Annual Percentage Yield (APY)
This section goes into our methodology in calculating the returns of validators and delegators on their stake.
Sources of Rewards
There are two main sources of rewards in Solana: producing transaction blocks and voting for blocks (i.e. consensus participation)
Proposing end-user transaction blocks
Validators are assigned to propose blocks (i.e. slot leaders). If they successfully produce blocks, they receive the base fees and priority fees from end-users and any MEV (maximum extractable value) they might extract. In terms of delegator rewards, validators do not share fees from block production to delegators. Meanwhile, MEV extracted through running the Jito Labs client is shared with delegators based on the commission rate set by validators.
Voting for blocks
Here is an example to illustrate:
Total SOL supply: 560,382,222
Annual inflation rate: 5.76%
Epochs per year: 182.5 epochs
Based on an ideal slot duration of 400 milliseconds or 48 hours per epoch and 365 days in a year
For a given epoch the total supply of SOL tokens is multiplied by the epoch inflation rate (we can call this absolute inflation):
0.000316 (inflation rate) * 560,382,222 (total supply) = ~177,080
For each validator account epoch credits are multiplied by stake delegated to them to obtain each validator’s points
Each validator is awarded a share of absolute inflation based on their points
The share of inflation is paid to the stake accounts delegated to the validator pro-rata
The validator receives their commission into the vote account
Example for absolute inflation of 177,080 with three validators:
TOTAL REWARDS
VALIDATOR AND DELEGATOR REWARDS
From the above, we can see that validators A and B have the same stake-weight, however they have a different number of credits. As a result the delegators to validator B have earned higher pre-commission rewards.
In the next sections, we will go through the methodologies for computing the delegator APR and validator APR.
Get going ⏩
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