Validator's Dilemma

Polkachu Team | 2022-08-20

Validator's Dilemma: In a perfectly competitive market where validators do not collude, individual validators choose the cheapest and most performant data center providers. As a result, the network is worse off due to data center concentration.

The dominance of Hetzner as node operators' first choice is a well-known "secret" in Tendermint-based blockchain projects.

By @larry0x

Kujira Nodes by ISPs

By @kohola_io

Crypto Twitter is good at hand-waving "decentralization good; centralization bad". However, few try to understand the economic root cause of the Validator's Dilemma, thus missing an opportunity to address the issue with a viable strategy.

In our view, choosing Hetzner is an optimal and dominant strategy for individual validators because of its cost advantage and superb performance. For instance, if the network is <33% Hetzner, a validator should just choose Hetzner because the choice won't impact the chance of chain halt. On the other hand, if the network is already >33% Hetzner, a validator might as well choose Hetzner because one way or another the chain halts if Hetzner is down.

So how to fix it? On most Tendermint chains, the stake is heavily concentrated on top validators. We should use social pressure to make these top validators diversify away from Hetzner. This will be effective for the following reasons:

1. They are identifiable name brands operated by known individuals
2. They are a small group that a collective action can target without losing focus
3. They make enough commissions so they can afford more expensive data center providers
4. The damage of a potential chain halt is higher to them than to smaller independent validators

In a way, this is to use one "disease" to cure the other. If we cannot fix the stake concentration issue, we might as well take advantage of it to fix the data center concentration issue.