What is a validator node? Well, in this video, we’re going to cover exactly what a node actually is. I’m also going to go over some use cases on how it is used in blockchain and cryptocurrency.
Okay, so first of all, everyone that hears the word “node” thinks it’s just like passive income. They don’t even understand what a node actually is. And what a node truly is, is the actual definition: just a connection point between branches and systems. It’s really just a connector between different pieces of systems, and in this case, we’re talking about blockchain. So it’s really just a place where information is received and then sent. Okay, and in the majority of the time, these nodes are sitting between an application and the node will sit in the middle and then communicate the information and transactions from this application into the node. And then, the node will communicate that to the blockchain. The majority of these nodes are validating the transactions, miners verify, and then place the transactions in a block. The reason why it’s called blockchain is because it’s a block of transactions. The block has a bunch of transactions in it, and then the chain is really just the hashing between the blocks. I’ll give you the Bitcoin example. Right, a transaction happens on Bitcoin. Let’s say that, and I can run my own full node by the way. I can spin up a full node on Bitcoin and I can, you know, send Bitcoin for myself to my mom. All right, and I want to send Bitcoin to my mom. So, I buy Bitcoin, I send it, and it’ll go through that node first. That node will first verify that transaction and then validate the transaction and then send it into the mining network. And the miners will actually verify that transaction, and then it’ll place it inside the block. And then, that block will get hashed to another block of transactions.
There’s also proof of stake blockchains, which are different. They don’t require you to buy physical mining equipment. It’s just a different type of blockchain. But in order to make income in these blockchains, which is what you know cryptocurrency does, the whole point of cryptocurrency is to decentralize the network so there’s no one point of failure. Right? There’s no significant counterparty risk because there’s only one entity that is running the entire network. So, how does cryptocurrency incentivize decentralization? By paying out income in the form of rewards.
In order to get people to buy $10,000 mining equipment and to spend a ton of money on electrical and to put it in a commercial building and use fans and all that stuff, there has to be a reward for them in order to do that. And how do they get rewarded for that? They get rewarded with the income from the mining equipment by just guessing complex mathematical problems, and when it solves an entire block of transactions, it gets rewarded with the income from that block.
Now, for validator nodes on proof of stake blockchains, there’s no mining equipment. So instead, what you’re doing is buying a bunch of that coin, whatever chain it’s built on. For example, let’s say it’s Avalanche. You have to buy AVAX, which is the coin. You buy a bunch of AVAX and you stake it on a validator node. Instead of a node communicating that into the mining network, that validator node does both of those things. So, it’ll verify and validate the transaction, and it communicates that information and data to the blockchain.
Another example is when we run a bunch of something called pocket nodes. So, a pocket is just another coin that’s on the pocket network. What we do is we have blockchain developers on the back end, they spin up these validator nodes. We use different types of cloud computing companies and then also our own physical hardware as well, and we will spin up these validator nodes, which is essentially just writing a bunch of code. Then we will buy the coin, which is the pocket coin, and we will place just over 15,000 of the pot coin on a node, and then that node actually sits on the outside of these different blockchains, so we can actually verify and validate a bunch of transactions on a ton of different blockchains. So right now, we validate on seven different chains, which you can do over 15 now on the pocket network, but a lot of them aren’t super profitable. And what we do on our team is like we will look at, you know, which chain has the most amount of relays, which is the most amount of relayed information essentially, and you get rewarded on the amount of relays that you actually relay from the applications to the blockchain. So we’ll spin up a bunch of these validator nodes, and the nodes get chosen at random, but it’s really important to have locations that are closer to the actual applications that you’re validating, because there’s one key metric that allows nodes to perform better, which is when they have low latency and they can verify information and validate it very, very quickly.
That’s what we do – we do that in our fund, we do that for our clients. We actually spin up these validator nodes, which are essentially just different computers all around the world, and we will spin up those nodes, we’ll buy the coin, we’ll place the coin, which is called stake. That’s why it’s called proof of stake, because you have to actually be a stakeholder in the overall coin and stake those on a validator node, which is essentially a computer, and then that node verifies and validates transactions, and you get paid for doing that. And, you’re getting paid to decentralize a network, and that’s how you build a decentralized economy is you incentivize a bunch of different people to help the network become more secure and to become more efficient, which is done by having a ton of nodes around the world that are all helping that blockchain ecosystem function and grow and scale and become more secure. And the more stakeholders there are, the more decentralized it is, the more secure that specific chain is. There’s a lot of mumbo jumbo right now on what an actual node is and people just think it’s like, you go to a website, you click three buttons, and all of a sudden you’re running a node. That’s not truly a validator node. You can go to like different applications and go and stake on someone else’s validator, but that is not your own validator. And typically, most income from these different validators is between 8% and 14% a year if you’re running your own validators, and that is also paid in kind, which means that it’s paid in the actual coin of that blockchain.
Some are much higher, some are a little bit lower – it kind of depends. Like in the pocket network, the inflation is definitely higher than most normal coins that are built on different blockchains, but it also has a much bigger, you know, workload because pocket is validating on a ton of different chains and they’re also like hyper growth right now by trying to decentralize the entire network which we’re doing a really good job at. So that income is typically a lot higher than 12% a year right now. Ours is over 100% annualized, if you’re not factoring in compound interest. If you’re just taking the income and selling it and you’re not compounding into new nodes, ours is just over 100% APR. And inflation is also in the double digits as well – it’s not in the triple digits so we’re definitely outperforming inflation. Just because there’s inflation, that doesn’t mean that the price is going down because if there’s mass adoption of it and people are continually staking because of blockchain and the amount of demand is growing, then it’s not always going to have a super negative impact on the price.
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