What is staking

Proof of Stake blockchains have special node operators called validators that communicate with each other to produce new blocks and form consensus on the canonical chain history. While becoming a validator is a permissionless process, this opens up an attack vector where malicious actors could spin up a large number of validators to deter consensus or even rewrite chain history. This is where staking comes in as a deterrent to sybil attacks. Since staking requires validators to lock in stake which can be slashed, this significantly increases the cost of attacking. Malicious actors would need to acquire a large enough stake to conduct a successful attack while risking losing all of that stake in the event they are caught.

Proof of Stake blockchains are not the only projects that use staking. Middleware projects like The Graph and Chainlink actively use or plan to use staking as a method of incentivizing node operators to perform their jobs correctly in a performant manner. We will also see Layer 2s using staking or restaking to decentralize sequencers or manage their data availability layer. We will see staking being explored in different ways to incentivize desired behaviors from protocol participants.

Protocol staking is synonymous to securing protocols. The more stake that is locked, the more difficult it becomes for malicious actors to acquire a significant portion of stake to attack the protocol. Therefore, protocols allow token holders who do not run validators or node operators themselves to participate in staking in the form of delegating. Delegators can stake to existing validators or node operators in a non-custodial manner.

In return for staking, validators and delegators (together referred to as stakers) are paid rewards in the protocols’ native tokens. These are called staking rewards and could come from new issuance or from fees paid by users of the protocol.

Staking rewards do not come without risks. Since the protocol must fend itself from bad actors, it actively monitors for underperformance and malicious activity. Any validators who are caught will be penalized or slashed and their stake along with their delegators’ stake will be forfeited. This risk and reward mechanics incentivizes validators to be good actors and delegators are incentivized to stake with reputable validators.