What is Staking?
Validators stake or ‘secure’ tokens on a blockchain, activating the ability to propose and validate new blocks. In exchange, validators earn staking rewards in the form of newly issued coins and transaction fees. Staking offers unique benefits when compared to alternatives such as lending, and buy-and-hold strategies. With staking, token holders have the opportunity to grow their position without having to purchase additional tokens.
PoS blockchains use a penalty system called “slashing” to discourage malicious behavior by validators. Slashing involves confiscating a portion of a validator’s staked tokens if they are caught breaking consensus rules or failing in their duties. Some PoS blockchains also confiscate a portion of the validator’s stake if they go offline and do not generate blocks when they were selected to do so. When you stake with Figment, you can opt-in for our Slashing Cover, which gives stakers peace of mind and will safeguard against digital asset loss exposure.
There are a couple of different common types of staking including protocol, pooled, and liquid staking. By locking up stake, digital asset users help secure blockchain networks in a decentralized manner.
How does Staking Impact Network Security?
Requiring validators to secure and operate with staked tokens by design disincentivizes malicious behavior that could harm the network. As decentralization on a network increases and more validators join the active set, networks become more resistant to attacks. On top of this, as more of a network is staked it makes attacks like 51% attacks and Sybil attacks increasingly more expensive and difficult given the massive stake required.
Overall, staking aligns validators’ interests with the network through significant staking collateral and infrastructure performance. The Proof-of-Stake consensus mechanism helps stakers secure networks by aligning economic incentives for correct participation. As more stake is secured on a blockchain network, the network becomes increasingly harder to attack.
Network Staking Ratio
When discussing PoS networks, a network staking ratio refers to the amount of total tokens on the network that are currently staked. As a network staking ratio goes higher, the ability to attack the network becomes more difficult. In other words, a higher network staking ratio means greater security for the overall network.
For reference, PoS networks have the following staking ratios:
Ethereum transitioned from a Proof-of-Work consensus to a Proof-of-Stake consensus during the long-awaited “Merge” upgrade last year on September 15, 2022. Since Ethereum’s transition to Proof-of-Stake, the network now has a staking ratio of 21%. As the staking ratio on Ethereum continues to increase, the network will become more secure, and resilient against attacks.
Figment’s Role in Network Security
As the largest independent staking provider, our enterprise-grade staking infrastructure prioritizes the security and resiliency of staked assets while minimizing risk.
Our multi-layered security approach encompasses continuous proactive measures and purpose-built controls to maximize the resiliency and security of our staking services. Security is integrated throughout all aspects to reduce risk and enable the assurance, integrity and confidentiality customers expect. We recently successfully completed a SOC 2 Type II audit. SOC 2 Type II reports help organizations validate their information security controls and focus on implementation and management of controls to mitigate any risks identified to different parts of the organization. Along with this, we have also been issued an ISO Certificate from an independent auditor.
Looking Towards the Future of Staking & Network Security
The future of staking and network security is bright as innovations in Layer 2 scaling, cross-chain interoperability, and liquid staking unlock new possibilities. Liquid staking protocols like Liquid Collective are particularly promising, allowing stakers to receive liquid tokens for staked assets to enable further on-chain activities.
In a recent report from Multicoin Capital, authors Vishal Kankani and Tushar Jain reference a concept called “long-term staking” where stakers can lock up tokens for distinct periods of time in exchange for greater returns on investment. This concept of “long-term staking” has the potential to create a ‘yield curve’ – an essential item to well-functioning financial markets, that doesn’t exist at the protocol level (yet). Read more about “long-term staking” from Multicoin Capital here.
As staking continues to evolve, it will bolster network security while retaining decentralization. Staking will continue to be a significant component of blockchain infrastructure, further empowering participants and strengthening blockchain networks.