The Solana Foundation Delegation Program & the Challenges Facing Long-tail Validators

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Sincere thanks to Zantetsu from Shinobi Systems, Michael from Laine | Stakewiz, and Ben Hawkins for reviewing earlier versions of this work.

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Actionable Insights

• Running a Solana validator is permissionless. There is no mandatory minimum stake required. No single entity, including the Solana Foundation, can control who operates on the network.
• Validators earn revenue denominated in SOL, which scales directly with their level of stake. Conversely, many operational costs are fixed and paid in fiat. These dynamics disadvantage new low-staked long-tail validators.
• SFDP delegates 51 million in stake, 13% of Solana’s total stake (385 million). This is down from 100 million when the program began in Dec 2020.
• SFDP is highly transparent in its activities, providing detailed delegation criteria, granular dashboard information, automated epoch updates, and public support channels. All delegations are administered from a single publicly known and labeled account.
• 72% of Solana validators receive support from SFDP, accounting for 19% of the stake. The 420 validators who are non-reliant on SFDP command 81% of the stake.
• Due to a hard 1 million SOL cap on outside stake, no validator in either the one-third superminority or the two-thirds supermajority can qualify for SFDP support.
• SFDP delegated stakes come in 2 categories: stake matching (up to 100k SOL) and residual delegation (approx. 30k SOL). Voting costs are also partially covered during the first year of the program. The mean average delegation is 45,652 SOL.
• 73% of SFDP program participants have attracted less than 10k in stake from outside the program, and 51% have managed to attract less than 1k.
• We estimate that if the SFDP were to be immediately discontinued, approximately 897 of the program’s participants—accounting for 57% of all Solana validators—would struggle to maintain profitable operations.
• To capture market share, long-tail independent validators must either compete for stake that is actively managed on-chain and responsive to factors like APY rates or secure allocations from a select few competitive large stake pools.
• There are multiple scenarios under which running a validator unprofitably makes sense, particularly if such operations translate into advantages for other business lines. This is particularly true for ecosystem teams operating dApps, wallets, or infrastructure.

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Introduction

The Solana Foundation Delegation Program (SFDP) received widespread attention this June after multiple participants were forcefully removed from the program. These validators had been found to have participated in private mempools, an act explicitly against the program’s terms.

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This action was widely reported by industry media, and subsequently, much-misinformed criticism and outright misinformation were spread online. This incident exposed the lack of formal analysis of the SFDP and the program’s positive and negative effects on Solana’s validator landscape — something we aim to address with this work.

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Firstly, we will cover the economics of Solana’s staked, block-producing validator nodes, as a solid grasp of validator economics is a critical prerequisite for later analysis. Readers already familiar with the latest developments, including SIMD-96, may wish to skip this section. Secondly, we provide a full breakdown of the SFDP, dissecting the program’s key components with examples and light analysis. Then, we will look at Solana’s stake distribution and the SFDP’s effect on this distribution specifically. With input from the validator community, we end with a discussion on the feasibility of lower-staked long-tail validators in building a viable, long-term, sustainable business.

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Disclaimer: Solana moves fast! This work should be considered a snapshot in time. Many of the values cited change daily, not least the price of SOL. Please refer to the data sources linked for the latest values.

Solana Validator Economics

Running a Solana validator is permissionless. Anyone or any organization with appropriate technical knowledge, access to the open internet, and sufficient financial resources can operate a Solana validator should they wish to do so. There is no mandatory minimum stake required.  Externalities aside, it is reasonable to assume that rational individuals and organizations will only commit time and resources to run a validator if they anticipate a positive financial return (revenues exceeding costs). To understand this further, let us first consider the relevant expenses.

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Expenses

The expenses involved in running a Solana validator can be categorized into three main components: hardware, operational costs, and the opportunity cost of capital and labor.

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Hardware (Fixed cost, denominated in fiat)

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Solana has higher node requirements than most industry peer networks with the full official hardware recommendation for Solana validators, including the following key components:

• CPU: 12 cores / 24 threads, or more, 2.8GHz base clock speed, or faster 
• Memory: 256 GB or more
• Disk: PCIe Gen3 x4 NVME SSD, or better, 2 TB combined or larger. High TBW
• No GPU requirement

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Hardware is one of the more straightforward validator costs to quantify, but even here, there is much nuance. Operators have two main options: purchase their hardware outright and amortize this cost over the equipment's lifespan or rent the hardware from a data center offering bare metal dedicated servers. Most validator operators opt for the latter due to its flexibility and the fact that home-based operations will necessitate a dedicated internet line due to the substantial bandwidth requirements.

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An often-cited cheaper option that fulfills these requirements is Latitude’s bare metal server offerings, which start at $350 per month. This pricing is at the low end of what operators typically pay. Costs vary by geographical region, service provider, and exact hardware. Popular ISPs chosen by 100 or more validators include Teraswitch, Constant, Interserver, and OVH. A breakdown can be found here.

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Solana Foundation’s long-running Server Program (SFSP) is designed to reduce the barrier to entry for new validator operators to join the network quickly with out-of-the-box solutions. This program is essentially a bulk purchase agreement in which the Foundation takes no cut. SFSP currently provides flexible lease contract options for Edgevana and Equinix, priced between $499 and $599 per month. Setup can be completed in as little as one day, and KYC is necessary.

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Voting fees (Fixed cost, denominated in SOL)

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Voting Fees per Epoch = 0.000005 SOL * Votes cast

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Operation costs come in 2 types: on-chain voting fees and data bandwidth costs. On-chain voting fees are the main cost of running a validator. They are incurred because validators are highly incentivized to vote on blocks they believe should be canonical, and these consensus votes are treated as transactions. Voting transactions are priced uniformly at 0.000005 SOL. They are privileged transactions processed by dedicated channels within the banking stage and, thus, never need to pay priority fees. Each epoch consists of 432,000 slots, but not every slot has an associated block. The actual number will be slightly lower due to skipped slots that cannot be voted on. Skipped slot rates typically vary from 2 to 6% depending on network conditions. Since the introduction of Timely Vote Credits on Mainnet-Beta earlier this year, validators now have the ability to vote for multiple blocks with a single vote. This has reduced the average voting fee cost to 1.4 SOL per epoch (≈2 days).

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Bandwidth (Variable cost, denominated in fiat)

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Bandwidth requirements vary between validators as those with higher stake will be chosen as the leader more frequently. Leaders experience large spikes in activity during their allocated slots. Inbound traffic can reach over a gigabyte per second as the entire network directs packets toward them. Accordingly, validator bandwidth recommendations are a minimum of 1 gigabyte, recommended 10. A typical validator can easily process 100 terabytes of data per month, with others reporting close to 150 in data egress alone.

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How data centers charge for bandwidth varies greatly. Latitude offers free ingress and 20 gigabytes of free egress, after which bandwidth will cost $0.64 to $3.60 per terabyte, depending on the region.

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Opportunity Cost (Fixed cost, denominated in fiat)

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Opportunity costs are twofold, first capital and second labor. Capital’s opportunity cost is the return from holding U.S. dollar short-duration treasury bills, currently 5.25 – 5.5%. This is the return we could expect to receive had we chosen not to invest in our validator operation. Labor’s opportunity cost is the market rate salary of a person qualified to operate the validator, a demanding technical job. Operators must have a firm grasp of blockchain architectures, hardware, backend development, and DevOps. Delinquency is penalized, meaning validator nodes should be active 100% of the time; they require constant monitoring and regular software updates. Fair market salaries for such individuals vary considerably based on geographic location.

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Revenue

Validators have multiple revenue streams, including block rewards, commission, and MEV.

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Staking Commission (Variable cost, denominated in SOL)

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Staking Commission = (Delegated Stake Rewards * Commission Rate )

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Solana distributes staking rewards each epoch by generating new SOL tokens according to the inflation schedule. Staking rewards are first divided based on credits earned for the epoch. Correctly voting on a block that is later finalized and becomes canonical earns the validator a single credit (this may change with the introduction of timely vote credits).

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A validator's share of the total credits (i.e., their credits divided by the sum of all validators' credits) determines their proportionate reward. This is further weighted by stake. A validator with 1% of the total stake should earn roughly 1% of the total inflation if they have an average number of credits. Rewards will fluctuate accordingly if they exceed the average number of credits. Vote credits are a quantitative measure of a validator's participation and correctness in the consensus process.

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Staking rewards are distributed to delegators rather than validators. However, validators can charge a commission for their services, which is a percentage of the delegator's inflation rewards. This commission is usually a single-digit percent but can technically be any whole number from 0% to 100%.

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N.B. There are over 200 "private" Solana validators whose stake is presumably wholly owned by the operating entity and delegated to themselves. These entirely self-staked SOL validators set their commission to 100%.

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Block Rewards (Variable cost, denominated in SOL)

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Block Rewards per Finalized Block Produced (post SIMD-96) =
(Base Transaction Fees * 0.5) + Priority Fees

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Validators designated as the leader for a specific block receive additional block rewards. Only the validator who produced the block receives these rewards. Block rewards are instantly credited to the validator’s identity account when the block is produced. 

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Previously, these rewards comprised 50% of the base fees and 50% of the priority fees for all transactions within the block, with the remaining fees burnt. However, this structure will shift with the passing of SIMD-96, which should be implemented after Breakpoint Conference 2024, with Agave 2.0 per the current feature gate activation schedule. Going forward, 100% of the priority fees will go to block producers. This change removes the incentive for block producers to engage in out-of-protocol side deals.

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MEV (Variable cost, denominated in SOL)

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MEV Commission = (Total MEV * MEV Commission Rate )

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Maximal Extractable Value (MEV) refers to profit that can be made by block producers arbitrarily including, excluding, or reordering transactions within the blocks they produce. Solana does not mandate how validators order transactions within a block, which provides a wide scope for out-of-protocol MEV mechanisms.

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Over 80% of stake operates the Jito client validator, a fork of the original Agave client that introduces an out-of-protocol blockspace auction that provides validators with an additional tips revenue stream. Blockspace auctions occur off-chain via the Jito Block Engine, allowing searchers and applications to submit groups of atomically executed transactions known as bundles. These bundles typically contain time-sensitive transactions such as arbitrages or liquidations. Previously, Jito operated a canonical out-of-protocol mempool service, which has now been deprecated.

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Jito charges a 5% fee on all tips, with a minimum tip of 10,000 lamports. Tips operate entirely out-of-protocol, separate from priority and base fees. They are collected from searchers across eight statically assigned account addresses and distributed at the end of each epoch by the Tip Distribution Program.

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Over 2024, income from Jito MEV has grown from a rounding error to a significant source of revenue for validators. This revenue is distributed by stake with a commission charge, matching how inflation rewards are distributed. MEV commission is a percentage of the delegator's MEV rewards ranging from 0% to 100%. This percentage is set independently of the validator’s commission rate for inflation rewards.

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Solana’s MEV landscape is rapidly evolving. Today, a few validators continue to engage in private mempools, profiting from sandwich attacks on users despite the social stigma and negative impact on user experience such activity brings. We anticipate the continued development of mechanisms designed to discourage such practices, including reputational-based QoS, fully on-chain scoring systems, and new validator clients that capture “good” MEV.

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MEV is a complex topic. Read our previous Helius blog article here to learn more about Jito and Solana MEV.

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Others

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Since the partial adoption of Stake-Weighted Quality of Service (SWQoS), validators have been free to enter agreements to lease their stake-weighted capacity to RPC nodes. In return, RPC nodes gain increased bandwidth, allowing them to achieve greater block inclusion rates. Transaction bandwidth auction marketplaces help facilitate these agreements between projects looking to buy bandwidth and validator operators looking to sell excess bandwidth.

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Indirect Motivations

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Having analyzed all the direct costs and revenue streams of operating a validator, it’s time to consider more indirect motivations.

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Operating a validator may have positive externalities or translate into advantages in other business lines. Helius exemplifies this by running a validator that synergizes with our core RPC business, enhancing customer transaction inclusion. Since the adoption of SWQoS, there is an added incentive for all popular ecosystem application teams to operate a validator, securing transaction quality of service.

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Additionally, operating a validator signals a virtuous commitment to the ecosystem, which can positively influence industry peers. Very highly staked validators also confer a degree of prestige on their operators. Conversely, running a low-staked validator could benefit newer, less established teams, fostering trust and serving as “proof of technical competence.”

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Centralized exchanges (CEXs) are another case to consider, given several exchanges rank amongst the highest-staked Solana validators. For them, Solana staking represents a relatively small single business line in a larger product matrix. Smaller exchanges may still wish to operate unprofitable staking services to maintain complete product offerings. CEX staking services are partially shielded from competition — the retail user is off-chain, seeking convenience, and relatively insensitive to below-average staking returns. This gives CEXs much flexibility on the returns they wish to pass on to the user.

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Another category worth considering is institutional staking solution providers. These businesses offer staking services across multiple chains, some of which may not be strictly profitable in isolation but make sense when analyzed as part of the company’s broader strategy. 

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The key point to take away here is that there are multiple scenarios under which running an unprofitable validator still makes sense. Additionally, the price of SOL—a key variable in determining fiat-denominated profitability—is subject to the volatility of crypto markets. In December 2022, with SOL priced at $15 post-FTX collapse, it was estimated as few as 183 Solana validators were profitable. Price volatility complicates reliable forecasting but builds tolerance to unprofitable quarters, especially for operators with conviction in the ecosystem’s long-term prospects.

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Summary

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Costs = Hardware (fixed, fiat) + Bandwidth (variable, fiat) + Voting (fixed, SOL)
+ Opportunity costs (fixed, fiat)

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Revenue = Staking Commission (variable, SOL) + Block Rewards (variable, SOL)
+ MEV Commission (variable, SOL)

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All revenue is earned in SOL and scales directly with the level of stake. Many costs are fixed and paid in fiat.

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For a more in-depth exploration of this important topic, refer to our previous Helius blog article, Solana Validator Economics: A Primer.

Solana Foundation Delegation Program (SFDP)

“Long term, I think SFDP should be a system that looks more like an incubator where we can help reduce the risk at the beginning, but not sustain you indefinitely. The less critical the foundation is in keeping a healthy validator count, I think, the better.” - Ben Hawkins, Head of Staking Ecosystem at Solana Foundation, (source)

‍Program Origins

There was no SFDP in Solana’s earliest days. The majority of Mainnet Beta validators directly received up to 550,000 SOL in delegation from the Solana Foundation—a value chosen somewhat arbitrarily.

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The SFDP was formally announced in December 2020. Deployment was initially automated by a script that dynamically and uniformly divided a pool of 100 million SOL to maximize the number of nodes in the one-third superminority. The superminority is a crucial threshold, representing the smallest group of validators that, if colluded, would hold enough stake to disrupt the consensus process, censor blocks or even halt the chain — a theoretically possible but in practice unlikely scenario, given that these entities stand to lose the most financially from network disruption.

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This original SFDP setup actively incentivized operators within the superminority to distribute their stake across multiple validators, thereby creating new nodes outside the superminority, and automatically qualifying for program delegations. Original program requirements were relatively lenient compared to current standards, and at 100 million SOL, the delegation pool was larger.

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This version of the SFDP acted as a blunt automated tool, helping to even the distribution of stake across a long tail of lower-staked validators.

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The current incarnation of the SFDP began in April 2024. The updated program states its goals as being threefold:

• Maximize decentralization, reliability, and performance of Solana
• Maximize the number of validators who have diverse sources of stake
• Sustain a large and representative testnet

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Testnet

We’ll first examine Testnet, one of Solana’s four standard clusters — Localnet, Testnet, Devnet, and Mainnet-Beta. Its purpose is stress-testing upcoming release features while monitoring network performance, stability, and validator behavior on a live cluster. Localnet should not be confused with Devnet, which is a playground for developers that allows safe, zero-cost program deployment and application testing. An active, large Testnet is critical for Solana, yet all testnet tokens are inherently valueless, so alternative methods must be found to incentivize and compensate validators. Accordingly, Testnet forms an important component of the SFDP. 

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Joining Testnet SFDP is a prerequisite for participation in the Mainnet-Beta program, as all participants must be accepted and in good standing with the Testnet program. In this way, SFDP can vet operators, who must prove their ability to operate by meeting a set of Testnet requirements. Additionally, the Testnet program has a small set of incentive payments—$250 per month for at most six months—that partially offset the fixed hardware costs of node operation and are contingent on meeting the performance requirements.

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Program Onboarding

While the Testnet program is available for immediate access, joining the core SFDP on Mainnet-Beta has a waitlist of at least one year due to high demand. New participants are currently added in low single-digit numbers to the Mainnet program each week through the Standard Priority Queue. Additionally, there is an alternative onboarding track called the “Ecosystem Contributor Priority Queue (ECPQ),” specifically designed for developers and ecosystem contributors. This “proof-of-work” Sybil-resistant queue allows for expedited onboarding for those who can demonstrate meaningful contributions to Solana, with verified ecosystem contributors being onboarded within one to two weeks. No formal criteria are provided for what constitutes a “meaningful contribution.”

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Stake Delegation
SFDP delegated stake comes in 2 categories — stake matching and residual delegation. With stake matching, the SFDP will match participants’ non-program stake one to one, up to a cap of 100,000 SOL. With residual stake, SOL earmarked for the program, but not yet allocated through matching, will be distributed evenly across all eligible validators. Currently, the residual stake is approximately 30,000 SOL per validator. The program’s maximum stake threshold is currently 1 million SOL. Participants with non-SFDP stake beyond this amount no longer qualify for the program. Below are some scenarios based on various amounts of non-SFDP stake:

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The SFDP greatly benefits lower-staked validators. Only once a validator exceeds 130k non-SFDP SOL will the SFDP portion begin to account for less than half their stake. Also, the program’s hard cutoff boundary means that validators with 1.1 million non-SFDP staked SOL will have less stake overall than those with just under 1 million still benefiting from the program. Unsurprisingly some have called for a softer tapering approach rather than a single cut-off that could, in some edge cases, incentivize validators to reduce stake to stay in the program.

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Vote Cost Coverage

Another major benefit of the program is vote cost coverage. As stated earlier, voting is the primary validator operational cost and can be prohibitive to new, lower-staked validators, discouraging many from attempting to start. To mitigate this, the SFDP provides a voting cost subsidy for the operator's first year within the program, covering 100% of vote costs across the first three months. This is reduced by 25% each quarter (45 epochs), ending after 12 months.

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Program Criteria

Prospective participants must pass a KYC/AML process to enter the program. They must also meet performance criteria listed in detail on the program’s official site. There are currently ten requirements for receiving residual delegation and one bonus requirement for receiving stake matching. Vote cost coverage has the same requirements as residual.

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Residual Delegation Requirements

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Stake Matching Requirements

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SFDP participants can operate the Jito validator client and sell SWQoS bandwidth. However, they are explicitly prohibited from joining private mempool programs that facilitate user sandwich attacks.

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The official site provides detailed information on individual validators participating in the SFDP program. Program stakes can be accessed in raw JSON format via Stakeview here.

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Detailed delegation program staking information is posted publicly every epoch through the Solana Tech Discord server ‘sfdp-mb-stake’ channel. SFDP previously provided a CLI tool, which has been deprecated.

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SFDP is not the only program of its kind. Similar initiatives on other blockchains include the Celestia Foundation’s delegation program, which some estimate benefits over half of all active Celestia validators, the Sui Foundation’s delegation program, and the Near Foundation’s delegation program (no longer active).

Validator Landscape and the Effects of SFDP

Before discussing the SFDP's effects, we first need to establish a baseline shared understanding of Solana’s validator and staking landscape. 

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While Solana co-founder Anatoly Yakovenko has previously indicated a longer-term aspirational target of 10,000+ full nodes, Solana’s current total validator count is 1525, down from a high of 2,564 in March 2023—a number that is still relatively high in comparison to most industry peers.

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However, just as addresses on a blockchain do not equate to users, the validator count does not equate to the true number of entities operating validators. This number is likely to be slightly lower as it is common for larger entities to split their stake across multiple validators; examples include Jito (1, 2), Coinbase (1, 2), and Mrgn (1, 2, 3, 4). There is nothing inherently wrong with a single entity operating multiple validators. It may benefit the network by increasing geographical and ISP diversity, assuming the validators are not run in the same location. Also note that not all validators are publicly associated with entities, which is the nature of a permissionless system.

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SOL's total supply currently stands at 582 million, with 382 million SOL staked, representing approximately 66% of the total supply. This level of stake has remained relatively stable for several years, even amid inflation. The high staking rate can be attributed in part to the simplicity of the staking process. Delegated Proof of Stake (DPOS) consensus is natively built into the Solana network. Staking is accessible directly through wallets, ecosystem dApps, and various comparison platforms. Token holders can easily stake or unstake SOL to a validator at every epoch boundary. Additionally, they can delegate to stake pools or purchase liquid staking tokens, which amounts to staking.

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Next, let us examine the current stake distribution across the Mainnet-Beta validator set. Charting this long-tail stake distribution directly on a linear scale chart is a little awkward:

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Below is the same data charted using a log scale for ease of analysis:

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The total number of staking addresses, currently 437 thousand, has risen steadily for several years. The total number of stake accounts, currently at 1.27 million, outpaces this rise. 

This averages to 2.9 staking accounts per staking address. There are many valid reasons for a single user to control multiple addresses, so staking addresses cannot be directly equated to staking users. However, it is reasonable to expect the number of users to directionally trend upwards in tandem with the number of addresses.

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Locked stake has been in a long-term state of slow and steady decline. Currently at 47.5 million SOL, it accounts for 12% of the total stake. The number of locked stake accounts has jumped up to an all-time high this year of 5,194 due to token sales from the bankruptcy proceedings of FTX Estate/Alameda Research.

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Locked stake refers to tokens held in accounts with conditions preventing their withdrawal before a predetermined date. These lockup parameters, set by a designated custodian when creating the account, are based on a specific UNIX timestamp or epoch.

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Surprisingly, 94% of all staked SOL is natively staked, with just 6% (24.2 million SOL) utilizing liquid staking, which allows for greater capital efficiency and easy participation across Solana’s defi ecosystem. Liquid staking is up from 17 million SOL at the beginning of 2024 and 12.4 million SOL a year ago (95% annual growth).

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Finally, Solana’s often-quoted Nakamoto Coefficient is currently 19, down from a peak of 34 on August 13th, 2023. The Nakamoto Coefficient, a crude measure of decentralization, represents the smallest set of nodes that can conspire to halt a blockchain, also known as the superminority, top one-third of stake.

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SFDP

Now, let’s analyse the SFDP specifically. All charts and values presented in this section are based on epoch 658 (mid-August 2024). Raw data for these charts and values can be accessed here.

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The SFDP’s delegations are administered from a single stake authority account, which currently delegates just over 51 million SOL, which is 13% of Solana’s total stake, valued at $7.3 billion at the time of writing. Over the past 3.5 years of operation, the stake administered has fallen by approximately half from an initial 100 million SOL.

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The total number of validators receiving support from SFDP is 1105, which is 72% of the total 1525 validators. Validators who benefit from SFDP account for 74 million SOL (SFDP + Non-SFDP stakes), or 19% of Solana’s total stake. The 420 validators, non-reliant on SFDP, command an 81% share of active stake. The mean average delegation is 45,652 SOL, with a medium average of 31,513 SOL.

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Overlaying SFDP stake on a log chart of total stake reveals how, despite accounting for just 13% of the total stake, SFDP stake disproportionately affects long-tail validators.

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Removing the SFDP stake from the above chart further reveals the program's considerable effect outside the two-thirds supermajority.

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Regarding the total stake (SFDP + non-SFDP stake) of SFDP participants, 13 validators (1% of participants) have more than 300k SOL, and 205 validators (19%) have more than 100k.

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When we remove the SFDP stake and focus on the non-SFDP stake that program participants have been able to attract themselves, we see 50 validators (4.5%) have more than 100k stake, 184 validators (17%) have more than 50k stake, 810 validators (73%) have less than 10k stake and 567 validators (51%) have managed to attract less than 1k in stake from outside of the program.

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The new SFDP participant onboarding rate shows a consistent trend line over several years, demonstrating that participants have been admitted to the program in a slow trickle rather than in batches.

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763 of the SFDP validators (69%) have their commission rates set to 7%, the maximum allowed by the program during this epoch. 295 validators (27%) have their commission rates set to 0%.

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Interestingly, 531 (48%) of all SFDP validators display a combination of commission rates set to a maximum of 7% and attracting less than 1k SOL in non-SFDP stake. Among the top 100 program validators ranked by the level of non-SFDP stake they have managed to attract from outside the program, 18 have commission rates at 7%. Among the bottom 100 validators, this number is 97.

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Longstanding members of the Solana validator community have previously estimated that approximately 35,000 SOL in stake is needed to cover vote fees, the most significant expense for validators. Currently, only 208 SFDP validators (19%) meet this benchmark with non-SFDP stake. This estimates that if the SFDP were to be immediately discontinued, 897 of the program’s participants—accounting for 57% of all Solana validators—would become unprofitable to a level where they would no longer be able to cover vote fees, let alone additional costs such as hardware, bandwidth, and opportunity costs.

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Due to the SFDP’s upper bound limit of 1 million non-program delegated SOL, no validator in the superminority or the supermajority can currently receive SFDP support. Only long-tail validators in the final 32% of stake outside the supermajority can qualify, given this hard limit.

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Validators' Path to Sustainability

This section of the report will examine things from the viewpoint of a newer, lower-staked independent Solana validator—exactly the type of entity SFDP is designed to help. What options are available to them to grow their stake beyond SFDP? How can they gain a competitive edge in the market? And what is the longer-term outlook for this cohort?

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In summary, an independent long-tail validator has three main channels for increasing stake: SFDP, stake pools, and self-owned channels. Having already covered SFDP, let’s examine the other available options.

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Stake Pools

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“There are only two ways to make money in business. One is to bundle. The other is to unbundle.” — Jim Barksdale, Netscape.

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Stake pools are often cited as one of the best ways for independent validators to gain stake. They are an alternative to traditional native staking that helps decentralize the network by allowing easy stake delegation across many validator nodes. In return for staking to a stake pool, delegators typically receive a liquid staking token (LST). Each stake pool has its own unique validator criteria and delegation strategy. Some pools emphasize geographical decentralization; nearly all require validators to meet minimum performance criteria to be added to the validator set. A single validator can take part in multiple stake pools simultaneously.

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Stake pools with the largest number of participating validators on Solana are Blaze (351), Marinade (337), Jito (283), and JPool (263). All have strict criteria that validators must meet to join the pool. Some common requirements are that the validator is outside the superminiority, has a high APY for multiple recent epochs, and has a low skip-slot rate. Detailed delegation criteria can be found here (Jito, Blaze, Marinade, JPool). Management fees are mSOL 6%, bSOL 5%, JitoSOL 4% and JPool 5%. Pools will be rebalanced each epoch up to a cap of around 5% to 7.5% of the total stake. 

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Stake pools are classic online aggregators that match supply and demand. In this case, supply is an undifferentiated independent validator, which you can think of as equivalent to Uber drivers or independent small merchants in an e-commerce marketplace. Demand is the thousands of users looking to stake relatively small or medium amounts of SOL. Users are seeking convenience and return in the form of competitive APY. Aggregators are looking to grow their market share and increase their take rate to enable the transfer between the two parties. Independent validators primarily want to grow their stake.

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Internet-based aggregators are well understood. Typically, in such value chains, the value will flow to the aggregator, who can exert pricing power over supply. What was a free lunch for the supplier over time morphs into a highly competitive pay-to-play system. We see signs of this developing with Mardinade Finance’s new Stake Auction Marketplace (SAM) delegation strategy — a competitive price auction in which validators directly bid against one another for stake allocation in a “pay-for-stake” system. Validators are incentivized to bid up to the rate they believe can still be profitable and perhaps even beyond this rate if they believe SFDP will match the stake they receive from SAM.

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Jito is the largest pool by stake, with over 12 million SOL. When averaged across the pool’s 283 validators, this amounts to 42.5k SOL per validator—a substantial allocation that can single-handedly bring a validator past the breakeven point. Other pools have lower averages, and given the overlap between them, relying solely on these pools would provide sufficient stake to support a few hundred validators.

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Sanctum & Validator LSTs

A much-talked-about compliment to the stake pool model that has grown in popularity this year is Sanctum. Sanctum removes many of the key barriers to launching LSTs, solving the problems of liquidity provisioning and defi composability for long-tail validators who wish to launch an independently branded LST to attract stake.

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Sanctum can be considered a Shopify-like platform that provides validators with the infrastructure needed to go ‘direct to consumer’ (DTC). However, it suffers from the same key drawback as Shopify—it cannot provide meaningful distribution. Sanctum is simply a toolkit, albeit an important one, that largely levels the playing field in user experience between the largest, most liquid LST providers and the small guys. Sanctum is an important breakthrough for validators that already have achieved product differentiation and/or self-owned distribution channels.

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This highlights a key issue for lower-staked pure-play independent validators — the limited number of effective avenues to promote their services. Creating content, managing social channels, and community building can all be effective, but these skill sets are unsuited to small, technically focused validator operation teams.

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Returning to our previous validator landscape outline, we see other cohorts, namely ecosystem teams, exchanges, and institutionally focused staking service providers, have more clearly defined channels to reach stakers. Ecosystem teams operate dApps, wallets, and infrastructure, which naturally generate high-quality leads for staking services. If planned carefully, the upsell or promotional drive to convert users into stakers can happen relatively seamlessly. Institutionally focused staking services will naturally take a different multipronged approach, including high-level relationship building, hiring B2B sales teams, and actively participating in industry events. Arguably, centralized exchanges are the best placed of all, able to draw upon their existing large customer bases.

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To capture market share, long-tail independent validators must compete for the portion of non-passive stake—stake that is actively managed on-chain and responsive to factors like APY rates. However, this amount is relatively small as a proportion of the total stake; for instance, all LSTs combined represent only 6%. Furthermore, by offering 0% commission on inflation and MEV, validators may inadvertently attract the most price-sensitive stakers—those most likely to unstake when rates increase to more sustainable levels.

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Voting Fees

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Another factor working against long-tail validators is the dynamics of voting fees. Voting fees are the main cost of running a validator; being denominated in SOL, this cost will increase further the more valuable the network becomes. Solana’s current vote fee mechanism has two main effects. First, it enforces a relatively small deflationary burn of SOL tokens to the benefit of all token holders. Second, it transfers wealth from lower-staked to higher-staked validators, as outlined in the high-level example below.

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Regardless of their stake, all validators must vote and pay the same voting fees. These fees are 50% burnt and 50% distributed to the block builder. Yet leader slots are assigned based on stake, meaning validators with higher stake build more blocks per epoch than those with lower stake, earning back more vote fees from the other validators. Thus, vote fees can be considered a circular economy that benefits higher-staked validators.

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Throughout 2024, the significant increase in priority fees and MEV commissions has diminished the relative importance of voting fees. However, the mechanism’s fixed costs and variable revenue dynamics still pose a persistent centralizing force, placing long-tail validators at a disadvantage.

Areas for Future Research

There are several potential avenues for future research based on the challenges discussed in this work. A few that come to mind include:

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• What incentives and mechanisms can be developed to counteract centralizing forces and better support lower-staked validators?
• What is the ideal number of Solana validators? What would constitute a "healthy" Nakamoto coefficient and distribution of stake?
• How could the SFDP be modified to better align participant incentives with the program's intended objectives?
• Are there strategies to encourage large private, exchange, and institutional validators to distribute their stake more evenly, possibly utilizing the existing stake pool infrastructure?

Conclusion

Throughout this piece, we’ve examined the SFDP and the associated challenges facing Solana’s long-tail independent validators. Independent validator operations are a highly competitive and open market. The business model is relatively transparent, with medium to low barriers to entry. Newer independent validators without self-owned distribution channels are fungible. Without differentiation, synergistic businesses, or self-owned promotional channels, they will likely struggle to produce long-term excess profits. Even with SFDP support, it is challenging to attract stake. Most SOL is passively staked and held by large private, institutional, and exchange validators, meaning it is inaccessible to new validators. The SFDP, in its current form, does little to help with these broader issues.