Solana Staking Guide Part 1:
How Staking works and How to Make Risk Free Gains
Disclaimer: We run a Solana validator. If you find this article helpful and would like to support us by staking with our validator you can find the details at the bottom of this page.
Table of contents
What is Staking?
Native Staking on Solana
How Do I stake?
How Do I Pick a Validator?
Liquid Staking: Stake Pools
What is Staking?
Put simply, staking is using your crypto holdings to earn rewards. More specifically in Proof of Stake networks like Solana, Avalanche, Polygon, Cardano, etc…, delegated stake is used to represent voting power in their respective consensus algorithms. Proof of Stake networks depend on the difficulty of acquiring a dominant amount of stake to prevent bad actors from stopping the network or, even worse, from corrupting the ledger. When you stake with a network operator/validator you are assigning them the voting power represented by your native tokens and helping decentralize the network. To encourage users to participate in the decentralization of their network, most protocols give out rewards for delegating that stake.
Native Staking on Solana
Consensus
As mentioned above, Solana is a proof of stake network which means its consensus algorithm uses weighted voting from its pool of validators to maintain ledger integrity. All blocks (group of transactions) have to have 66% of the weighted votes agree that the transactions are valid for them to be added to the chain of blocks. If more than 33% of the voting power is controlled by bad actors then consensus will fail and the network will come to a halt. This is where the term “halting line” comes from. (It is worth noting however, that in the event of a 33% attack, the other validators could exclude that 33% and restart, rendering such an attack as not enough to be able to take over the Solana network or make changes to the ledger.) If you take the list of all validators sorted by their delegated stake, the halting line separates the group of entities that, if combined, could conceivably halt the network. The smallest number of entities required to interrupt a block chain is referred to as the Nakamoto Coefficient. At this current time, April 2023, Solana’s coefficient is 33.
Rewards
Solana staking rewards are paid out from its inflation. Solana has a predefined inflation schedule that started with 8% per year and gradually decreases to 1.5% over the next 10 years. As of April 2023, the Solana inflation rate is 6.325%. That means at the beginning of each epoch, a pool of tokens that match the per epoch interest rate is created. This pool of tokens is then distributed amongst the staked SOL across all validators accordingly, in respect to their performance and commission rate.
Delegating SOL
To take advantage of the staking rewards you must delegate your SOL to a validator. When you do so you are increasing their voting power and you are “vouching” for that validator. It is important to pick a good validator, not only from a network strength perspective but also to maximize the amount of rewards you get. We go further into how to choose a validator below.
Risks
Staking on Solana is considered “non-custodial” because when you delegate your SOL to a validator, you never give up control or ownership. The validator has no access to your funds, they cannot take them or prevent you from unstaking in any way.
There is currently no mechanism in which you can lose staked SOL as slashing** on the Solana network has not been implemented as of yet. You can however lose out on gains. If a validator sets their commission to 100% right before the epoch ends they end up getting all of your rewards. Thankfully there are some community built tools that you can set up alerts for any validators you are staking with.
** Slashing involves the removal and destruction of a portion of a validator’s delegated stake in response to intentional malicious behavior, such as creating invalid transactions or censoring certain types of transactions or network participants.
Warming Up and Cooling Down
To prevent bad actors from quickly acquiring enough stake to damage the network, all staking actions undergo a warm up period which takes an epoch (2–3 days) to go into effect. When delegating your SOL you will notice that it starts out in the state of “Activating” and takes a few days to be “Fully Activated”. Once fully active, the staked SOL begins earning rewards. The same time period applies when unstaking. It takes a 2–3 day cool down period for your SOL to deactivate and become available for withdrawal or redelegation.
How Do I stake?
Staking natively on Solana requires that you have custody of your SOL and can move it from an exchange into a wallet. Phantom, Solflare and Backpack are excellent wallet choices. In this guide, we will focus on staking using a Phantom wallet.
Step 1: Have a Phantom wallet set up and funded with SOL. Here is a nice guide on how to set up and fund a Phantom wallet if you are not familiar.
Step 2: To start staking go to the main page of your wallet and select Solana.
Step 3: Click Start Earning Sol.
Step 4: Select the Validator you would like to delegate to.
Step 5: Specify the amount of SOL you want to stake, and then click Stake. Be sure to leave at least .1 sol in your wallet to pay for transactions
How Do I Pick a Validator?
When choosing a validator you are in a unique position to decide who to give voting weight to and what kind of staking returns you will get.
Total Returns
First and foremost it is a good idea to optimize your own returns. To do this you need to understand the commission and vote credit components of returns.
Commission: Commission is simpler to understand of the two. It is the percentage of your rewards that the Validator takes to help fund the cost of operating a validator (validators can cost upwards of $50,000 a year to operate.) This is labeled as either “Fee” or “Commission” in many of the staking UIs. The higher the commission a Validator charges the less of the overall returns you receive. Validators can charge anywhere from 0% to 100% commission. In this case lower is better. A Validator that charges 100% commission does not allow any rewards to go to their stakers.
Vote Credits: Unfortunately, commission only tells half of the story. The other half has everything to do with the performance of the validator. The performance we care about as stakers is the amount of vote credits they received in an epoch. A vote credit is a successful vote on a set of transactions (a block). There are 432,000 blocks per epoch meaning the most vote credits a validator can get is 432,000. In reality it is impossible for a validator to successfully vote on all blocks. However it is possible for a Validator to make optimizations to increase the amount of vote credits they get per epoch through both hardware and software optimizations. The more vote credits a validator receives the greater the percentage of the inflation rewards they receive for themselves and their stakers.
APY: Calculating APY from vote credits and commission can be difficult so it is advised to use websites that aggregate and rank validators on APY to make it easier for you to optimize returns. Some excellent examples of websites that do this aggregation are stakeview.app and stakewiz.com. They look at vote credits and commission to return one number, APY, from which to decipher expected returns.
Decentralization
The other most important thing to consider when choosing a Validator is how delegating SOL to a specific validator will help or harm Solana’s overall decentralization.
Halting Line: The most important decentralization metric to consider is the “Halting Line”. As mentioned above the network requires 66% of the weighted vote to agree that a set of transactions are valid. This means that if more than 33% of the vote is controlled by a set of bad actors then they can “Halt” the blockchain. It is critical to not stake with these validators that control the top 33% of stake to further promote the robustness of the network. You can refer to SolanaBeach.io to see the validators in the top 33% to avoid staking with.
Data Center Concentration: Another important consideration is the data center that the validator operates in. If something catastrophic happened in a highly concentrated data center then the network could become vulnerable by making the total active stake considerably reduced and, in return, making the resources needed to halt the network considerably reduced as well. This is mitigated by the warm up and cool down period when changing stake but, in general, the more spread out the stake is among data centers the better. Our suggestion is to look at how much stake is in the data center of the Validator that you are considering. If it is above 5%, you might consider a different Validator. You can look up this information by searching the Validator of interest on Validators.app, clicking the data center for the validator, and viewing the total stake in that data center.
Validator Trustworthiness and Community Engagement: Validators who are involved in the community and have established trust are far less likely to be bad actors or be persuaded to join a group of bad actors in the future. Not only that, they increase the credibility of the community and therefore the value of the overall network which leads to an increased value of SOL. While it is hard to quantify or measure a Validator’s engagement and involvement here are a few things we look for:
- Do they have a website where you can learn more about them and contact them if necessary?
- Are they helpful in places like the Solana Discord or Reddit?
- Have they built any tools for the community?
- Do they conduct themselves professionally and with kindness?
Tools to help pick a Validator:
While this may sound like a lot to consider there are many useful community-made tools that can help immensely with choosing a validator. Our favorite tool is StakeWiz.com. They take into account all of the above and produce a ranking across all validators.
Liquid Staking: Tokenized Stake Accounts
A tokenized stake account is simply a representation of a stake account that is delegated to a validator. Think of it as a receipt token for staking with a validator. It provides holders with the same cumulative staking rewards as native staking but with the additional benefit of automatic accumulation of MEV rewards, freedom to access instant liquidity and a way to explore and enjoy DeFi.
Cogent Crypto are excited to offer our stakers the opportunity to hold a tokenized stake account, should they wish, in the form of cgntSOL.
Liquid Staking: Stake Pools
While we encourage folks to consider staking directly with validators with at least a portion of their holdings, there are many circumstances in which it makes sense to participate in stake pools for staking.
What is a Stake Pool?
A stake pool is a protocol that accepts SOL and returns a liquidity token. For example BlazeStake, one of the fastest growing stake pools, returns bSOL. The value of the liquidity token goes up over time as the pool makes returns on staking. This value increase is implemented directly in the stake pool protocols by offering more SOL over time per liquidity token. For example, the exchange rate for bSOL to SOL used to be 1 to 1. At the time of writing you can now exchange 1 bSOL back to the stake pool for 1.0967 SOL (December 2023).
Which Stake Pools are the best?
BlazeStake: SOL→ bSOL
BlazeStake is a fully non-custodial Solana stake pool protocol that uses the SPL stakepool program supported by the Solana Foundation. It is one of the fastest growing stake pools currently out there, offering a strong community and rewards program. They delegate to the largest number (200+)of high-quality validators.
By staking SOL through BlazeStake, users receive BlazeStake’s staked SOL (bSOL) tokens that can be used in a ton of DeFi applications. BlazeStake automatically delegates SOL across many Solana validators to strengthen the decentralization of Solana. You can read more about their strategy here.
Users can always withdraw their SOL from the stake pool at any time either through the instant unstake feature or through delayed unstaking.
Additionally, BlazeStake offers the ability to custom liquid stake, giving the user the flexibility and option to support validators of their choice whilst still receiving BlazeStake’s bSOL token.
Marinade: SOL→ mSOL :
Marinade is currently the largest stake pool on Solana. It also offers a ton of DeFi integrations and strong community values which makes it a popular choice. Their delegation strategy revolves around maximizing decentralization while still having high APY. You can read more about their strategy here.
Similar to BlazeStake, Marinade also offers custom staking, known as Directed Staking, allowing stakers to utilize their liquid token whilst supporting validators of their choice.
If you would prefer to natively stake your SOL whilst still benefiting from an automated delegation strategy then Marinade Native is a great option. However, unlike liquid staking, you do not receive mSOL in return.
Jpool: Sol → jSOL:
Jpool has a very clean website with a great team behind it. Their delegation strategy is optimized for both APY and choosing validators that are below the halting line. They also offer key features such as instant unstaking and the ability to deposit stake accounts directly. A solid choice overall.
Socean: SOL → scnSOL
Socean has a solid community and with a decentralization oriented delegation strategy. Their presence in Defi is reasonably strong and offers a fair amount of integrations. Unfortunately, they have far more fees than other pools. They have a deposit fee, an instant unstake fee, and even a delayed unstake fee. Overall, a workable choice that would be easier to recommend if they had less fees.
Other Stake Pools
There are other stake pools but we do not recommend utilizing them. Lido for example, runs a stake pool with the token stSOL. They take a 10% fee when doing a delayed unstake and do not even offer instant unstake. Instead, they rely on liquidity pool swapping which ends up eating into your rewards even more then the 10% they charge on the delayed unstake. Further exacerbating the negatives of Lido, they do not spread their stake across many independent validators. They keep a private pool of validators of which they retain withdrawal authority on and do not consider staking with the broader decentralized network. Over time this harms the growth and success of Solana. (As of 16/10/2023, Lido has sunsetted their operations and can no longer be staked to)
Stake Pool Risks
While the risks are relatively low, by taking part of the stake pools you are exposed to protocol risk. Protocol risk is the risk associated with trusting the correctness and validity of all the smart contracts written to implement the stake pool. One mitigating factor is when the smart contracts have been audited. BlazeStake, Marinade and Jpool have published their audits for all to review.
Stake Pool Advantages
Liquidity: In native staking there is a cool down period that takes an epoch (2–3 days) for your SOL to become available for transacting. With tokens like bSOL you can transact with them instantly. If you need to get back to SOL you can either swap them on a DEX, you can go to the stake pool and do an instant unstake for a small fee (0.3%), or you can do a delayed unstake where there is no fee but you have to wait an epoch.
Defi: The real advantage of liquid staking is taking the tokens and utilizing the DeFi space. There is a lot to explore in DeFi and far too much to cover in part 1.
Staking Guide Part 2 goes over advanced DeFi staking strategies and utilizing lending platforms like Solend to boost your gains significantly without greatly increasing your risk.
Please consider staking with us if you found this article helpful. Search “Cogent” in your wallet or stake directly on our website https://cogentcrypto.io/.
Why stake with us?: At Cogent Crypto we strive to be a helpful and contributing part of the Solana community, deliver maximum value to our stakers and provide the opportunity to bring others along the ride of our success. We are a JITO enabled validator who are proud to offer our stakers healthy and competitive APY returns, consistently being in the top of the APY return leaderboards. Besides offering top rewards, Cogent Crypto also offers a unique NFT collection known as the Cogent Cogs, with priority going to stakers. You can learn more by joining our Discord or you can check out our website CogentCrypto.io for more information and additional instructions on how to stake.
If you would like to support us through BlazeStake or Marinade, then please use the following links:
Updated: December, 2023
