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December 9, 2022

How blockchain participants can offset costs by becoming a node operator

Blockchain participants worried about the cost of integrating with and using Polymesh for security tokens can offset costs by becoming a blockchain node operator.

One of the main concerns companies have when integrating blockchain technology is the cost. 

For Polymesh blockchain participants, there are four key ways to offset costs of issuing and managing security tokens and other chain uses: 

  1. Become a blockchain node operator to earn rewards in POLYX
  2. Fund development by applying to Polymesh’s Grants Program or Ecosystem Development Fund 
  3. Expand the Polymesh ecosystem to create more opportunities for cost-reducing features or integrations
  4. Pass costs to customers with a profit margin to create a revenue source 

In this blog post, we’ll take a look at #1: how blockchain participants can offset costs by becoming a blockchain node operator.

What are the functions of blockchain nodes?

The blockchain is a distributed ledger where data is stored, shared, and synchronized across multiple nodes on a peer-to-peer network. Multiple independent nodes are a key component of decentralization. Each node functions like a server and contains a copy of the blockchain and its transaction history. 

The main function of a blockchain node is to broadcast and validate transactions. There are two types of nodes on Polymesh:

  • Regular nodes (read and submit only): Nodes that broadcast the blockchain network, read its data, and submit transactions to the chain; anyone can run this type of node. 
  • Operator nodes (read, submit, and write): Nodes that also validate new blocks; on Polymesh, only licensed financial entities can be permissioned to run operator nodes. 

What is a node operator? 

Polymesh node operators run the authoring nodes that keep Polymesh secure and operational by validating blocks according to the protocol. 

Polymesh is a permissioned blockchain, meaning access to the network and specific activities is guarded by a control layer. Existing Polymesh users will be familiar with this concept as it’s what’s behind the identity verification that takes place during Polymesh onboarding.

Node operators on Polymesh must be permissioned too, but with more specific criteria; only licensed financial entities may run operator nodes on Polymesh. 

Permissioned node operators keep the blockchain highly secure by ensuring that only reputable, known entities are validating transactions. Since these entities have reputational risk, individuals and companies using Polymesh can place more trust in the network knowing that transactions will likely not be intercepted or reversed maliciously. 

What are the primary incentives in place for node operators? 

Most Polymesh node operators are extrinsically motivated to keep the blockchain secure and available by reputation and rewards.

These incentives are intertwined by the mechanics of nominated proof-of-stake, as node operators who garner a good reputation for behaving towards the correct operation of the chain are more likely to be nominated through staking, and therefore earn rewards. 

When it comes to rewards, node operators are incentivized through two main sources of income in the form of Polymesh’s native utility token POLYX:

  1. Fees for authoring new blocks: Node operators receive 20% of all block fees (e.g. transaction fees; protocol fees for configuring security tokens) for the blocks they author.

  2. Staking rewards: Staking rewards are paid to node operators from newly minted tokens and are directly related to the number of blocks a node operator authors. 

Only node operators in the active node operator set for that specific era (every 24h) may author new blocks and gain these rewards. The chance of being selected into the set depends on the amount of POLYX staked to that node operator, which is why a node operator’s reputation among nominators plays a key incentivizing factor.

Overall, nominated proof-of-stake on Polymesh economically aligns node operators’ interests with the desire to maintain high chain uptime and chain security, as well as promote adoption of Polymesh, since increased activity will result in higher returns. 

How are node operators rewarded in staking?

Verified POLYX token holders back node operators with their own stake as a show of faith in the node operator’s good behavior. This increases the node operator’s chance of being selected into the active node operator set for that era.

Total rewards for any era are divided across the nodes in the set based on the number of blocks each node operator authors. In theory, all correctly performing nodes should receive similar rewards, irrespective of the number of POLYX tokens nominated to them; in practice there is likely to be variability due to differences in node performance. 

Node operators receive staking rewards in two ways: 

  1. Commission: Node operators take a commission, currently capped at 10%, from staking rewards before they are distributed to stakers 
  2. Stake-based rewards: Remaining staking rewards are distributed proportionally to the node operator and its stakers based on the number of tokens nominated

Is running a blockchain node profitable?

Running a blockchain node can be profitable but depends on many factors. 

For example, a node operator’s likelihood of being selected into the active node operator set, or even authoring new blocks if selected, may be impacted depending on factors such as hardware performance and network connectivity.

Well-behaving node operators should generally average out to have a similar number of blocks authored over a large number of eras. While node operators will always receive 20% of all block fees for the blocks they author, the percentage of staking rewards a node operator receives can vary. 

In principle, a higher commission will result in a higher reward for the node operator; in practice, however, it may deter nominators from staking their POLYX on that node operator. 

Another factor is the amount of POLYX the node operator itself has staked. Currently, the minimum bond requirement for a node operator is 50,000 POLYX. However, it’s in node operators’ interests to stake more as the higher the node operator’s stake as a portion of the total POLYX staked on that node, the higher the node operator’s rewards will be. 

Is there a limit to the number of Polymesh node operators? 

The maximum operator node count is set by the Polymesh Governing Council and may be subject to change at any time. 

Currently, Polymesh has a limit of 50 operator nodes. When there are less than 50 operator nodes, all node operators will automatically be elected to the active node operator set, provided they are online and operational during the daily election phase. 

Once the number of node operators exceeds the node operator count limit, only the node operators with the highest number of nominated tokens will be elected to the active set. At that point, it becomes in the node operator’s interest to encourage nominations of their node(s) to ensure they are elected, either by demonstrating a strong track record of node uptime and performance or by offering competitive commissions. 

How do you become a Polymesh node operator?

Polymesh node operators must be licensed financial entities. Node operators can choose to set up and run their nodes themselves, or they can work with a blockchain node provider such as RadiumBlock, which offers node-as-a-service to Polymesh node operators.  

To see if you qualify, get in touch with us. If you meet the criteria, we’ll ask you to complete a short application to collect and verify information about your business and its directors. This information will be compared against the Office of Foreign Assets Control (OFAC), European Union (EU), and United Nations (UN) sanctions lists. 

From there, we’ll notify you of any next steps should your application be accepted. Learn more about becoming a Polymesh node operator.

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