Voting Power Cap for Enhanced Decentralization

Proposals
1

Proposal: Voting Power Cap for Enhanced Decentralization

Abstract

To address the ongoing issue of centralized voting power within the Terra Classic network, which currently has a Nakamoto index of 5, this proposal introduces a new rule to the staking module: a 2.5% voting power cap on validators. This cap prevents validators with more than 2.5% voting power from receiving new delegations or redelegations, encouraging a more equitable distribution of voting power, increasing the Nakamoto index to a target of 14, and fostering greater decentralization and validator equal profitability.

Background & Problem Statement

Terra Classic prides itself on being a fully decentralized blockchain, where governance decisions are made through community consensus. However, the current Nakamoto index of 5 indicates that just five validators could potentially veto proposals or exert significant control over the chain. While historical data suggests no malicious intent from the top validators, this low index undermines the chain’s decentralization ethos and introduces risks.

Additionally, the concentration of voting power among the top validators creates profitability challenges for smaller validators. Only the top 10 validators can consistently cover the operational costs of running a node, leading to reduced motivation for others to participate actively. This centralization fosters internal conflicts and discourages validators from championing Terra Classic’s growth.

Key issues include:

  • Centralized Control: A Nakamoto index of 5 indicates that five validators can dominate governance, contradicting Terra Classic’s decentralization principles.

  • Validator Profitability: Smaller validators struggle to remain profitable, reducing their incentive to maintain nodes or advocate for the network.

  • Community Dynamics: Centralization fuels internal disputes, hindering collaborative efforts to build and promote Terra Classic.

Proposal & Example

This proposal introduces a simple yet effective rule to the staking module: Validators with more than 2.5% of the total voting power cannot receive new delegations or redelegations. This cap ensures that voting power is gradually redistributed to smaller validators, increasing the Nakamoto index and enhancing network fairness.

Example Scenario

  • Validator A: Currently holds 3% voting power. Under the proposed rule, Validator A cannot receive new delegations or redelegations until their voting power falls below 2.5%.

  • Validator B: Holds 2% voting power. This validator can continue to receive delegations, attracting new stakers and increasing their voting power up to the 2.5% cap.

  • Outcome: Over time, validators with lower voting power gain more stake, reducing the dominance of top validators and increasing the Nakamoto index.

The goal is to raise the Nakamoto index from 5 to 14 within a reasonable timeframe, making Terra Classic more decentralized and resilient.

Mechanics of the Mechanism

The proposed rule will be implemented as follows:

  • Voting Power Cap: Any validator exceeding 2.5% of the total voting power will be ineligible to receive new delegations or redelegations.

  • Monitoring and Enforcement: The staking module will check each validator’s voting power at the end of each epoch. If a validator exceeds 2.5% ( prev. cap 20%), new delegations and redelegations will be blocked.

  • Grace Period: Upon implementation, validators above 2.5% will retain their current stake but cannot receive additional delegations or redelegations until their voting power falls below the threshold .

  • Governance Adjustments: The 2.5% cap can be adjusted via governance proposals to reflect network conditions, validator feedback, or decentralization goals.

This mechanism requires minimal changes to the staking module .

Advantages

  • Enhanced Decentralization: By limiting the voting power of dominant validators, the proposal encourages a broader distribution of stake, increasing the Nakamoto index.

  • Improved equal Validator Profitability: Smaller validators gain access to more delegations, improving their financial sustainability and motivation to participate.

  • Network Security: A higher Nakamoto index reduces the risk of coordinated attacks or governance manipulation.

  • Community Unity: Fairer stake distribution mitigates internal conflicts, fostering collaboration among validators and community members.

  • Simplicity: The 2.5% cap is straightforward to implement and understand, minimizing technical complexity.

Future Adjustments

The 2.5% voting power cap can be fine-tuned through governance based on:

  • The current Nakamoto index and decentralization metrics.

  • Feedback from validators and delegators.

  • Network growth and staking participation rates.

Regular evaluations will ensure the cap remains effective and aligned with Terra Classic’s goals.

Conclusion

The proposed 2.5% voting power cap addresses Terra Classic’s centralization challenges by redistributing voting power, increasing the Nakamoto index, and improving validator eqaul profitability. This mechanism aligns with the community’s decentralization ethos, enhances network security, and fosters a more collaborative ecosystem. By implementing this rule, Terra Classic can solidify its position as a truly decentralized blockchain.

Cast Your Vote Now

  • Yes: Support the 2.5% voting power cap proposal.

  • No: Oppose the proposal.

Note on Implementation

Implementing the voting power cap requires modifications to the staking module at the L1 level. While this entails development effort, the changes are relatively straightforward and can leverage existing governance and staking frameworks.

Author: Vegas

1 Like
2

While the proposal to implement a 2.5% voting power cap aims to enhance decentralization within the Terra Classic network, several significant concerns and potential drawbacks present themselves upon closer examination:

  1. Impact on Large Validators: Implementing this cap may significantly affect large validators that have invested in building infrastructure and securing large delegations. Curtailing their ability to receive new delegations could be seen as punitive and may reduce their engagement or even trigger their exit from the network, potentially destabilizing it.

  2. Market Dynamics: The cap could disrupt existing market dynamics, especially if large delegators choose to leave the network rather than spread their stake across many smaller validators. This behavior might inadvertently decrease the total value staked, weakening the network’s security.

  3. Short-Term Viability for Smaller Validators: While the cap theoretically helps smaller validators gain delegations, it may not guarantee that they will receive enough stake to become sustainably profitable. This assumes that delegators will distribute their stake evenly, which may not occur organically.

  4. Imposed Limitations and Efficiency: Introducing a hard cap might be seen as an overly rigid solution that doesn’t adjust naturally to network changes or varying validator contributions. A more dynamic system, possibly using a scaled or sliding cap based on actual participation metrics, might be more equitable.

  5. Governance and Flexibility Issues: While the proposal mentions the ability to adjust the cap, the governance process might be slow or heavily influenced by large stakeholders, rendering real-world adjustments ineffective or delayed.

  6. Delegation Inefficiencies: Imposing a cap might lead to delegation inefficiencies, where substantial delegations get fragmented across many validators. This could potentially lead to increased overhead in terms of governance and management for delegators, complicating their engagement with the network.

  7. Implementation Complexity: The proposal states that the implementation would be straightforward, but any change at the L1 level carries risks, especially around unintended side effects or bugs that could arise from altering a fundamental component like the staking module.

  8. Potential for Centralization Shift: Reducing the power of top validators might inadvertently consolidate centralization amongst a new set of mid-tier validators who then control close to the cap, thus only shifting the centralization problem rather than resolving it.

Addressing these concerns may require additional mechanisms or alternative proposals that consider dynamic and market-driven solutions, more gradual adjustments, or incentivizing other forms of decentralization, such as validator diversity in terms of geographic distribution or technical contributions, beyond just staking metrics.

3

  1. Wallets vote, not validators. Validator is just a medium through which the wallet’s vote is cast. Top 5 wallets hold 30% of VP. That is the real problem here.

  2. What is the problem you’re trying to solve? Nakamoto 5 isn’t a problem in of itself – governance is running good – quorum ir reached very very often. Suits me. Vals are here primarily to validate blocks, not to vote.

  3. Even if the Top 5 can reach the PASS threshold, it still falls short of quorum. Also, the remaining vals hold 65% VP to combat the potential dictatorship of the Top 5.

  4. We need organic incentives, not restrictions. DynComm tried but did not succeed. Only succeeded in making allnodes very rich.

  5. I don’t want to be ‘forced’ to delegate with certain validator, when I want to delegate with Allnodes, for example. What if people trust them more than, say, LuncLoop (#102)? Same way I don’t want to vote for some other political party, because the political party I want to vote for has reached some kind of voting threshold. Silly.

  6. As an alternative, we could offer a separate governance setup where only those validators who “opt-in” for each proposal get to vote on that proposal, and their VP% will be distributed equally. That way the ‘weight’ of the vote will be heavier even for the smaller vals, as KuCoin will never opt-in. And those vals who simply want to validate+receive rewards will be left in peace.

1 Like
4

First of all, I support the core goal of this proposal: to increase decentralization and improve the Nakamoto index. However, I believe some key aspects of the implementation need to be reconsidered.

Points I Support:

A Nakamoto Index of 5 poses long-term risks for governance centralization.

Smaller validators are currently struggling to grow, which weakens competitiveness and stake distribution.

The proposal is technically simple and clearly defined.

Points of Concern:

The 2.5% cap is arguably too strict. Such a low threshold could create a sudden and imbalanced redistribution. A more moderate cap (e.g., 4% or 5%) might be more practical.

Delegation behavior is not purely rational. Users won’t automatically delegate to smaller validators—they need trust, visibility, and performance.

Large validators might exit the network, reducing total stake and weakening overall network security.

A dynamic mechanism might be more effective: Instead of a fixed number, a flexible cap based on real-time validator distribution could better adapt to network conditions.

Alternative Suggestions:

Start with a 4% cap and observe the effects before tightening further.

Use a “soft cap” model until the network reaches a broader validator base (e.g., at least 20 active validators).

Implement a reward-scaling system where validators above a certain threshold receive slightly reduced staking rewards—encouraging organic stake redistribution.

Decentralization is crucial, but so is preserving validator engagement, performance, and security. A balanced approach can help achieve both.

5

I am happy with enforcing such a cap.

Interstellar would say that this is just a “fucking communist” initiative. But I think it’s not. I believe that we can heavily benefit from being perceived as the best decentralized network. Look at the Cosmos Hub: Their biggest validator has 20%. We can only do better!

Although I think that 2.5% might be out of question here, unfortunately. I would rather go with a number that preserves the status quo (like 12%) - so that we don’t get worse in terms of decentralization.

6

doesn’t matter what InterStellar thinks now..they’re #22 validator now lol :joy:

But I’d agree.. i feel like this is akin to limiting the votes a political party can receive in your elections.. not a fan.

7

I´ve heard about this kind of cap plenty of times since Lunc started. Why not using a different approach, one like Cardano had (not sure if still has) and instead of punishing and making it a problem for validators, you make it a penalty for delegators: Once validator get more than certaing %, delegators will see their rewards reduced and they will just receive less and less until they redelegate. Governance responsability is on all holders, not just validators. Every holder has to be responsable about who they delegate with and checking that rewards are not being reduced. Then choose if they want to redelegate or not. Both vals and users has to be reduced in rewards not only vals.

8

When you punish the delegators you implicitly punish the validators because they make their percentage from commissions on the delegator rewards…

1 Like
9

Didn´t know that. Are you familiared with Cardano staking approach? They have thresholds for validators pools so, if a validator passes the threshold they get their rewards (and delegator´s) diluted. So they do anti-campaign for their delegators to undelegate and send to another. That enhaces democratization and more even rewards and delegations across the val set. I´m not sure if it´s still like that but 5 years ago I remember it was

1 Like
10

Allnodes personally approached me saying: “If you do that, we are going to double or triple node”. Btw, if I remember correctly that approach was from Polygon as well.

11

I understand, that´s permitted in Cardano. Validators have 2, 3 or plenty of nodes so they can earn more, but they have to be chosen in the first place. I´m not sure who´s staking with allnodes after that high commission. Maybe dormant wallets just forgot about it, maybe themselves, but I don´t think that they would be chosen if we started from scratch with a new system. Some are already double noding, so if it evens power, allow little vals to grow, evens responsability on both vals and delegators, and allows multi-noding. I don´t know if it´s worst or better actually. Seems more descentralized, at a cost of course.

1 Like