Running a validator on a blockchain network like Polygon can be an enriching opportunity to earn rewards for validating transactions to secure the network.
Validators can earn rewards through commissions, block rewards, and delegator rewards. However, managing these rewards can be a complex and daunting task for validators, especially when accounting for them. For validators running on the Polygon Network, in particular, some issues may arise in managing staking rewards: limited support for all types of staking rewards, the different accounting treatments for each type of reward, and the high volume of transactions that must be managed.
Bitwave solves the three-fold problem of managing staking rewards on the Polygon network by streamlining the reporting process.
What is the Polygon Network?
The Polygon Network is a Layer 2 scaling solution that utilizes a Proof of Stake (PoS) consensus algorithm to achieve high throughput and low transaction fees. The network is made of a series of sidechains that are connected to Ethereum via bridges. This lets users transfer assets between the Ethereum mainnet and the Polygon PoS Network quickly and cost-effectively.
What Role Do Validators Play?
Validators are nodes on the Polygon Network responsible for securing the network and validating transactions. They are chosen through a staking process, which requires them to lock up a certain amount of MATIC tokens. In return for their service, validators are rewarded with MATIC tokens.
Validators play a critical role in the Polygon Network. They are responsible for ensuring the network is secure, and transactions are processed correctly. They also help keep the network running smoothly by proposing new blocks and validating those other validators propose.
The network validators continue to become essential and see more transactions as major brands such as Reddit, Stripe, Disney, Prada, Adidas, .Swoosh (Nike), and others continue to turn to the Polygon network to launch. Blue chip crypto-native applications such as Uniswap and OpenSea also continue seeing increased network volume.
Running a Validator on Polygon Network
Running a validator on the Polygon Network requires a few necessary steps:
- Set up a node that meets the necessary system requirements
- Stake MATIC (current minimum is 10,000 MATIC)
- Validators can both stake their own MATIC and receive delegations from other token holders that allow the validator to use the tokens for validator purposes only
Running your own polygon node allows you to earn staking rewards and add to the network's health. However, doing so comes with high costs, and it is not always feasible for institutions and businesses to build and maintain their own node.
If the “DIY” route sounds a bit too complex, blockchain infrastructure companies like Blockdaemon allow institutions to access staking rewards by deploying, running, and maintaining nodes on their behalf.
Cadence of Rewards
Validators receive rewards for their services. These rewards are paid out in MATIC tokens, the native cryptocurrency of the Polygon Network. The rewards are paid out at a rate of 2 MATIC per block, with a new block being added to the blockchain approximately every 2 seconds! This means validators can earn rewards at about 60 MATIC per minute, or 3,600 MATIC per hour.
The amount of rewards earned by validators can vary depending on several factors:
- The number of validators currently active on the network
- The number of transactions being processed
- The amount of MATIC being staked by delegators
- The amount of MATIC being self staked
Additionally, validators who provide reliable and high-quality services will be more likely to attract delegators, further increasing their rewards.
For example, you can see the various components and reputation of a validator such as Blockdaemon, along with all the corresponding details of delegators and signed checkpoints.
While staking rewards can be an excellent source of revenue, they also present a unique set of challenges regarding accounting and financial operations. For validators running on the Polygon Network, in particular, some issues may arise in managing staking rewards: limited support for all types of staking rewards, the different accounting treatments for each type of reward, and the high volume of transactions that must be managed.
Understanding Reward Types
There are three different types of Polygon staking rewards:
- Validator Owner Commissions: Validators can set a commission rate for their delegators. This commission rate is a percentage of the rewards that the delegator earns. For example, if a validator has a commission rate of 10%, and the delegator earns 100 MATIC in rewards, the validator will receive 10 MATIC in commissions, and the delegator will receive 90 MATIC in rewards.
- Validator Signer Block Rewards: Validators who successfully propose and sign blocks are rewarded with block rewards. These block rewards are paid out in MATIC tokens. The amount of block rewards that a validator receives is based on the number of blocks that they propose and sign.
- Delegator Rewards: Delegators who stake their MATIC tokens with a validator are rewarded with a portion of the block rewards that the validator earns. The amount of delegator rewards that a delegator receives is based on the amount of MATIC tokens they stake and the commission rate of the validator.
While an “integration” may claim to be complete, it may only record on-chain transactions. However, delegator rewards and validator commissions accrue every block without being distributed in an on-chain transaction. This can create a significant issue for those who rely on delegator rewards or validator owner commissions as a substantial portion of their staking income. Accountants are often left to manual means to encourage teams to claim rewards every month or manually match accruals with claims.
Furthermore, it becomes difficult to accurately track and manage revenue streams without support for all three types of staking rewards. This can lead to errors in accounting and difficulty in managing financial statements. This issue is compounded when staking on multiple networks or with multiple validators, as different rewards may be earned at different rates or on different schedules.
Bitwave supports all three transaction types mentioned above. With Bitwave, users can manage their staking rewards in one platform without the mess of separate spreadsheets. They can monitor and track their earnings and accruals from each type of reward. This level of support is essential for users who want to maximize their returns on investment in staking on the Polygon Network.
Accounting Treatment by Reward
Each type of staking reward may have different accounting treatments. Block rewards are typically recognized as revenue since they are actual transactions on the blockchain. On the other hand, delegator rewards and validator owner commissions are more like balance accruals, and it could be argued that they are deferred revenue until an on-chain transaction is signed to claim the accrual.
The graphic below illustrates various checkpoints signed by Blockdaemon and the accompanying rewards issued for that validator each time. However, this does not split out the validator commissions or the delegator rewards earned, nor is this transaction recorded on-chain.
This presents a challenge for accounting and financial reporting purposes. Different accounting treatments may apply depending on the nature of the reward, and it is essential to correctly classify and record these rewards in accordance with accounting standards. Bitwave solves this problem by allowing users to perform any accounting treatment they prefer. This allows companies to comply with accounting standards and properly report their financial statements while providing the transparency and auditability required in the Polygon ecosystem.
Reducing Volume Complexity
The third problem in managing staking rewards is the massive volume of transactions, especially in the case of validator signer block rewards. On the Polygon Network, it is not uncommon for a single validator to receive over 100,000 transactions per year. This volume of data is far too much for an ERP system to handle, and even an accountant would struggle to code and categorize that many transactions.
To overcome this challenge, Bitwave offers a solution by rolling up these transactions, which can reduce the volume by over 95%. This reduction in volume makes it possible to categorize and push the transactions to an ERP system. Additionally, Bitwave provides the raw data (non-rolled up) for audit purposes. This feature ensures that the data is always available in case of audits or other needs that require access to the unaltered data.
Simplify Your Polygon Staking Rewards Management with Bitwave
Managing staking rewards for validators on the Polygon Network can be daunting. However, with the right tools and solutions, such as Bitwave's comprehensive staking management platform, managing these rewards can be made much more efficient and streamlined. By supporting all three types of staking rewards, allowing users to choose their preferred accounting treatment, and providing rolled-up data to reduce transaction volume, Bitwave makes managing staking rewards on Polygon Network more manageable and less stressful for all involved. Bitwave is an accounting solution that is adaptive to support a validator's various needs, so those securing the network can worry about securing the network and not be inundated with transactions and complexity.
Disclaimer: The information provided in this blog post is for general informational purposes only and should not be construed as tax, accounting, or financial advice. The content is not intended to address the specific needs of any individual or organization, and readers are encouraged to consult with a qualified tax, accounting, or financial professional before making any decisions based on the information provided. The author and the publisher of this blog post disclaim any liability, loss, or risk incurred as a consequence, directly or indirectly, of the use or application of any of the contents herein.