Introduction to staking
Proof Of Stake
Blockchain networks use consensus mechanisms to finalize blocks on the chain. Consensus is the process of agreeing on something, in this case, the progression of the blockchain or how blocks are added to the chain. Consensus consists of two actions:
- Block production, i.e. the way multiple blocks candidates are produced, and
- Block finality, i.e. the way only one block out of many candidates is selected and added to the canonical chain (see this article for more information about finality).
Proof-of-Work (PoW) and Proof-of-Stake (PoS) are well-known mechanisms used to reach consensus in a secure and trustless way on public blockchains, where there are many participants who do not know each other (and probably never will). In PoW, network security relies on the fact that the miners who are responsible for adding blocks to the chain must compete to solve difficult mathematic puzzles to add blocks - a solution that has been criticized for the wastage of energy. For doing this work, miners are typically rewarded with tokens.
In PoS networks like BalanceAI the security of the network depends on the amount of capital locked on the chain: the more the capital locked, the lower the chance of an attack on the network, as the attacker needs to incur a heavy loss to orchestrate a successful attack (more on this later on). The process of locking tokens on the chain is called staking.
Similar to the miners in PoW networks, PoS networks have validators, but they do not have to compete with each other to solve mathematical puzzles. They are instead pre-selected to produce the blocks based on the stake backing them. Token holders can lock funds on the chain and for doing so, they are getting staking rewards. There is thus an economic incentive for token holders to become active participants who contribute to the economic security and stability of the network. PoS networks in general are therefore more inclusive than PoW networks, as participants do not need to have either technical knowledge about blockchain technology or experience in running mining equipment.
PoS ensures that everybody participating in the staking process has "skin in the game" and thus can be held accountable. In case of misbehavior, participants in the staking process can be punished or slashed, and depending on the gravity of the situation, their stake can be partly or fully confiscated by the network. It is not in a staker's economic interest to orchestrate an attack and risk losing tokens. Any rational actor staking on the network would want to get rewarded, and the PoS network rewards good behavior and punishes bad behavior.
Nominated Proof-of-Stake (NPoS)
BalanceAI implements Nominated Proof-of-Stake (NPoS), a relatively novel and sophisticated mechanism to select the validators who are allowed to participate in its consensus protocol. NPoS encourages BAI holders to participate as nominators.
Although the minimum nomination intent is 10 BAI, it does not guarantee staking rewards. The nominated amount has to be greater than minimum active nomination, which is a dynamic value that can be much higher than 10 BAI.
Nominating Validators
Nominating on BalanceAI requires 2 actions:
- Locking tokens on-chain.
- Selecting a set of validators, to whom these locked tokens will automatically be allocated to.
How many tokens you lock up is completely up to you - as are the validators you wish to select. The action of locking tokens is also known as bonding. You can also refer to your locked tokens as your bonded tokens, or staked tokens. Likewise, selecting validators is also known as backing or nominating validators. These terms are used interchangeably by the community. From now on locked tokens will be referred to as bonded tokens.
Once the previous 2 steps are completed and you are nominating, your bonded tokens could be allocated to one or more of your selected validators, and this happens every time the active validator set changes. This validator set is updated every era on BalanceAI.
Eras and Sessions
The stake from nominators is used to increase the number of tokens held by such candidates, increasing their chance of being selected by the election algorithm for block production during a specific era. An era is a period of 24 hours during which an active set of validators is producing blocks and performing other actions on the chain. This means that not all validators are in the active set and such set changes between eras. Each era is divided into 6 epochs or sessions during which validators are assigned as block producers to specific time frames or slots. This means that validators know the slots when they will be required to produce a block within a specific session, but they do not know all the slots within a specific era. Having sessions adds a layer of security because it decreases the chance of having multiple validators assigned to a slot colluding to harm the network.
Staking Rewards
Validators who produce a block are rewarded with tokens, and they can share rewards with their nominators. Both validators and nominators can stake their tokens on chain and receive staking rewards at the end of each era. The staking system pays out rewards equally to all validators regardless of stake. Thus, having more stake in a validator does not influence the amount of block rewards it receives. This avoids the centralization of power to a few validators. There is a probabilistic component in the calculation of rewards, so they may not be exactly equal for all validators. In fact, during each era validators can earn era points by doing different tasks on chain. The more the points, the higher the reward for a specific era. This promotes validators' activity on chain.
Skin in the game when Staking
The security of PoS networks depends on the amount of staked tokens. To successfully attack the network, a malicious actor would need to accrue a large number of tokens or would need different participants to collude and act maliciously. If there is an attack in the case of NPoS, both the validator(s) and nominators will be slashed resulting in their stake being partially or fully confiscated by the network and then deposited to the treasury. There is little interest for a rational network participant to act in a harmful way because NPoS ensures that all participants can be held accountable for their bad actions. In NPoS, validators are paid equal rewards regardless of the amount of stake backing them, thus avoiding large payouts to few large validators which might lead to centralization.
Being a Nominator
Tasks and Responsibilities of a Nominator
Validators. Since validator slots are limited, most of those who wish to stake their BAI and contribute to the economic security of the network will be nominators, thus here we focus on the role of nominators. However, it is worth mentioning that validators do most of the heavy lifting: they run the validator nodes and manage session keys, produce new block candidates in BABE, vote and come to consensus in GRANDPA.
Nominators. Nominators have far fewer responsibilities than validators. These include selecting validators and monitoring their performance, keeping an eye on changing commission rates (a validator can change commission at any time), and general health monitoring of their validators' accounts. Thus, while not being completely set-it-and-forget-it, a nominator's experience is relatively hands-off compared to that of a validator, and even more with nomination pools. For more information, you can take a look at the nominator guide to understanding your responsibilities as a nominator.
Getting Started with Staking
Follow our step-by-step guide to securely stake your tokens and to start receiving rewards!