When you have a strong long-term perspective and conviction on a certain cryptocurrency, staking may be a terrific method to develop your digital assets. If you see potential in the Solana Blockchain as a growing Proof-of-Stake network, you may have considered staking SOL. If you haven't yet, you should. The Solana network provides an excellent opportunity for SOL owners to generate yield based on network inflation and activity.

In case you want to know a little more about Solana staking, we created this article in which you will be able to learn:

·      What staking is and how does staking work

·      Why staking is important

·      How token holders can benefit from staking

·      How to stake SOL

·      Terms to know before staking SOL

What is staking and how does staking work?

Staking is the process of actively participating in transaction validation. It is comparable to mining, yet a far less resource-intensive alternative. Staking involves depositing the respective blockchains’ native assets in a cryptocurrency wallet, which is directed to the maintenance of a blockchain network's security and operations. Then, the individual who provided these funds to be available for the upkeep of the network receives a sort of remuneration for doing so.

In fewer words, staking is the act of contributing to the security and maintenance of the underlying blockchain and being compensated for it. An individual can get started by joining a staking pool, which can be thought of similarly to an interest-bearing savings account. Ryan Sean Adams from Bankless summarized staking quite elegantly as ‘digital work agreements [that] involve collateralizing value for the right to provide work and earn rewards [for the underlying network]’. This ‘digital work agreement’ is a right that is baked into every PoS token. 

To fully understand staking, you should first know about Proof-of-Stake. The basic notion is that users can lock tokens (their "stake") in order to be eligible for the right to write new transactions into the ledger, hence appending and validating the next block to a blockchain. The chances of being chosen are proportional to the number of tokens you have locked up, put differently, staked. This means that the more tokens you have locked up, the higher the likelihood of being picked to append and validate new blocks. Now in order to avoid a ‘rich-get-richer’ scenario, randomness also plays a crucial role in the selection of validators. Picture a lottery drum. The more stake one has, the more tickets they are  allowed to put into the drum. Tickets get drawn randomly at certain time intervals. 

When compared to Proof of Work, PoS is a faster and less energy-consuming method of keeping the blockchain network running and secure.

In PoS networks, validators take on the role of miners, which you find in PoW networks such as Bitcoin. Being a validator is not a trivial task as it requires a high degree of technical knowledge, capital in the form of the network's native tokens as well as labor. As a token holder, you can still act on your ‘digital work agreement’ without having to run your own validator operation. To do so, you can simply delegate your tokens to a validator of your choice. This increases the respective validator’s stake so that the validator is more likely to earn rewards, which are then shared with its’ delegators (the people who delegated their tokens to it).

Why is staking important?

By staking, you contribute to the blockchain's ability to process transactions and help keep the Solana network secure.

One of the main focuses of the Solana Foundation is to scale decentralized finance to the masses. To accomplish this, Solana must operate and maintain a decentralized network of independent nodes. In Proof-of-Stake systems such as the Solana protocol, these nodes are dubbed validators. They provide the necessary infrastructure for the blockchain to operate. Due to the fact that there is no central party keeping the network running, mechanisms were created to incentivize these validators to operate the necessary infrastructure and services to maintain the blockchain as well as to choose which validator gets to write entries to the ledger next. These incentives also must compensate for the resources and sunk costs that parties bear in order to take on the role of a validator. Thus, staking plays an extremely important role as the means to remunerate the parties that keep the network operating and secure.

How do I, as a token holder, benefit from staking SOL?

There are many benefits from staking your assets on Solana. By staking with one or more validators in the network, SOL token holders can earn staking rewards. Depending on the scenario, staking SOL can even become a passive income. The interest rate of staked assets on Solana is defined by the current inflation rate, how much SOL is staked on the network, and the uptime and commission (fee) of each Solana validator.

Initially, Solana had an inflation rate of 8% annually. However, there is a roadmap for it to decrease by 15% year-over-year. This decrease happens up to the point when Solana’s inflation reaches its long-term fixed rate of 1.5% annually. Taking into consideration automated compounding at every epoch, SOL stakers can potentially earn even more. Thus, staking on the Solana protocol provides exceptional potential financial gains by earning rewards.

How can I start staking on Solana (SOL)?

SOL staking provides an opportunity to earn rewards and generate income for anyone who owns SOL tokens and wants to participate in a growing ecosystem. Thus, in order to stake tokens on Solana, you only need to have a crypto wallet to create a stake account, some SOL tokens, and you will be all set to join a staking pool. There are a number of wallets that supports staking SOL tokens. Solflare and Phantom are two crypto wallets that stand out due to their slick interfaces, great features, and pleasing UX. 

If you wish to participate, you can check our guide on how to stake any amount of SOL using Solflare.  All you need are the items below:

Terms to know before you stake your SOL

If you are new to blockchain and staking, there are some terms that you might not be familiar with. Understanding these terms will make your life easier when choosing a  validator to delegate to, as well as maintaining your staking operations. With that in mind, we made a list of the most important terms of staking and their meanings:

  • Nominal Staking Rewards: Percentage of annualized earnings, delegators earn through staking rewards and transaction fees. This percentage will vary from validator to validator depending on their staking commission.
  • Staking Commission: The staking commission fee is the cut of your staking rewards that the validator keeps to him/herself as a means of payment for their services. This percentage will vary from validator to validator. There are many validators but it's important to note that the Solana Foundation doesn't recommend a particular validator to choose from.
  • Capital Custody Risk: It refers to who has control over the delegators' principal (staked tokens). The most ideal would be that you would have self-custody of your staked SOL, rather than the validator.
  • Illiquidity Risk: Digital assets, esp. cryptocurrencies are subject to high price volatility. While staking provides delegators with a mechanism to offset / hedge against a certain degree of volatility, it sometimes results in the staked tokens being illiquid for a certain period of time. For delegators, this might result in being unable to respond to certain price movements for the said period. The exact duration of how long tokens are locked differs for each protocol. 
  • Warmup Period: The time between the moment you issue the delegation transaction and the moment that your Stake Account is fully delegated and starts to earn staking rewards. In between, your Stake Account is considered to be “activating”.
  • Cooldown Period: The time between the moment you issue the transaction to undelegate your account and the moment that your Stake Account is fully undelegated. In between, your Stake Account is considered to be “deactivating”, does not earn staking rewards anymore, and is illiquid.
  • Slashing: A mechanism created in PoS blockchain protocols in order to discourage validator misbehavior. It consists of the removal and destruction of a portion of a validator's delegated stake as a consequence of intentional malicious behavior, such as creating invalid transactions or censoring certain types of transactions or network participants. When a validator is slashed, all token holders who have delegated stake to that validator lose a portion of their delegation. However, it is relevant to state that slashing is currently not being implemented on Solana. 
  • Slot Success Rate: The percentage of a validator’s slots that were successfully included in the blockchain. Validators can miss slots for various reasons related to performance and network latency. Still, this metric can assist in choosing to which validator you wish to delegate your SOL. 
  • Hot and Cold Wallets: Hot crypto wallets are connected to the internet, and they tend to be faster, simpler to use, and accept more tokens. But, hot wallets are also usually more susceptible to online attacks, possible regulation, and other technical vulnerabilities. Cold wallets, on the other hand, are not connected to the internet. Thus, while they may be more secure, they also tend to be less convenient and accept fewer tokens. In addition, while most hot wallets are free, cold wallets generally have a starting price.

In conclusion

Web3 gives plenty of benefits to users who are looking to participate in a whole new economy and support groundbreaking projects like Solana. One can simply delegate their stake and earn rewards. Others can join Solana's community of validators and vote on proposals through on-chain governance.

No action is too small either. It doesn't matter if you are staking larger amounts of SOL or not, what's important is that you are helping further decentralize and secure the network. The best part is that you might be able to start earning rewards right away, no matter how much your stake.

If you're curious about how to stake tokens on Solana or how to create a stake account, feel free to connect with us or visit our Solana about page for more information.

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Please note that none of this is to be considered financial nor investment advice. We highly advise you to always do your own research (’DYOR’) before interacting with any of the projects or tools we write about. Crypto is a highly dynamic and fast paced environment with lots of moving parts that can quickly change.

Published on:
September 22, 2021