Reduce Validator Set to 120

This proposal asks that the Osmosis Validator active set be reduced to 120 from 150 to enhance network performance and validator sustainability while maintaining decentralization of stake.

Osmosis currently has a very long tail of validators, with the minimum stake needed to enter the active set being only 30k OSMO. This proposal would remove the bottom 2% of voting power and cause the new entry point to be 335k OSMO delegated.

There are two main concerns about the current size of the validator set:

Performance

A decentralized blockchain using the CometBFT consensus requires 67% voting power to approve each block or software upgrade and 33% to veto any changes.

Even with this reduction, the number of validators making up the 33% that can veto a block (Nakomoto Coefficient) remains at 10, maintaining Osmosis's position as one of the most decentralized Cosmos chains.

The number of validators required to approve a block decreases by one, showing that these tail validators mostly add additional peering steps for consensus. Reducing the active set could improve block processing efficiency by reducing unnecessary consensus steps, while still maintaining a high degree of decentralization.

Validator Sustainability

Validators in the middle of the set have reported that operating on Osmosis is financially unsustainable, as they receive insufficient rewards to cover costs. This proposal ensures that active validators are more adequately compensated, reducing reliance on inflation-based rewards.

In the long term, all validators should be profitable to run. As Osmosis governance makes further changes to tokenomics to lower inflation, this issue is often raised as a reason to retain inflation. Eventually, validators should receive sufficient rewards from non-inflationary or net-neutral inflationary sources to perform their roles.

One way to boost this is to reduce the active set over time to ensure that all validators receive more appropriate rewards for their work and scale the validator set size based on the number of validators that Osmosis can afford to maintain rather than the previous expansion proposals which aimed to reduce the competition for remaining in the active set. As there is no competition to remain in the active set now, the inverse of the previous increase proposal in October 2022 should be true, where validators should be attempting to differentiate themselves to receive delegations rather than exist in a competition-free environment.

Further data available from SmartStake

Forum post: https://forum.osmosis.zone/t/reduce-validator-set-to-120/3454