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Revenue Sources and Tracking

shMonad tracks validator revenue across multiple epochs to make fair allocation decisions. Understanding how revenue is measured helps explain why stake flows to certain validators.

Two Primary Revenue Sources​

Validators can earn revenue in two ways:

1. Staking Rewards​

These are the standard block rewards that Monad validators earn for participating in consensus. When a validator produces blocks or attests correctly, they receive MON as a reward.

How shMonad sees it: The protocol queries each validator's earned rewards through Monad's staking system, collecting any accumulated rewards at epoch boundaries.

After fees: The protocol takes a 5% commission, and the remaining 95% increases the equity backing all shMON tokens.

2. Boost Payments (MEV)​

Validators may also receive additional payments from:

  • MEV (Maximum Extractable Value) from validator-aligned transaction ordering
  • ACE (Application-Controlled Execution) a form of application-aligned MEV protection
  • Other value capture mechanisms from FastLane-operated infrastructure and smart contracts

These payments arrive as MON transfers. The protocol recognizes them, allocates a share to the validator, takes its commission, and distributes the remainder to increase shMON value.

Multi-Epoch Revenue Tracking​

The allocation system doesn't just look at the most recent epoch—it tracks revenue across multiple epochs and smooths the data.

The Importance of Smoothing​

Without smoothing, a validator who gets lucky in one epoch (perhaps they produced several high-value blocks) would receive a disproportionate allocation increase. Then, in the next epoch, their allocation would drop dramatically.

This creates inefficiency:

  • Constantly moving large amounts of stake between validators
  • Higher transaction costs from frequent rebalancing
  • Unstable validator revenues
  • Potentially worse performance as validators can't rely on stable stake

How Smoothing Works​

Instead of using only the most recent epoch's revenue, the system averages across multiple epochs:

Smoothed Revenue=Revenuelast epoch+Revenuetwo epochs ago2\text{Smoothed Revenue} = \frac{\text{Revenue}_{\text{last epoch}} + \text{Revenue}_{\text{two epochs ago}}}{2}

This two-epoch moving average:

  • Reduces impact of random variation
  • Makes allocations more stable
  • Gives validators predictable stake levels
  • Still responds to genuine performance changes

The Effect on Allocations​

Example scenario:

Validator A consistently earns 100 MON per epoch.
Validator B typically earns 100 MON but had one lucky epoch earning 200 MON.

Without smoothing:

  • In the lucky epoch, Validator B would receive a huge allocation increase
  • The next epoch, that allocation would drop back down

With smoothing:

  • In the lucky epoch, Validator B's smoothed revenue = (200 + 100) / 2 = 150
  • The next epoch, if they earn 100, smoothed revenue = (100 + 200) / 2 = 150
  • Two epochs later, assuming normal 100 earnings, = (100 + 100) / 2 = 100

The result: gradual, stable adjustments rather than violent swings.

Revenue Attribution​

Not all revenue is treated equally for allocation purposes:

Registered validators: Validators explicitly registered with shMonad have their revenue tracked individually and used for allocation calculations.

Unregistered validators: If an unregistered validator somehow receives rewards that pass through shMonad (rare but possible), that revenue benefits all shMON holders but doesn't affect allocation weights.

Why the distinction: The protocol can only measure and respond to performance from validators it knows about. Unregistered validator revenue becomes a general boost to returns rather than an allocation signal.

Higher smoothed revenue leads to higher allocation weight, which leads to more stake delegated

This creates a natural feedback loop:

  1. Validators that perform well earn more revenue
  2. More revenue leads to higher allocation weights
  3. Higher weights mean more stake from shMonad
  4. More stake enables more blocks and more revenue (reinforcing good performance)

Conversely, underperforming validators naturally receive less stake over time. This automatic performance-based rebalancing happens every epoch without any manual intervention, ensuring shMonad's stake flows toward validators that maximize returns for all holders.