with a low amount of delegation, or just becoming a Delegator yourself, then we could eventually see many smaller Indexers switch sides.
In addition, the dilution of rewards received by a Delegator when their Indexer is overdelegated, requires a lot more in terms of GRT to make an impact against a large stake weight. This can mean that a large stake with a low fee remains a preferable option in terms of APY well beyond 100% capacity when compared to what smaller Indexers could offer (while dealing with the same overheads as others). This only further exacerbates the problems faced by smaller Indexers.
All of the above seems like it has and may continue to centralize the stake on the network. This is clearly not an ideal situation for anyone who cares about the network health in the long-term.
By highlighting the current situation and where we seem to be headed, i’m hoping to start a discussion that will hopefully lead us towards a proposal/solution in the near future. I say “near”, as i feel this is already quite a critical issue that is snowballing fast and should be addressed sooner rather than later. With some of the unlocks coming in the near-term, we could see many more Indexers with multi-billion capacities appearing.
Making changes to steer the network towards a more broadly distributed set of delegations would ensure that smaller Indexers (in context - the vast majority) have a more likely opportunity to remain involved in the network, enabling healthy competition (also a positive for Delegators) and ensuring a more likely outcome of true decentralization of the network.
Delegators could still enjoy attractive APYs, but this would instead be provided across a larger set of Indexers through the ‘trickle down’ effect of network stake being passed down.
Feedback, criticism, and further suggestions are all welcome!
I’ve been over a lot of numbers and projections with many people regarding this topic, but have not included them initially, as i was interested in getting this discussion started ASAP. We can of course discuss numbers, projections and expectations during the course of the thread. Any contributions of this nature are also highly appreciated!