Nym nodes approve min. profit margin

The Nym network matures with a successful first community governance vote

Author: Nym

May 28, 20248 mins read

The Nym network matures with a successful first community governance vote

The Nym nodes have spoken: they want a minimum profit margin (PM) vis-à-vis network stakers.

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This is the first vote by a community that is co-creating a novel digital market which incentivizes privacy rather than surveillance. And it marks a new level of maturity for the Nym network as it graduates from its R&D phase to a fully fledged commercial platform. Strong privacy protections will soon be offered as a service thanks to collective decision making by the network itself.

Nym nodes are global operators who provide an increasingly valuable service: privacy. In fact, they are powering what might be the most advanced privacy platform for internet traffic today: a noise generating mixnet (NGM). By mixing your traffic with other people’s, delaying packet transmission, and adding cover traffic (noise), decentralized Nym nodes make you virtually impossible to trace. Unlike all other VPNs on the market, this protects both the content of your traffic as well as your metadata and patterns of communication from surveillance.

But Nym nodes are not just service providers: they are also a growing community of operators. And in their first act of community governance, the Nym nodes unanimously declared their support of a minimum PM for their work, with 88% voting in favor. A second vote is currently underway to determine the exact percentage, which will be ratified by the Nym node community.

So how did this vote come about and what it will mean for Nym nodes, present and to come?

First Nym Node Town Hall

Recently the Nym core team and operator community held a first Nym Node Town Hall to discuss some major updates and improvements to the Nym node reward scheme. The improved scheme will include gateway nodes in the reward set. The operator community is now peer-reviewing the proposal before implementation.

The Town Hall also marked the launch of the Nym forum as a new governance platform. Through the forum, the community is now voting on community initiatives, and operators can vote on network changes. This marks the first step in Nym’s community governance roadmap. Stayed tuned for details on the new rewards system and governance procedures.

But now, time to note something special: the first roadmark on node governance has just been reached! A multi-stage vote between node operators and the Nym Squad Wealth Fund (SWF) stewards is happening on the enactment of a minimum PM for Nym node operators. While this is just the beginning of Nym community governance, here’s why it is such an important move for the health of the network and community.

Understanding a minimum PM for Nym nodes

Like blockchains which incentivize transaction verifications, or proof-of-work, Nym nodes can earn revenue by routing and mixing user traffic through the Nym mixnet, effectively mixmining.

Nym nodes are rewarded from a mixmining pool based on their performance and stake. The rewards cover, first, an operator’s operational cost, then the operator gets a profit margin and finally, the remaining rewards are shared with people who have staked on their node. In short: the profit margin (PM) is the operator’s revenue after their costs have been covered, with the remaining rewards going to their stakers.

Besides being a main source of revenue, PM is also how node operators compete with one another to attract delegations from the community. Nodes with lower PMs are thus more attractive to delegators because they offer a higher delegator annual percentage yield (APY). Left unchecked, this competition can lead to a race to the bottom in which node operators cannot remain competitive by setting a PM that yields adequate operator rewards.

In this scenario, everyone loses: the Nym network, no less than its users. Low profits encourage cost savings, which then lead to cutting corners, worsening the quality of service for the entire network. We saw glimpses of this last year when a growing number of nodes set 0% PMs to attract delegations. A network-wide minimum PM can thus be an effective solution to protect the network, its users, and its operators from this dynamic.

A minimum PM ultimately ensures a minimal and acceptable income for all nodes. This can improve the prospect of operating Nym nodes and support the operator community for their crucial work. As a network-wide rule, it favors those who invest work and time in operating the core infrastructure over those who passively stake by delegating.

A minimum PM can also ensure that node operators have more robust advantages and financial incentives to perform well. Economically speaking, this mechanism helps sustain a kind of nodal “middle-class,” ensuring that the overall network is both extensively decentralized, economically sustainable for operators and performative for users.

Leadup to the minimum PM vote

Discussions about a minimum PM for Nym nodes began last year when Wunderbaer, a node operator and former Delegations Program mentor, raised the idea to the Nym core team. A Telegram vote followed which indicated generally favorability for the idea among the community.

It was then discovered that some operators were setting low PMs (some at 1% or even 0%) and operator costs to attract stake, and then radically elevating operator costs shortly after. This forced other nodes to follow suit, raising the possibility of a race to the bottom among node operators.

In response, the Nym core team set minimum and maximum values on PM as well as operator cost as a soft-nudge in the wallet interface (PM min. 4% and a max. 80%, and operator costs at 40 NYM and 2000 NYM). This sparked disagreement from operators, with some wanting the min PM hardcoded on-chain, while others expressed disagreement about a min PM overall.

This now went for vote and a minimum PM for node operators on-chain has now passed the first stage of communal governance. The “yes/no” vote by Nym node operators was conducted between 16–22 May 2024 with a min. 50% quorum. The result was the overwhelming community vote in favor of a minimum PM for node operators (with 88% voting yes).

Second step of the minimum PM vote

Setting a minimum PM primarily affects the ratio of rewards between operators and stakers (people who delegate stake on nodes and earn a share of their rewards). Ultimately, imposing a minimum PM will reduce the annual percentage yield (APY) for delegating stake and thus affect the Nym community as a whole.

The Nym community has a treasury called the Squad Wealth Fund (SWF). This fund is replenished through the staking rewards accrued from the Nym Delegations Program which stakes on high performing nodes. Just like all other delegations, setting a minimum PM will therefore impact the revenue of the SWF as well. The higher the minimum PM, the more drastic the impact: if a minimum PM of 50% is imposed, SWF revenue will drop by half.

This graph illustrates the impact of a minimum PM. The first bar shows SWF revenues and the share of rewards that operators received after the first quarter of the Nym Squad League (NSL). At the time, the Nym Treasury had delegated 32m NYM, which accrued 457k NYM in staking rewards. With an average profit margin of 7%, this resulted in only 34k NYM in total operator rewards being shared among the 120 participating nodes. The following two simulated scenarios show the share of the same total rewards but with a 20% and 30% minimum PM respectively.

In relative terms, this would have a greater positive effect on operator rewards (boosting their totals by roughly 200% and 300% respectively) than the negative effect on SWF revenues (which would drop by 14% and 25% respectively). However, in absolute terms the impact on SWF revenues is still significant as the Fund is the main source of funding for community contributions, including localizing content, decentralized moderation of Nym channels all around the world, building tooling, and much more.

For this reason, the community stewards of the SWF, namely Nymja and Shinobi-level community members, will now propose a ceiling for how large the minimum PM can be. Options on the table for minimum PM are: 5%, 10%, 15%, 20%, 25%, and 30%. Once the stewards of the fund decide on the scope of the minimum PM, it will be presented once again to the Nym node operator community for a final vote, determining the minimum PM every node must set.

Voting by Nymjas and Shinobis is open as of today, 29 May 2024.

What’s next for Nym community governance?

It’s an exciting time for the Nym community. This is just the first step in an emerging process of communal governance by stakeholders in the Nym economy. Stay tuned for the results of the very first Nym core community governance initiative, and more details on the core governance system. In the meantime, join the conversation on the Nym forum, ask questions, and consider the advantages of becoming a Nym node operator.