Delegators cannot be slashed for bad behavior, but there is a deposit tax on Delegators to disincentivize poor decision making that could harm the integrity of the network.
This guide will explain how to be an effective delegator in the Graph Network, and earn a good return on your delegated stake. A Delegator must use their best judgement to choose Indexers that will do a good job, and provide them with a healthy return, otherwise they could earn very low rewards.Please note this guide will not go over steps such as setting up Metamask properly, as that information is widely available on the internet. There are three sections in this guide:
- The risks of delegating tokens in The Graph Network
- How to calculate expected returns as a delegator
- A Video guide showing the steps to delegate in the Graph Network UI
Listed below are the main risks of being a delegator in the protocol.
It is important to understand that every time you delegate, you will be charged 0.5%. This means if you are delegating 1000 GRT, you will automatically burn 5 GRT.
This means that to be safe, a Delegator should calculate what their return will be by delegating to an Indexer. For example, a Delegator might calculate how many days it will take before they have earned back the 0.5% deposit tax on their delegation.
Whenever a Delegator wants to undelegate, their tokens are subject to a 28 day unbonding period. This means they cannot transfer their tokens, or earn any rewards for 28 days.
One thing to consider as well is choosing an Indexer wisely. If you choose an Indexer who was not trustworthy, or not doing a good job, you will want to undelegate, which means you will be losing a lot of opportunity to earn rewards, which can be just as bad as burning GRT.
This is an important part to understand. First let's discuss three very important values, which are the Delegation Parameters.
Indexing Reward Cut - The indexing reward cut is the portion of the rewards that the indexer will keep for themselves. That means, if it is set to 100%, as a delegator you will get 0 indexing rewards. If you see 80% in the UI, that means as a delegator, you will receive 20%. An important note - in the beginning of the network, Indexing Rewards will account for the majority of the rewards.
- Query Fee Cut - This works exactly like the Indexing Reward Cut. However, this is specifically for returns on the query fees the Indexer collects. It should be noted that at the start of the network, returns from query fees will be very small compared to the indexing reward. It is recommended to pay attention to the network to determine when the query fees in the network will start to be more significant.
As you can see, there is a lot of thought that must go into choosing the right Indexer. This is why we highly recommend you explore The Graph Discord to determine who the Indexers are with the best social reputation, and technical reputation, to reward delegators on a consistent basis. Many of the Indexers are very active in Discord, and will be happy to answer your questions. Many of them have been Indexing for months in the testnet, and are doing their best to help delegators earn a good return, as it improves the health and success of the network.
A Delegator has to consider a lot of factors when determining the return. These
- A technical Delegator can also look at the Indexers ability to use the Delegated tokens available to them. If an indexer is not allocating all the tokens available, they are not earning the maximum profit they could be for themselves or their Delegators.
- Right now in the network an Indexer can choose to close an allocation and collect rewards anytime between 1 and 28 days. So it is possible that an Indexer has a lot of rewards they have not collected yet, and thus, their total rewards are low. This should be taken into consideration in the early days.
As described in the above sections, you should choose an Indexer that is transparent and honest about setting their Query Fee Cut and Indexing Fee Cuts. A Delegator should also look at the Parameters Cooldown time to see how much of a time buffer they have. After that is done, it is fairly simple to calculate the amount of rewards the delegators are getting. The formula is:
Another thing a Delegator has to consider is what proportion of the Delegation Pool they own. All delegation rewards are shared evenly, with a simple rebalancing of the pool determined by the amount the Delegator has deposited into the pool. This gives the delegator a share of the pool:
Using this formula, we can see that it is actually possible for an indexer who is offering only 20% to delegators, to actually be giving delegators an even better reward than an Indexer who is giving 90% to delegators.
A delegator can therefore do the math to determine that the Indexer offering 20% to delegators, is offering a better return.
Another thing to consider is the delegation capacity. Currently the Delegation Ratio is set to 16. This means that if an Indexer has staked 1,000,000 GRT, their Delegation Capacity is 16,000,000 GRT of Delegated tokens that they can use in the protocol. Any delegated tokens over this amount will dilute all the Delegator rewards.
Imagine an Indexer has 100,000,000 GRT delegated to them, and their capacity is only 16,000,000 GRT. This means effectively, 84,000,000 GRT tokens are not being used to earn tokens. And all the Delegators, and the Indexer, are earning way less rewards that they could be.
Therefore a delegator should always consider the Delegation Capacity of an Indexer, and factor it into their decision making.
This guide provides a full review of this document, and how to consider everything in this document while interacting with the UI.