In this section we go over the mechanism determining validator and nominator compensation for their work in safeguarding the network.
Aleph Zero employs uniform inflation, meaning that each year 30M new AZERO coins are minted, out of which:
- 90% goes to nominators and validators as rewards,
- 10% goes to the Ecosystem Fund.
In each era (lasting roughly 24h), both validators and nominators are rewarded a constant amount of coins, which is approximately 73922 AZERO, calculated as:
i.e., the total yearly inflation times 90%, divided by 365.25 – the average number of days in the Julian calendar. Out of this pool of 73922 AZERO, each validator receives a reward proportional to their own stake, increased by the commission it takes from their nominators' rewards. Similarly, nominators get rewards proportional to their stake decreased by the validator’s commission. Below we provide an example of staking rewards calculation based on a simplified scenario.
Consider a single era in which we distribute 15 AZERO among validators and nominators (note that the actual number is 73922 AZERO, but we'll use a rounder number for the sake of simplicity). Suppose we have the following validators and nominators:
- 1.Validator V1 has a stake of 25 AZERO, 5 AZERO is staked by nominator N1, and 20 AZERO is staked by nominator N2.
- 2.Validator V2 has a stake of 35 AZERO, 60 AZERO is staked by nominator N3, and 5 AZERO is staked by nominator N4.
The total stake of V1 is then 25+5+20=50, and the total stake of V2 is 35+60+5=100. The payouts to the validators will be then:
- 50/(50+100)*15 = 5 AZERO for V1,
- 100/(50+100)*15 = 10 AZERO for V2.
Note, however, that these rewards don’t go directly to the validators but are distributed proportionally to their nominators according to their stake. Assume for a moment that both V1 and V2 run with 0% commission; then the calculation is quite simple:
- V1 receives 50% (25/50) of 5, which is 2.5;
- N1 receives 10% (5/50) of 5, which is 0.5;
- N2 receives 40% (20/50) of 5, which is 2.0;
- V2 receives 35% (35/100) of 10, which is 3.5;
- N3 receives 60% (60/100) of 10, which is 6.0;
- N4 receives 5% (5/100) of 10, which is 0.5.
An important observation here is that nominators N1 and N4 enter with the same stake of 5 AZERO and obtain the same reward of 0.5 AZERO. This is a general rule: two nominators with the same stake are rewarded the same, provided their chosen validators charge the same commission and both have the same uptime.
Now let us see how validators' commission influences the rewards. Let's assume V1 charges 5% commission and V2 10% commission:
- N1 receives 0.475 (0.5 minus 5%);
- N2 receives 1.9 (2.0 minus 5%);
- V1 receives 2.625 (2.5 plus commission from N1 and N2);
- N3 receives 5.4 (6.0 minus 10%);
- N4 receives 0.45 (0.5 minus 10%)
- V2 receives 4.15 (3.5 plus commission from N3 and N4);
Now N1 and N4 receive slightly different rewards, because N1 has chosen the validator with the smaller commission.
All the above calculations assume that the validators have 100% performance (which is almost always the case). If the performance of a validator is not optimal, the reward is also slightly reduced.