How Blockchain Networks Are Safeguarded Through Staking
Blockchain technology has revolutionized how we think about digital transactions and data security. Blockchain’s ability to provide a secure and decentralized platform for various applications lies at the heart of its success and eventual mass adoption.
But without central authorities in place, how does a blockchain network operate and keep the system up and running?
Staking acts as a key mechanism that contributes to network security.
In this article, we will explore the following:
Rather than rely on a single authority for processing and validating transactions on the network, blockchain relies on multiple entities called validators.
Staking helps increase the decentralization of blockchain networks by allowing a broader range of participants to participate in network validation. This increased decentralization makes it harder for a single figure to control a majority share of the network and manipulate transactions.
Staking also increases network resiliency. By having validators scattered across the globe, the blockchain continues functioning even if some validators go offline due to unforeseeable events.
An investor may look at the network staking participation through the Staking Ratio. The higher the ratio, the more participation from network holders.
Ethereum, the largest PoS blockchain, has a Staking Ratio of 26%, with $92 Billion worth of tokens staked.
Staking deters malicious behavior because participants must put their capital into the network. If a participant attempts to attack the network, they risk losing a portion of their stake in a process called “slashing.”
Depending on the blockchain network, slashing can result in significant financial loss.
A solo staker on Ethereum must stake 32 ETH ($96,000 as of writing) to qualify as a validator. Slashing automatically reduces the stake by 1/32 or 1 ETH ($3,000 worth), quite a significant amount. In extreme cases, a staker may even lose the entire stake.
By requiring participants to have skin in the game, staking helps ensure that network participants act in the network's best interests.
Double-spending means the same cryptocurrency units could be spent twice, an issue facing digital transactions.
To double-spend coins, the attacker would first send coins to a party. Once the transaction is confirmed, the attacker would manipulate transaction history by creating a new block that excludes the original transaction. This would reverse the transaction and allow the attacker to spend the coins again.
- What is blockchain staking
- How does staking secure a blockchain
- What are the security challenges blockchain projects face
What is Blockchain Staking?
Rather than rely on a single authority for processing and validating transactions on the network, blockchain relies on multiple entities called validators.
- These participants, called “stakers” lock up their cryptocurrency holdings (called the “stake”) to support the operations of a blockchain network.
- Stakers must agree on which transactions go into the network and validate transactions.
- In return for their contribution, stakers earn rewards through newly minted native tokens or transaction fees.
Staking’s Role in Blockchain Security
Staking fulfills a vital role in blockchain security by creating a system of checks and balances that helps to ensure network integrity. Stakers are incentivized to act honestly and in the best interests of the blockchain because they risk losing a part of their stake if they act maliciously. Here’s how staking contributes to blockchain security:Decentralization
Staking helps increase the decentralization of blockchain networks by allowing a broader range of participants to participate in network validation. This increased decentralization makes it harder for a single figure to control a majority share of the network and manipulate transactions.
Staking also increases network resiliency. By having validators scattered across the globe, the blockchain continues functioning even if some validators go offline due to unforeseeable events.
An investor may look at the network staking participation through the Staking Ratio. The higher the ratio, the more participation from network holders.
Ethereum, the largest PoS blockchain, has a Staking Ratio of 26%, with $92 Billion worth of tokens staked.
Penalization
Staking deters malicious behavior because participants must put their capital into the network. If a participant attempts to attack the network, they risk losing a portion of their stake in a process called “slashing.”
Depending on the blockchain network, slashing can result in significant financial loss.
A solo staker on Ethereum must stake 32 ETH ($96,000 as of writing) to qualify as a validator. Slashing automatically reduces the stake by 1/32 or 1 ETH ($3,000 worth), quite a significant amount. In extreme cases, a staker may even lose the entire stake.
By requiring participants to have skin in the game, staking helps ensure that network participants act in the network's best interests.
Benefits of Participating in Blockchain Staking
Staking keeps the blockchain secure and operational. As an industry participant, you should be encouraged to stake as it supports the blockchain space. Without staking, we would not be able to experience the wonderful benefits of blockchain networks. However, staking does incur financial costs. Whether it is the required staking capital or the capital expenditure of setting up your own validator, you do have to spend some money. To compensate for this, here are other appealing benefits that staking provides:Earn Passive Income by Staking Crypto
As a reward for keeping the network secure and performing transaction validation, a staker earns staking rewards. This is a good way to generate consistent returns on your digital assets, especially if you are not into trading. Depending on which blockchain you choose, you could earn staking rewards from 3% to 20% per annum.Receive Early-Access Tokens as Staking Rewards
Crypto participants can get on new protocol tokens first by staking during incentive campaigns. This could then lead to enticing financial rewards. For example, Jito Network, a popular liquid staking platform for Solana (SOL), offered their native token JTO for those who staked SOL on their platform. Early backers received over $165 Million in Jito tokens with some users reporting tens of thousands dollars worth as the token subsequently listed on popular centralized cryptocurrency exchanges such as Coinbase.Risks Associated With Staking for Network Security
While staking can provide benefits such as increased security and passive income, it has several risks. Here are some of the main risks that stakers face:Illiquidity of Staked Tokens
Staked cryptocurrency is typically locked up for a period of time. To withdraw the funds, the stake undergoes an unbonding period, which may take up to 30 days, depending on the network. This can be a problem if there is a sudden market downturn or the cryptocurrency is needed for other purposes. Popular DPOS blockchain Cosmos has an unbonding period of 21 days, making it difficult to access the funds if you are in a hurry. Some developers have tackled this illiquidity challenge through Liquid Staking. Make sure to read our guide to learn more about it.Regulatory Uncertainty for Staking Crypto
Staking is a relatively new and evolving area, and regulations are still being developed. There is a risk that regulators may crack down on staking or impose restrictions that could impact profitability or accessibility. In June 2023, centralized exchange Coinbase was forced to withdraw its staking services in several U.S. states after a regulatory crackdown.Security Challenges Faced by Blockchain Networks
Despite the security benefits offered by blockchain technology, blockchains are not immune to security challenges. Such is the difficulty faced in operating in the technological sector. Here are a couple of security challenges present in the blockchain space:DDoS Attack
When trying to access a popular website during high-traffic times, you may have experienced slowdowns and network unavailability issues. A Distributed Denial of Service (DDoS) attack floods a network or server with traffic to make it unavailable to its intended users. It mimics the same high-volume activity experienced by sites during extremely high traffic. DDoS attacks can damage blockchain networks by preventing validators from accessing the network and overloading it, causing it to become unstable or fail entirely. Manta Network, a new modular blockchain, witnessed a DDoS attack during its maiden exchange token listing. The attack severely impacted token withdrawal times and network speed.51% Attack
In a Proof of Stake (PoS) blockchain, a 51% attack refers to a scenario where a single entity or group of entities controls more than 50% of the total stake in the network. This control allows them to manipulate the transaction history and double-spend coins.
Double-spending means the same cryptocurrency units could be spent twice, an issue facing digital transactions.
To double-spend coins, the attacker would first send coins to a party. Once the transaction is confirmed, the attacker would manipulate transaction history by creating a new block that excludes the original transaction. This would reverse the transaction and allow the attacker to spend the coins again.
Conclusion: Staking is the Key to Blockchain Security
While staking has become synonymous with passive income, it is, first and foremost, a consensus mechanism that contributes to network security. It incentivizes network participants through staking rewards and penalizes malicious behavior through slashing. Furthermore, staking keeps the network resilient through the decentralization of its validator network. If staking and its ability to earn passive income has caught your attention, read more of our staking guides at Solo Stakers. Happy Staking! At the very least, reflect on your personal risk tolerance.The content of solostakers.com is for informational purposes only and should not be considered financial advice. It represents the personal views and opinions of the author(s) and is not endorsed by any financial institution or regulatory body. Cryptocurrency and staking investments carry inherent risks and readers should conduct their own research and consult with a financial professional before making any investment decisions. The owner and author(s) of solostakers.com will not be liable for any losses, damages, or consequences arising from the use of the information on this site. By accessing solostakers.com, you agree to bear full responsibility for your investment decisions.
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