What are Node Sales?

What are node sales?

The question of blockchain infrastructure distribution has existed as long as blockchains have. Each blockchain consists of nodes; which are devices that maintain a copy of the ledger of the chain and participate in the chain’s consensus protocol to produce blocks.

Many chains have implemented different mechanisms to distribute nodes which have substantial impacts on the security and liveness of the chain.

One of these key mechanisms that has emerged as a crucial tool in this endeavour is the sale of node licenses. Node licenses are NFTs which represent the right to operate one node on the network Node sales represent a strategic approach by blockchain networks to distribute the responsibility of maintaining and securing the network, while also ensuring its long-term sustainability and decentralization.

Why are Node Sales unique?

Infrastructure bootstrapping in crypto has always been a challenge for new chains; this is why most PoS blockchains in ecosystems like Cosmos launch with a relatively small set of nodes. This creates a small set of node runners (often between 100-200) who share the rewards dedicated towards node runners.

This leads to a high level of network centralization and creates censorship risks for the entire network. Alternatively, letting anybody operate a node on the network dilutes rewards generated by the protocol amongst a large set of node operators, leading to a high churn of node operators. The open node strategy works well for established chains like Ethereum, where low APYs are compensated for by the perceived stability of an established asset.

The middle way

To solve this problem, one needs a strategy of node bootstrapping which creates a broad set of participants committed to the success of the network; while each node operator is still fairly compensated for their services. And who better to decide what ‘fair’ compensation is than node operators themselves.

Enter Node Sales

Node sales are a market-driven mechanism of bootstrapping nodes, wherein potential node operators purchase node licenses in a tiered system. The price of each node license increases with each tier, while the rewards associated with the node remain constant. Such a structure creates an ‘implied FDV (Fully Diluted Valuation) to breakeven’; of the token being rewarded to the node runners at each tier, and the market will determine what the ‘fair reward’ for node operation and the valuation of the project is.

The first tiers will be in the highest demand, as the price of the license is low. The market will work its way down the tiers as long as people believe the valuation of the token rewards associated with each node exceeds the cost of purchasing the node license. This process of price discovery will let the market establish what a fair dollar value is, for operating nodes as well as establish what the fair value of the token they are being rewarded in.

Reward distribution

In most node sales rewards are distributed to node operators at regular intervals, based on the number of nodes that are active for that epoch. This throws in another factor to consider when buying and operating a node. The rewards generated by the protocol in an epoch are distributed to all active nodes. So, the fewer active nodes on the network, the more rewards go to individual node operators. This mechanism incentivizes people to buy and operate nodes if the supply of active nodes is low.

The way node sales are designed, not all nodes are supposed to sell out. Healthy price discovery will limit how many nodes are in the market. On top of this, some users who have nodes might not wish to keep them active, and will not accrue rewards. We estimate that a maximum of 50% of all nodes in the network will actually be active. Hence, this is the assumption we use in all of our documentation to calculate and forecast rewards for node operators.