Validators Are Profiting From Solana’s Growth and Now It’s Stakers’ Turn

This year, 2024, will go down as a very good year for Solana which, on every meaningful metric, has put every other chain in the shade. Even its total fees, which per unit are multiples lower than Ethereum’s, have recently surpassed Ethereum on busy days. And these days, there are no quiet days on Solana: everyone wants to be a part of it and is willing to pay over the odds for the privilege of having their transaction confirmed first.

For Solana validators, whose fortunes have waxed and waned over the year (March was a good month but rewards dropped sharply over the summer), Q4 is proving to be particularly lucrative. While a handful of chains such as TRON and BNB Chain have had their fleeting moment in the sun, all roads lead back to Solana which remains the retail network of choice.

And the evidence is clear to see, not just in the number of tokens being launched daily on Pump.fun, but in the amount of fees being collected by Solana validators. Given that the network’s smaller validators were struggling to make ends meet as little as a couple of months ago, they’re entitled to have finally secured a pay raise. But as millions of dollars are scooped up by the 1,500 or so Solana validators who are active on any given day, it’s prompted questions about the role played by Solana users who delegate their stake and specifically whether they’re entitled to share in the windfall that’s now a routine occurrence.

Solana Makes Millions for Validators – But How Much Goes to Stakers?

Stakers and validators on Solana lead a symbiotic relationship. Validators are reliant on stakers, since the greater the total value of the stake assigned to them, the greater their chances of being selected to confirm the next block. This system incentivizes ethical behavior and aligns incentives between stakers and validators, but it also accounts for why smaller validators were struggling earlier this year.

Running a validator incurs costs, and thus the rewards being paid out in return for undertaking this role need to be sufficient to cover this expense. In this respect, running a validator is no different to mining Bitcoin: if production costs become too high or rewards too low, miners will power down their machines. But right now, Solana is on a tear and everyone is making money – large validators, small validators, and stakers too. But the question is how that revenue should be distributed and specifically whether stakers are entitled to more during times of plenty.

By default, SOL stakers don’t receive any of the additional rewards validators receive in the form of priority fees. Validators have no obligation to share these fees and so they don’t. The only exception is Xandeum, whose multi-validator pool is the first to programmatically share block rewards. While its TVL, which stands at nearly $5M (29.8K SOL) as of November 4, is growing steadily, this is still a fraction of Solana’s $6B staking ecosystem. So will other staking providers follow suit and assign more block rewards to SOL stakers – and do they even have an obligation to do so?

Breaking Down Solana Staking

As a glance at Solana’s metrics shows, there’s a lot of revenue being scooped up by validators right now. Fifty percent of each transaction fee is burned and the validator that processes the transaction receives the other 50% as a reward. In early March, daily fees were averaging below $500K, but they spiked at the end of that month as the first wave of memecoin mania kicked in, prompting a 10x increase in total fees.

While this level of activity subsequently abated somewhat, averaging around $1.5M per day over the summer, Solana network activity has gone into overdrive since October resulting in daily fees that have peaked at $5M and are currently averaging around $3M. For validators, this has resulted in some extremely juicy rewards. Total validator revenue has increased by 12x over the last six months, but staking APRs have barely moved in this time.

The consensus appears to be shifting towards advocating for SOL stakers to receive more, acknowledging that their stake has been instrumental in ensuring validators can consistently pocket such generous returns. The onus is now on staking protocols, including liquid staking platforms, to implement a system for fairly recompensing SOL stakers. Staking is a highly competitive landscape, with users having no qualms about withdrawing their stake and taking it to where greater economic opportunities lie.

Regardless of the moral imperative, giving a little extra back to SOL stakers makes a lot of sense from a business perspective. Staking platforms that do so will ensure their validators remain filled with the maximum SOL stake, enhancing their ability to retain those juicy block rewards that keep on coming.

Disclaimer: This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.