#What is the Validator Redirected Revenue proposal?
The Validator Redirected Revenue proposal, introduced by Clément Lesaege of Kleros on the Ethereum Research Forum, aims to establish a protocol-level mechanism. This mechanism would enable validators to redirect a portion of their staking rewards, specifically between 0% and 10%, to finance public goods within the ecosystem.
#How would this funding mechanism operate?
Currently, there are approximately 35 to 40 million ETH staked across the Ethereum network, generating an average reward rate of 1.91%. This figure indicates total annual validator earnings of about 700,000 ETH. Should validators decide to allocate 5% to 10% of these rewards through the proposed mechanism, this could yield between 50,000 and 70,000 ETH per year, equating to around $120 million annually when converted to current ETH prices.
Each validator would select their desired contribution rate from the range of 0% to 10%. If the majority opts for a rate greater than zero, this rate would then become obligatory for the entire network. The funds would be managed through a smart contract referred to as a “splitter,” which sorts and allocates money based on the preferences expressed by validators. To determine how funds are distributed, the proposal adopts a Condorcet-winner voting method, which is adept at identifying the choice that consistently outperforms others in direct comparisons.
#Is this proposal a solution to the free-rider problem?
Historically, the funding of public goods within Ethereum has been predominantly handled by the Ethereum Foundation and several grant programs. Introducing a protocol-level funding mechanism could broaden this funding landscape and empower validators to have a direct say in how ecosystem funds are utilized, rather than leaving such critical decisions to a select few organizations.
#What concerns have been raised regarding this proposal?
Despite the potential benefits, the Ethereum research community has identified several risks associated with this proposal. One key concern is the possibility of cartelization. A coalition with a majority stake in ETH could potentially funnel all redirected funds toward projects that exclusively benefit them or are under their control.
Another significant issue involves the alignment of interests between validators and their delegators. Most Ethereum is staked through liquid staking setups or centralized services, which often leads to diverging priorities between the entities operating validator nodes and the token holders they represent.
Lastly, some stakeholders have proposed a counter-approach: reducing ETH issuance rather than reallocating rewards. They argue that cutting the overall reward rate could achieve similar ends of redirecting value without introducing a new governance mechanism vulnerable to manipulation.
#What’s next for the Validator Redirected Revenue proposal?
At this stage, the proposal is still in an early discussion phase, with no formal Ethereum Improvement Proposal submitted and no technical implementation in progress. If implemented, decreasing the net yield for ETH stakers by redirecting 5% to 10% of rewards could lead to significant ecosystem advancements, provided the fund allocation process yields valuable public goods. However, if the mechanism results in political tactics and cartel behavior, it could represent a costly new vulnerability.