Validation Credits (VCs)

Alright, so you read the intro, and now you're thinking "wtf is a validation credit". Fair enough.

Validation Credits are a concept heavily inspired by proposed "Smoothing Commitments". They are quite similar to Ethereum's proposed "Execution Tickets". In simple terms, a validation credit is the right to run a validator as part of a validation cluster for a day and keep 100% of the rewards.

Operators purchase VCs in auctions and thereby effectively pre-pay the PoS rewards. An efficient validator will be able to pay a good price for the VC and make a profit through the proof-of-stake rewards gained, which the validators are allowed to keep (specifically, they are equally shared among the nodes in a DVT cluster).

Validation credits are fungible, but not between DVT cluster sizes: A validation credit for a cluster of 4 will always entitle an operator to be part of a cluster of 4.

The purpose of validation credits

In a standard delegated staking setup, the staker and the node operator are both incentivised to avoid slashing and inactivity penalties, but if the node operator performs their validation acitvities poorly, well, they've not actually lost very much except missed revenues. This problem of "lazy validators" exists for all permissionless staking pools and works to decrease their returns.

Validation credits effectively represent a pre-payment of staking rewards - thereby providing safer rewards to the stakers and granting operators complete freedom in their validation strategy.

Acquiring validation credits

Validators acquire validation credits through winning auction bids. When joining the protocol, an operator defines their standing bid parametres that, together with the operator's reputation, determine the auction score.

Every time a batch of 32ETH is filled (either via liquid staking or via a full staker), an auction is run and the top $n$ bids are selected (ranked by auction score), with $n$ being the desired DVT cluster size.

As soon as an operator is selected and they pay their bid, a number of validation credits are minted for them equal to the number of days they had bid for. The operator is then immediately slotted into that DVT cluster, deposits the credits with the protocol, and starts validating.

Validation credit pricing formula

See Validation credit bid pricing.

Auction bid formula

See Total auction bid.

Using validation credits

When a new cluster is formed, before running an auction, the protocol tries to automatically fill the cluster with unassigned node operators who have remaining validation credits to be used. If there are not enough, a new auction is launched.

While an operator is part of a validator, their VCs are deposited with the protocol and are burned at a rate of one credit per day.

Validation credits FAQ

What if my validation credits run out?

If an operator's validation credits run out, they have the chance to purchase any desired amount / duration worth of additional validation credits at the same discount rate as their original bid.

If they choose not to do so, they are removed from the DVT cluster in question and replaced with a new operator, who would have won another auction.

What if the staker shuts down the validator before my validation credits run out?

If this comes to pass, the validator is exited and the DVT cluster is closed. Moreover, the remaining validation credits are refunded to the node operators in the cluster, and (less any penalties) the 1ETH bond is returned.

What if I exit before all my VCs are used up?

If an operator exits before using up all VCs, the remaining VCs are burned. The purpose of this mechanism is to ensure stability and balance in the protocol marketplace.