What is Staking?

Published: 7/12/2024 • By: @cedros_io • Category: Staking

In this post, we'll explain what staking is, how it works, and why it's important to the security and operation of PoS blockchains.

What is staking on proof-of-stake blockchains?

At its core, staking is the act of locking up cryptocurrency holdings to participate in maintaining the operations of a PoS blockchain network. Participants who stake their coins, known as stakers, are selected by the protocol to add the next block to the chain.

The amount of cryptocurrency a validator must stake and the length of time it must be staked varies between different PoS blockchains. In essence though, staking acts as a security deposit, disincentivizing malicious behavior by putting the validator's staked coins at risk of being slashed (taken) if they act dishonestly or fail to properly perform their duties.

How does staking work?

While the specifics vary between PoS implementations, the general process of staking goes as follows:

A validator locks up the required minimum amount of the blockchain's native cryptocurrency in a special contract or wallet. This is their stake.
The PoS protocol uses the stakes as a way to pseudo-randomly (but verifiably) select which validator gets to add the next block of transactions to the chain.
If the chosen validator successfully adds the block, they receive the block rewards (newly minted coins) plus any transaction fees included in the block.
If the validator acts maliciously, fails to validate properly, or goes offline, their staked coins can be slashed as punishment.

This process repeats with every new block added to the chain. Over time, the protocol is designed to select validators proportional to their share of the overall stake, incentivizing validators to stake more coins to earn more rewards.

Why is staking important?

Staking is a crucial component of PoS consensus for several reasons:

Security: By forcing validators to put their own coins at stake, it makes attacking the network very costly and strongly incentivizes honest behavior. An attacker would need to acquire a large amount (often 51% or more) of the staked coins to have a chance at a profitable attack.
Decentralization: Since anyone with enough coins can participate in staking, it allows a wider range of participants to contribute to maintaining the network compared to PoW mining which requires expensive, specialized hardware. This potentially leads to more decentralization.
Sustainability: PoS staking does not inherently consume large amounts of energy like PoW mining, making it a more sustainable and environmentally friendly alternative as blockchain networks scale.
Incentive alignment: Stakers have a vested interest in the long-term success and security of the network, since the value of their staked coins and rewards depends on the continued health of the blockchain.

Concerns and risks

While staking has many benefits, there are also some risks and concerns to be aware of:

Lockup periods: Many PoS blockchains require validators to stake their coins for a minimum amount of time, during which they cannot freely access or sell those coins. This introduces liquidity risk.
Slashing risk: Validators face the risk of having their stake slashed if they act maliciously or fail in their duties. Software and hardware issues that cause downtime can lead to slashing on some networks.
Centralization: If a small group of validators acquire a large percentage of the staked coins, it could lead to centralization concerns. However, many PoS designs attempt to mitigate this.
Tech complexity: Participating in staking yourself requires running a complex validator node. Third party staking services ease this, but require trust.

Despite these issues, many believe the benefits of the PoS staking model make it an attractive option as blockchain technology matures and seeks long-term sustainability.

How staking works on Solana

Solana is a high-performance blockchain that uses a unique Proof-of-Stake implementation called Delegated Proof of Stake for its consensus. Let's look at how staking functions within Solana's architecture.

Validators and staking requirements

To become a validator on the Solana network there is no minimum amount of SOL required outside of the SOL needed to pay voting fees (each vote by a validator is a Solana transaction needed to be processed by the Solana network).

There is no upper limit to the amount that can be staked. The more SOL staked, the higher the chances of being selected to validate the next block. Holders of SOL can stake their SOL with any network validator. Validators compete with each other to offer the best returns to stakers in order to attract more stake.

Validators must also run a validator node, which requires a reliable internet connection and a computer or server meeting the necessary hardware requirements. This includes a 12 core CPU, 256GB of RAM, and at least 1TB of high-speed SSD storage. For exact hardware requirements review the latest updates in the Solana validator requirements documentation.

Block production and rewards

Solana divides time into slots, each lasting approximately 400ms and representing the opportunity for a validator to create a block. In each slot, a validator is pseudo-randomly selected to be the leader based on their stake-weight, and is responsible for producing the next block and transmitting it to the network. Validators on Solana are given four consecutive slots each time they are chosen to be leader.

If the leader successfully produces a block, they receive a portion of the transaction fees included in that block as a reward. Solana's consensus is designed to produce blocks at a very high speed, resulting in many opportunities for rewards.

Slashing risks

Like other PoS systems, Solana punishes validator misbehavior through slashing. If a validator node is found to be malicious, experiencing extended downtime, or otherwise not meeting performance requirements, a portion of their staked SOL can be slashed and removed from their account.

The specific conditions that trigger slashing and the percentage of stake slashed varies based on the infraction and is subject to change based on governance decisions. Currently automatic slashing is not implemented on Solana and slashing can only be carried out through social consensus mechanisms.

Delegating stake

For SOL holders who want to participate in staking rewards without running their own validator hardware, Solana allows delegating stake to an existing validator. Delegators can assign their stake to validators of their choice and earn a portion of the rewards generated by that validator.

Delegating is a lower-barrier way to participate in staking, but does involve trusting the chosen validator to behave honestly and maintain consistent uptime to avoid slashing risks. Solana provides on-chain metrics like validator performance history to aid in delegation decisions.

Staking and Solana's performance

Solana's delegated proof of stake consensus, combined with other innovations like Proof-of-History and parallel transaction processing, enable it to achieve high speed and scalability while maintaining the security benefits of staking.

As more value is staked on Solana, it increases the cost for a potential attacker seeking to acquire enough stake for a 51% attack, strengthening one aspect of the economic security of the network.

Conclusion

Staking is an essential part of how Proof-of-Stake blockchains like Solana function. By having participants put value at stake to participate in block production, PoS networks create strong incentives for validator honesty and network security.

On Solana specifically, staking works together with the network's unique architecture to enable a high-performance, secure blockchain suited for large-scale applications. As blockchain technology continues to evolve, staking mechanisms like Solana's aim to address key challenges around sustainability, security, and scalability.