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 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. 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 the time of writing, February 2022, Solana’s coefficient is 20.

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 February 2022, the Solana inflation rate is 7.2%. 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.

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 no mechanism in which you can lose staked SOL. 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.

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. Both Phantom and Solflare 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: 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 Marinade, one of the largest stake pools, returns mSOL. 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 mSOL to SOL used to be 1 to 1. At the time of writing you can now exchange 1 mSOL back to the stake pool for 1.03 SOL.

Which Stake Pools are the best?

Marinade: SOL→ mSOL :

Marinade has the most defi integrations and strong community values which makes it one of the best stake pool choices.Their delegation strategy revolves around maximizing decentralization while still having high APY. When you stake with marinade you are indirectly staking with over 400 validators. You can read more about their strategy here.

While decentralization is an excellent thing to support, its worth considering what your own rewards will be. Marinade charges the least amount of fees when instant unstaking and even offers the option to have 0 fees by doing a delayed unstake. Another key feature that differentiates marinade from other stake pools is the ability to exchange already staked SOL accounts for mSOL. This enables you to get access to natively staked funds immediately.

With their clear market lead and dedication to decentralizing Solana, Marinade comes in as our recommended stake pool.

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.

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. Both 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 mSOL 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 with out greatly increasing your risk.

Please consider staking with us if you found this article helpful. Search “Cogent” in your wallet or stake directly on SolStake.io.

Why stake with us?: We offer 0% commission and are consistently in the top of the APY return leaderboards. Besides offering top rewards, Cogent Crypto will be launching a unique NFT collection 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.

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