WHAT ARE VALIDATORS?

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Validators are the miners of the Terra blockchain. They are responsible for securing the Terra blockchain and ensuring its accuracy. Validators run programs called full nodes which allow them to verify each transaction made on the Terra network. Validators propose blocks, vote on their validity, and add each new block to the chain in exchange for staking rewards from transaction fees. Users can stake their Luna to validators in exchange for staking rewards. Validators also play an important role in the governance of the Terra protocol. 

The Terra protocol is a decentralized public blockchain governed by community members. Governance is the democratic process that allows users and validators to make changes to the Terra protocol. Community members submit, vote, and implement proposals.

Proposals start as ideas within the community. A community member drafts and submits a proposal alongside an initial deposit.

The most common proposal types include:

• ParameterChangeProposal: To change the parameters defined in each module.
• CommunityPoolSpendProposal: To spend funds in the community pool.
• TextProposal : To handle other issues like large directional changes or any decision requiring manual implementation.

Community members vote with their staked Lunc. One staked Lunc equals one vote. If a user fails to specify a vote, their vote defaults to the validator they are staked to. Validators vote with their entire stake unless specified by delegators. For this reason, it is very important that each delegator votes according to their preferences.

The following is a basic outline of the governance process.

• A user submits a proposal and a two-week deposit period begins.
• Users deposit Lunc as collateral to back the proposal. This period ends once a minimum threshold of 50 Lunc is deposited. Deposits are to protect against spam.
• The one-week vote period begins. The voting options are:
  • Yes: In favor.
  • No: Not in favor.
  • NoWithVeto: Not in favor, the deposit should be burned.
  • Abstain: Voter abstains.
• The votes are tallied. Proposals pass if they meet three conditions:
  • Quorum is met: at least 40% of all staked Lunc must vote.
  • The total number of NoWithVeto votes is less than 33.4% of the total vote.
  • The number of Yes votes reaches a 50% majority. If the previous conditions are not met, the proposal is rejected.
• Accepted proposals get put into effect.
• Deposits get refunded or burned.

Once accepted, the changes described in a governance proposal are automatically put into effect by the proposal handler. Generic proposals, such as a passed TextProposal, must be reviewed by the Terra team and community, and they must be manually implemented.

The Terra blockchain is a proof-of-stake blockchain, powered by the Cosmos SDK and secured by a system of verification called the Tendermint consensus.

The following process explains how Tendermint consensus works.

• A validator called a proposer is chosen to submit a new block of transactions.
• Validators vote in two rounds on whether they accept or reject the proposed block. If a block is rejected, a new proposer is selected and the process starts again.
• If accepted, the block is signed and added to the chain.
• The transaction fees from the block are distributed as staking rewards to validators and delegators. Proposers get rewarded extra for their participation.

This process repeats, adding new blocks of transactions to the chain. Each validator has a copy of all transactions made on the network, which they compare against the proposed block of transactions before voting. Because multiple independent validators take place in consensus voting, it is infeasible for any false block to be accepted. In this way, validators protect the integrity of the Terra blockchain and ensure the validity of each transaction.

Staking is the process of bonding Lunc to a validator in exchange for staking rewards.

The Terra protocol only allows the top 110 validators (previously 130) to participate in consensus. A validator’s rank is determined by their stake or the total amount of Lunc bonded to them. Although validators can bond Lunc to themselves, they mainly amass larger stakes from delegators. Validators with larger stakes get chosen more often to propose new blocks and earn proportionally more rewards.

Delegators are users who want to receive rewards from consensus without running a full node. Any user that stakes Lunc is a delegator. Delegators stake their Lunc to a validator, adding to a validator’s weight, or total stake. In return, delegators receive a portion of transaction fees as staking rewards.

To start receiving rewards, delegators bond their Luna to a validator. The bonding process adds a delegator’s Lunc to a validator’s stake, which helps validators to participate in consensus.

Luna exists in the following three phases:

• Unbonded: Lunc that can be freely traded and is not staked to a validator.
• Bonded: Lunc that is staked to a validator. Bonded Luna accrues staking rewards. Although Lunc bonded to validators in Terra Station can’t be traded freely.
• Un-bonding: Lunc that is in the process of becoming unbonded from a validator and does not accrue rewards. This process takes 21 days to complete.

Generally, the terms bonding, staking, and delegating can be used interchangeably, as they happen in the same step. A delegator delegates Lunc to a validator, the Lunc gets bonded to the validator, and the bonded Luna gets added to the validator’s stake.

Delegators can bond Lunc to any validator in the active set using the delegate function in Terra Station. Delegators start earning staking rewards the moment they bond or stake to a validator.

 Delegators can un-bond or un-stake their Luna using the un-delegate function in Terra Station. The un-bonding process takes 21 days to complete. During this period, the un-bonding Lunc can’t be traded, and no staking rewards accrue.

Caution

Once started, the delegating or un-delegating processes can’t be stopped. Un-delegating takes 21 days to complete. The only way to undo a delegating or un-delegating transaction is to wait for the un-bonding process to pass. Alternatively, you can redelegate staked Lunc to a different validator without waiting 21 days.

The 21-day un-bonding process helps the long-term stability of the Terra protocol. The un-bonding period discourages volatility by locking staked Lunc in the system for at least 21 days. In exchange, delegators receive staking rewards, further incentivizing network stability.

Redelegating instantly sends staked Lunc from one validator to another. Instead of waiting for the 21-day un-staking period, a user can redelegate their staked Lunc at any time using Terra Station’s redelegate function. Validators receiving redelegations are barred from further redelegating any amount of Lunc to any validator for 21 days.

Caution

When a user redelegates staked Lunc from one validator to another, the validator receiving the staked Lunc is barred from making further redelegation transactions for 21 days. This requirement only applies to the wallet that made the redelegation transaction.

The Terra protocol incentivizes validators and delegators with staking rewards. Staking rewards come from two sources: gas and swap fees.

• Gas: Compute fees added on to each transaction to avoid spamming. Validators set minimum gas prices and reject transactions that have implied gas prices below this threshold.
• Swap Fees: The fee for swapping Terra stablecoin denominations is called a Tobin tax. Exchanges between Terra and Lunc are subject to a spread fee. Swap fees are directed to the Oracle reward pool, where they are distributed over a period of two years to validators who faithfully report correct Oracle prices. (swapping is currently disabled)

At the end of every block, transaction fees are distributed to each validator and their delegators proportional to their staked amount. Validators can keep a portion of rewards to pay for their services. This portion is called commission. The rest of the rewards are distributed to delegators according to their staked amounts.

Running a validator is a big responsibility. Validators must meet strict standards and constantly monitor and participate in the consensus process. Slashing is the penalty for misbehaving validators. When a validator gets slashed, they lose a small portion of their stake as well as a small portion of their delegator’s stake. Slashed validators also get jailed, or excluded, from consensus for a period of time.

The risks of staking

Slashing affects validators and delegators. When a validator gets slashed, delegators who stake to that validator also get slashed. Slashing is proportional to a delegator’s staked amount. Though slashing is rare and usually results in a small penalty, it does occur. Delegators should monitor their validators closely, do their research, and understand the risks of staking Lunc.

Slashing occurs under the following conditions:

• Double signing: When a validator signs two different blocks with the same chain ID at the same height.
• Downtime: When a validator is unresponsive or can’t be reached for a period of time.
• Missed votes: When a validator misses votes in consensus or fails to vote correctly in the Oracle process.

Validators monitor each other closely and can submit evidence of misbehavior. Once discovered, the misbehaving validator will have a small portion of their funds slashed. Offending validators will also be jailed or excluded from consensus for a period of time. Even simple issues such as malfunctions or downtimes from upgrading can lead to slashing.