In the fast-paced world of crypto investing, whererisk assessmentis paramount for everyone, traditional approaches like farming, lending, borrowing, or engaging with multipleDeFi platformsmay not fit into institutions’ investment thesis. For those seeking a secure yet lucrative path to navigate thedigital assetinvestment landscape, runningvalidator nodesstands as an enticing frontier.
By delving into the intricacies of these nodes, we will explore howvalidator nodeswork, the specific requirements to run them, and the potential rewards they offer. we will delve into how validator nodes distinguish themselves from full nodes, uncovering their unique roles in securingblockchain networks. In the end, we will see how one can get their validator nodes up and running in less than 5 minutes, skipping all the complexities.
So, without further ado, let’s get straight into it.
What is a Validator Node?
Avalidator nodeis a participant in the network that has the role of validating and relaying transactions. Validators are fundamental to the functioning and security of ablockchain network.
While the specific roles and responsibilities of validator nodes can vary depending on the specific blockchain protocol, they perform the following functions:
- Transaction Validation:Validators review and verify the authenticity of transactions that are to be added to the blockchain. This includes checking thecryptographicsignatures and ensuring the transactions are properly formed according to theprotocolrules.
- Block Creation/Proposal:In someblockchain networks, validators are responsible for creating or proposing new blocks of transactions. This involves gathering a set of valid transactions, forming them into a block, and proposing that block to the rest of the network.
- Consensus Participation: After a block has been proposed, the network must agree on whether to accept it and add it to the blockchain. Validators participate in this process by following the rules of the consensus mechanism to agree or disagree with the proposed block.
- Network Security:By fulfilling the above roles, validators contribute to the security of the blockchain network. They help to prevent double spending, ensure that only valid transactions are added to the blockchain, and contribute to the immutability of the ledger.
Being a validator often requires meeting certain requirements. For instance, you may need to hold and be willing to “stake” a certain amount of the blockchain’s native token. This stake is a security deposit, incentivizing honest behavior and disincentivizing malicious actions. If avalidatoracts dishonestly or fails to fulfill its duties properly, it may lose part or all of its stake.
How Validator Nodes Work?
Let’s understand by taking the example ofEthereum. When a user on the Ethereum Network initiates a transaction, the transaction enters a queue to be included in the next block.Validatorsplay a key role in this process. To become a validator, a participant is required to deposit 32 ETH into a specific contract and run three types of software: an execution client, a consensus client, and a validator client. Once set up, the validator starts receiving transactions to verify and validate.
The process begins when a user creates and signs a transaction using their private keys, typically initiated via a wallet interface. This interface communicates with the network through theJSON-RPCAPI, specifying the base fee and tip to be paid to the validator. The transaction is then sent to the execution client, which verifies whether the initiating user has sufficient funds for the transaction. Once confirmed, the transaction is added to the mempool and broadcast to the network nodes.
A system called RANDAO, a Random Number Generation Authority, then selects validators to validate the transaction. The transactions from the mempool are bundled into an execution payload and sent to the chosen validators for verification. This block includes details about rewards, penalties, slashings, and attestations.
After the validators receive this block, they verify it, updating the state of the blockchain. This information is then passed to the consensus layer of the network, where the transactions are re-validated to ensure their sequence. If everything checks out, the validator attests that the block is valid. This process continues in cycles, with thevalidator nodescontinuously validating and verifying new transactions and blocks.
How Do Validator Nodes Differ from Full Nodes?
In the realm ofblockchain nodes, we often hear two names: validator nodes andfull nodes. While both are integral to a blockchain network, their roles, functionalities, and capabilities vary.
Let’s examine these differences:
- Roles in the Network:
Validator Nodes are run by a pre-set number of validators responsible for validating transactions. WhileFull Nodecan be run by any participant who meets the network’s entry requirements, verifying transactions and maintaining network synchronization.
- Transaction Validation:
Validator Nodes validate transactions based on the blockchain’s rules andprotocols.
And Full Nodes validate transactions through synchronization with the rest of the network, ensuring blockchain-wide consensus.
- Writes and Reads:
Validator Nodes accept “writes” to the blockchain, processing and adding user transactions to the ledger. ButFull Nodesprimarily focus on “reads,” handling user queries and offering scalability to the validators by distributing read request loads.
- State Authentication:
Validator Nodesmaintain signatures that validate the current state of the blockchain.
While Full Nodes rely on the validators’ signatures to authenticate the blockchain’s state.
Running a Validator Node: The Requirements & The Rewards
When you plan to run your own validator node, there are certain hardware requirements that you should meet. Have a look at them, and you can also analyze the cost implications and the rewards to come to a conclusion about whether you wish to run thevalidator nodesin the first place or not.
Efficacy of Validator Nodes In the Long Run
Diversification is key to mitigating risk in your investment portfolio. Traditional means often suggest investing in bonds, which provide stable returns over a specified period. For instance, bonds from economies such as the USA, Canada, Germany, and India yield returns of 3.52%, 2.85%, 2.25%, and 7.33%, respectively. But if you’re seeking higher yields, running a validator node on certainblockchain networkscan be an intriguing addition to your portfolio.
ConsiderAVAX, which offers an 11% reward rate – a figure that outstrips the highest returns generated by bonds in various countries. Similarly,Polkadotyields a staggering 16%, andKusamaoffers 14.77%.
However, understanding the economics of running a validator node is crucial to ensure its profitability over the long run. A basic equation to compute potential returns looks like this:
ROI = Validator Rewards + Network Fees – Cost of Running a Single Validator Node
Before deciding to run avalidator node; it’s essential to calculate based on this equation. Need to keep in mind the macroeconomic factors and current market conditions, too, as they can greatly affect profitability.
The economic model of validator nodes incentivizes validators to remain active, increasing their chances of receiving rewards. For instance, on Ethereum, one of the most prominent blockchains, validators have seen returns ranging from 4.6% to 10%. Since January 2022, these figures have soared to as high as 12% APY.
This might seem attractive and spark the urge to jump in and earn. But before you do, here are a few things you must consider.
About The Author
Dr. Ravi Chamria is co-founder CEO of Zeeve Inc, an Enterprise Blockchain company. He has an experience of 18+ years in IT consulting spanning across Fintech, InsureTech, Supply Chain and eCommerce. He is an executive MBA from IIM, Lucknow and a prolific speaker on emerging technologies like Blockchain, IoT and AI/ML.
Passionate About: Blockchain, Supply Chain Management, Digital Lending, Digital Payments, AI/ML, IoT
Specialities: Strategic Management, Technology Innovation, Product Management
