What is staking?
In this blog post, we want to shed some light on the concept of staking for everyone getting started with Proof-of-Stake (PoS) networks. Please note that this is a high-level, simplified explanation of the major terms and concepts. To dive a bit deeper and to find more articles about staking, please visit the Staking Academy.
What is a Validator?
In a Proof-of-Stake network, just as in a Proof-of-Work network, the blockchain is simultaneously maintained over a diverse and geographically distributed network of disparate computers or servers called “nodes”. Validators, like Staking Facilities, are special nodes responsible for the provision of infrastructure as well as validating new blocks and appending them to the blockchain. Hence, together with other validators, they ensure the blockchain’s security by monitoring its accuracy, establishing validity and guaranteeing availability.
How does Proof-of-Stake work?
For doing so, validators receive block rewards (i.e. newly minted tokens by the network) and staking fees (paid by the users of the network) denominated in the native token of the respective blockchain. Many validators compete to add the next block in order to earn these rewards. Two metrics are commonly used to determine who is allowed to append the next block: a pseudo-random lottery, and the “stake weight” of the validator for assigning block validation slots. Validators who have more tokens are said to have a greater “stake weight”. In systems that assign block validation slots based on stake weight, the number of assigned slots is proportional to their stake weight.
In order to motivate validators to participate honestly in the validation process, there are also penalties. In case of malicious or careless behavior by the validator, such as validating two blocks at the same time or being offline for too long, the stake of a validator can be automatically forfeited in a process referred to as “slashing”. In order to participate in securing the network and to be paid for this service, validators are required to put up collateral “stake” which can be forfeited (i.e. “slashed”) programmatically if their actions break the programmatic rules that define the blockchain protocol which they secure.
What is a Delegator?
The right to validate and add blocks, hence, to secure the validity and utility of the blockchain, is attached to every PoS token. In many Proof-of-Stake blockchains, token holders who want to contribute to the blockchain’s security, yet do not want to act as a validator, can delegate these rights to a validator, thereby increasing the validator’s stake. This renders the token holder a “delegator”. Delegating tokens is not the same as sending tokens, because delegators only transfer the rights contained in their tokens without transferring ownership of the token itself. The original holder remains the legal owner of the tokens at all times. Token holders are incentivized to participate in the Proof-of-Stake process in order to earn rewards and to avoid the dilution of their funds due to the inflationary character, which is caused by block rewards.
The amount of rewards generated by the token holder through the validator’s service is the ratio between the size of the holder’s own stake and the total stake of the validator. For their services, the validators charge a fee on the holder’s rewards.
We hope that we were able to provide you with a better understanding of Proof-of-Stake and staking. It is a highly complex topic and takes some time to wrap your head around it, but it is worth getting at least somewhat familiar with it as we strongly believe that staking will secure the world’s most precious digital public infrastructures. This believe is substantiated by an increasing dominance of PoS networks. To facilitate a sustainable diffusion of these networks, protect stakeholders (pun intended) and to mature the overall staking industry, we need to educate policy makers about the mechanics, risk and opportunities of PoS. To do so, we joined forces with other validators, lawyers as well as industry experts and co-founded the Staking Infrastructure Working Group within the European Blockchain Association. I kindly invite you to read our positioning paper, here.