Validator incentives are misaligned. Block proposal rewards dominate staking yields, decoupling validator income from the network's core service: transaction execution and state growth.
liquid-staking-and-the-restaking-revolution
Blog
The Future of Validator Incentives: Beyond Block Proposals
The era of block proposals as the primary validator reward is ending. This analysis deconstructs the emerging incentive frontier: optimizing attestation, securing data availability layers, and providing security to Actively Validated Services (AVS).
introduction
THE INCENTIVE MISMATCH
Introduction
Current validator economics are a broken market, failing to align security with the network's actual utility.
Proof-of-Stake is a commodity. The market for block production is saturated, pushing yields toward zero and forcing validators to seek extraction via MEV or exit the market entirely.
EigenLayer and Babylon demonstrate the demand for restaking security. These protocols monetize validator staked capital for new services, proving the base-layer incentive model is insufficient.
Evidence: Ethereum's post-merge issuance is ~0.5% APR, while MEV-Boost relays capture over 90% of proposer value, highlighting the core/proposal reward inversion.
key-trends
BEYOND BLOCK PROPOSALS
Executive Summary: The Three Pillars of Future Yield
Validator revenue is shifting from simple block rewards to a complex economy of specialized services. The future is in optionality and diversification.
01
The Problem: MEV is a $500M+ Revenue Stream You're Not Capturing
Validators who simply propose blocks leave ~90% of extractable value on the table for searchers and builders. This is a massive inefficiency in the validator revenue model.
- Revenue Diversification: Move beyond volatile base issuance.
- Network Health: Align validator incentives with user experience by reducing harmful MEV.
$500M+
Annual MEV
~90%
Value Leakage
02
The Solution: Specialized Execution Layers (e.g., Flashbots SUAVE)
Decentralized block building markets turn validators into auctioneers of block space. This creates a competitive, transparent market for transaction ordering.
- Direct Revenue Capture: Validators earn fees from builders competing for slots.
- Censorship Resistance: Decentralized builders prevent centralized control over transaction flow.
10-100x
More Bids
>95%
Ethereum PBS
03
The Frontier: Provisioning RPC & Data Services
Validators are uniquely positioned to become infrastructure providers, monetizing their direct chain access and data. This builds a moat beyond stake weight.
- Recurring SaaS Revenue: Charge for high-performance RPC endpoints and data streams.
- Network Effects: Become the preferred provider for dApps and wallets in your staking pool.
$1B+
RPC Market
<100ms
Latency Edge
04
The Hedge: Interchain Security & Shared Sequencers
Proof-of-Stake capital is the ultimate collateral. Projects like Cosmos ICS and EigenLayer allow validators to re-stake their security to earn fees from new chains and rollups.
- Yield Amplification: Earn fees from multiple protocols simultaneously.
- Economic Security: Bootstraps security for new networks without diluting token supply.
$15B+
TVL in Restaking
2-5x
Yield Multiplier
05
The Risk: Centralization via Maximum Extractable Revenue
Optimizing purely for revenue leads to vertical integration (staking pools operating builders, RPC, etc.), creating new centralization vectors and systemic risk.
- Protocol Vulnerability: A fault in one service layer can cascade.
- Regulatory Targeting: Consolidated entities become clear targets for enforcement.
>60%
Top 5 Pool Share
Single Point
Of Failure
06
The Imperative: Programmable Validator Clients
The winning stack will be modular. Validator clients must become execution platforms that can plug into various revenue modules (MEV, Data, Security) without forking.
- Composability: Swap revenue strategies based on market conditions.
- Innovation Flywheel: Enables rapid iteration on new yield sources like ZK-proof generation or oracle duties.
Modular
Architecture
0 Downtime
Strategy Switch
thesis-statement
THE INCENTIVE MISMATCH
The Core Thesis: Block Proposals Are a Commodity, Consensus is the Premium
Validator rewards are structurally misaligned, overpaying for a simple task and underpaying for the critical one.
Block proposal is a commodity. The core task of ordering transactions is computationally trivial. The market for block builders like Flashbots SUAVE and Titan Builder proves the value is in MEV extraction, not the proposal itself.
Consensus execution is the premium service. The cryptographic signing and attestation process is the actual security backbone. It requires constant uptime, slashing risk, and coordination, yet current reward models do not reflect this cost.
Proof-of-Stake economics are backwards. Protocols like Ethereum and Solana reward validators proportionally to stake, which conflates capital provision with work. This subsidizes the commodity task and starves the security-critical one.
Evidence: On Ethereum, a validator's proposal reward is ~10x their attestation reward for the same slot, despite the latter requiring identical infrastructure and slashing risk.
THE FUTURE OF VALIDATOR INCENTIVES
Incentive Shift: From Monolithic to Modular Rewards
Comparing the evolution of validator reward structures from traditional block proposals to specialized, modular tasks.
| Incentive Mechanism | Monolithic Block Proposals | Modular Task-Based Rewards | Hybrid MEV-Boost Model |
|---|---|---|---|
Primary Reward Source | Block proposal + transaction fees | Specialized task execution (e.g., proving, bridging) | Block proposal + external MEV auction |
Revenue Predictability | High (fixed issuance + variable fees) | Low (market-driven task pricing) | Variable (issuance + volatile MEV payouts) |
Capital Efficiency | Low (requires full staking stake) | High (task-specific bonds possible) | Medium (requires full stake + optional relays) |
Protocol Dependencies | Single Layer 1 (e.g., Ethereum, Solana) | Multiple (e.g., EigenLayer AVS, AltLayer, Hyperlane) | Ethereum + external builders/relays |
Slashing Risk Surface | Single consensus failure | Multiple (per-task slashing conditions) | Consensus failure + MEV relay censorship |
Adoption Stage | Production (All major L1s) | Early (EigenLayer, Babylon) | Production (Ethereum post-Merge) |
Annual Yield Range (Est.) | 3-5% (issuance + base fees) | 5-20%+ (variable by task demand) | 3-8% + MEV (highly variable) |
Key Enabling Tech | Proof-of-Stake consensus | Restaking, Proof Systems, Intent Solvers | Proposer-Builder Separation (PBS) |
deep-dive
THE INCENTIVE SHIFT
Deconstructing the New Reward Stack
Validator revenue is decoupling from block proposals, creating a multi-layered reward stack driven by MEV and specialized services.
Block proposals are commoditized. The base layer reward for proposing a block is becoming a smaller fraction of total validator income. This forces validators to seek supplementary revenue streams to remain profitable.
MEV is the primary subsidy. Protocols like Flashbots MEV-Boost and EigenLayer transform validators into economic security coordinators. They capture value from arbitrage and liquidations, redistributing it from users to stakers.
Specialized services create new markets. Validators now earn fees for providing ZK proof generation (e.g., Espresso Systems), fast finality services, or acting as oracle nodes for protocols like Chainlink or Pyth.
Evidence: Post-Merge, proposer-builder separation (PBS) on Ethereum routes over 90% of block production through MEV-Boost, with MEV often exceeding base issuance.
risk-analysis
VALIDATOR INCENTIVE CRISIS
The Inevitable Risks & Centralization Vectors
Current MEV-centric reward models are creating perverse incentives, threatening network security and decentralization at the protocol's core.
01
The Problem: MEV as the Dominant Validator Income
When >50% of validator rewards come from MEV extraction, security becomes a financial game. Validators are incentivized to maximize extractable value, not network health. This leads to centralization around sophisticated MEV strategies and infrastructure like Flashbots SUAVE and Jito.
- Centralizes power with MEV-specialized staking pools.
- Creates systemic risk where validator loyalty is to profit, not protocol rules.
- Distorts L1 security budget, making base rewards irrelevant.
>50%
Of Rewards
Jito / Flashbots
Key Entities
02
The Solution: Enshrined Proposer-Builder Separation (PBS)
Formalize the separation of block building from proposal via protocol-level PBS, as Ethereum is pursuing. This neutralizes the validator's advantage in MEV capture and turns them into a neutral auctioneer.
- Decouples profit motive from consensus role.
- Creates a competitive market for block building, reducing builder centralization.
- Allows for credible neutrality; the protocol enforces fair access to block space.
Protocol-Level
Enforcement
Ethereum Roadmap
Primary Example
03
The Problem: The Staking Pool Oligopoly
Economies of scale in MEV and infrastructure create a winner-take-most dynamic. Large pools like Lido, Coinbase, Binance can offer higher returns via superior MEV capture, attracting more stake in a vicious cycle.
- Lido's ~30%+ Ethereum stake demonstrates the risk.
- Small validators are priced out of competitive MEV rewards.
- Threatens the 1/3 and 1/2 attack thresholds, making them politically plausible.
~30%
Lido Dominance
1/3 Attack Threshold
Risk Vector
04
The Solution: Minimum Viable Issuance & Social Slashing
Guarantee a sufficient base reward via minimum viable issuance to ensure security without MEV. Pair with social slashing (aka governance slashing) to penalize validators in dominant pools that threaten decentralization.
- Provides a security floor independent of MEV markets.
- Social slashing acts as a nuclear deterrent against pool overgrowth.
- Aligns crypto-economic security with social consensus, as seen in Cosmos Hub's governance.
Security Floor
Base Reward
Cosmos Hub
Precedent
05
The Problem: Geographic & Infrastructural Centralization
MEV requires low-latency connections (<100ms) to centralized exchanges and other validators. This forces validators into specific data centers (e.g., AWS, Google Cloud) and geographic regions, creating a single point of failure.
- ~60% of Ethereum nodes run on centralized cloud providers.
- Createns censorship risk from jurisdictional pressure.
- Undermines network resilience to physical/network attacks.
~60%
On Cloud Providers
<100ms
Latency Demand
06
The Solution: Distributed Validator Technology (DVT)
Use DVT, like Obol SSV Network, to split a validator's key across multiple nodes and locations. This decouples validator performance from single-node latency and uptime, democratizing access to MEV.
- Fault tolerance allows use of residential or distributed infrastructure.
- Reduces reliance on hyperscale cloud data centers.
- Enables "staking as a service" without centralization of operator control.
Obol / SSV
Key Protocols
Fault Tolerant
Key Benefit
future-outlook
THE INCENTIVE SHIFT
The 24-Month Outlook: Specialization and Fragmentation
Validator revenue will fragment beyond block proposals into specialized roles like data availability, sequencing, and cross-chain messaging.
Revenue streams will fragment. Block proposal rewards are commoditized. Validators will monetize specialized services like data attestation for Celestia/EigenDA and sequencing for rollups like Arbitrum/Optimism.
Cross-chain validation is the new frontier. Protocols like LayerZero and Wormhole create demand for oracle/relayer services. Validators will stake to secure these systems, creating a new fee market separate from L1 consensus.
Proof-of-Stake becomes Proof-of-Service. The monolithic validator role splits. A node might stake to provide ZK proof generation for a zkRollup, secure a bridge for Across, and propose blocks for Ethereum—all simultaneously.
Evidence: EigenLayer's restaking TVL exceeds $15B, demonstrating demand to rehypothecate security for new services. This capital is the fuel for the coming fragmentation.
takeaways
VALIDATOR INCENTIVES 2.0
TL;DR for Builders and Investors
Block proposal rewards are becoming a commodity; the next frontier is incentivizing the full validator lifecycle for security and performance.
01
The Problem: MEV is the New Block Reward
Proposer-Builder Separation (PBS) has outsourced block building, turning validator revenue into a volatile auction. This creates centralization pressure and misaligned incentives.
- >90% of Ethereum validator revenue now comes from MEV/priority fees.
- Builders (e.g., Flashbots, bloXroute) capture the value, not the protocol.
- Validators are reduced to passive, low-margin infrastructure.
>90%
MEV Revenue
~10s
Auction Latency
02
The Solution: Enshrined PBS & MEV Smoothing
Protocols must formalize the builder market and redistribute MEV to secure the network long-term, moving beyond the proposer.
- Ethereum's enshrined PBS aims to bring builder competition on-chain, reducing trust assumptions.
- MEV smoothing pools (e.g., Obol, SSV Network) socialize rewards, protecting solo stakers.
- MEV burn mechanisms can recapture value for the protocol treasury or stakers.
$1B+
Annual MEV
-99%
Trust Assumptions
03
The Frontier: Incentivized Data Availability & Attestation
Future validator roles will be unbundled and rewarded for specific services beyond proposing, securing the full stack.
- EigenLayer restaking allows validators to opt-in to secure AVSs (e.g., data availability layers like EigenDA).
- Fast finality attestations could be incentivized separately to reduce reorg risk.
- ZK proof generation/verification becomes a new, high-value service for validators.
10-100x
Yield Multiplier
<2s
Finality Target
04
The Metric: Total Value Secured (TVS) > TVL
Investor valuation must shift from locked capital to the economic security a validator set provides across multiple protocols.
- Restaking protocols (EigenLayer, Babylon) explicitly monetize crypto-economic security.
- Interchain security (Cosmos ICS, Polymer) allows validators to lease security to consumer chains.
- The business model moves from staking yield to security-as-a-service fees.
$50B+
Restaked TVS
5-20%
Fee Revenue
ENQUIRY
Get In Touch
today.
Our experts will offer a free quote and a 30min call to discuss your project.
NDA Protected
Confidentiality24h Response
Time to ValueDirectly to Engineering Team
No Sales Fluff10+
Protocols Shipped
$20M+
TVL Overall