We’ve been talking a lot about how validators play a critical role in ensuring the strongest possible security and performance for Basechain.

As you might imagine, it’s not a trivial undertaking for them to pull that off. Running a full validator node requires serious technical expertise and investment, so in exchange for their services, we need to make sure they’re rewarded for their efforts.

Initially, we announced that Basechain validators would be rewarded based on the fees generated on the network — dapp hosting fees paid by third-party developers, marketplace commissions, and transfer fees on payments.

However, just like how Bitcoin and Ethereum have block rewards and don’t rely solely on transaction fees, Basechain will also have a pool of guaranteed block rewards that are released over time to the network validators.

To fund this pool of block rewards for years to come, Loom Network will be contributing the majority of the company’s remaining LOOM token reserve and releasing it over time.

In fact, 300M of the 350M remaining token pool will be put to work! You can think of that 300M LOOM as an “inflation supply”. (While the number of tokens is fixed at 1 billion, these 300M reserve tokens have never entered the circulating supply before now).

These block rewards will guarantee that validators can be profitable while the network is still being bootstrapped, until fees from dapp hosting and marketplace commissions are enough to cover the costs of securing Basechain.

Let’s dig into some of the details and numbers around the block reward payout schedule, reward percentages, and lock-up bonus incentives…

Block Reward Payout Schedule

Each year, a maximum of 20% of the company’s remaining token pool will be paid out to validators.

The payments will be made every election cycle (2 weeks), and divided between validators based on how many blocks each validator created, which is in proportion to how many tokens they have staked.

Here’s how that maximum payout looks over the next 5 years (assuming the maximum is released in each previous year):

Note: these figures represent max inflation for each respective year.

For the first year, this number is 60M tokens (20% of 300M). For the second year, if all 60M tokens are released in year 1, the max inflation would then be 48M tokens (20% of the remaining 240M) — so on and so forth…

What do we mean by maximum?

The actual number of tokens paid out will depend on how many tokens are staked in the network in total, and the length of time those tokens are locked up in smart contracts, as detailed in the section below.

So if a lower number of tokens is staked across the entire network, less than the maximum will be released in that year.

Block Reward Percentages and Lock-up Bonuses

The amount of block rewards validators receive is calculated based on (a) the number of tokens they have staked, and (b) the length of time those tokens are staked or ‘locked up’.

Longer lock-up periods are rewarded with higher percentages, as detailed below:

DPoS networks are more secure when more value is at stake and protecting the network, so the idea is to strongly incentivize committing to longer lock-up periods. We do this by offering competitive rewards that scale up accordingly.

For instance, staking one’s tokens with no lock-up commitment for a single election cycle provides a base level return of 5%, whereas locking up for 1 year would yield up to 20% (a 300% bonus over no lock-up).

As detailed above, the total rewards will be capped according to the maximum block reward payout schedule. So in year one, a bare minimum of 300M tokens would need to be staked before the annual reward would approach 60M (assuming all 300M tokens were in 12-month lock-ups — 60M is 20% of 300M).

300M tokens would be around 47% of the current circulating supply, and it’s improbable that all of it would be placed in 12-month lock-up contracts — so it’s likely the network won’t approach the maximum block reward in the first year. (Though if it does, that’s great for the security of the network!)

If more than that is staked, then the “Annual Reward on Tokens Staked” column will be ignored. The maximum block reward (60M in year 1) will instead be divided proportionately between all staked tokens, where each staker inherits the “Lock-up Bonus” associated with their lock-up contracts (300% bonus on 12-month locked tokens, 100% bonus on 6-month locked tokens, etc.).

Validators Can Choose to Pass Rewards on to Stakers

We’ve written about how users are able to proxy their tokens to a given validator candidate, thereby increasing the size of that validator’s staking pool and effectively ‘voting’ for that validator.

Remember, the top staking pools are elected as official validators of the network and will receive the payouts in exchange for their services.

Validators can optionally choose to share a percentage of the rewards they earn on the delegators’ tokens. This percentage is up to the individual validator to decide.

A quick example of how this will look in action — if a delegator locks up their stake for 6 months for a 10% reward (see Table 2) and they delegate to a validator with 50% commission, then they will ultimately receive rewards at a 5% rate (i.e. 50% fee on their 10% target return), with the validator receiving the other 5%.

The delegator would still remain in control of their tokens — they would simply be locking them in a smart contract, and then using the Basechain Dashboard to choose which validator to delegate them to. The validator doesn’t have access to the delegator’s tokens at any point.

Note: we are currently researching a minimum fee structure that would potentially impose a static or dynamic floor to prevent more well-resourced validators from undercutting and driving smaller validators out.

When Can We Start Staking on Basechain?

Update: LOOM staking is already live. Follow our Staking Guide to stake your LOOM from both desktop and mobile wallets.

We’ll be rolling out delegation for all users in the coming weeks, and introducing lock-up bonuses at the beginning of Q2 next year.

Stay tuned for updates on minimum validator fees, slashing conditions and mechanics, more measures for maintaining balanced staking pools, and lots more.