Staking and Validators

Introduction

Staking is a fundamental component of proof-of-stake (PoS) blockchains, essential for maintaining security and efficiency. In Solana’s PoS system, staking involves delegating your SOL to validators to support the network’s basic functions while earning rewards. Validators, the backbone of Solana, are machines that verify transactions, create blocks and maintain the chain’s integrity.

PoS relies on validators who are chosen as leaders to propose and verify blocks of transactions. This process, known as consensus, guarantees that all participants agree on the state of the blockchain. Validators earn the right to create new blocks and validate transactions based on the amount of SOL they have staked.

By staking your SOL, you delegate your tokens to a validator you trust to act in the network’s best interest. In return for supporting the network, you earn rewards based on the amount of SOL you’ve staked and the performance of your chosen validator. This incentivizes both the validator and you, the delegator, to maintain and enhance the network’s health and security.

Staking is crucial because it allows you to participate in the network’s operation and governance without the need to run a full node. It’s a way to actively support the blockchain while earning passive income from your staked tokens.

In this lesson, we’ll explore the role of validators, the process of staking, and how to choose a reliable validator. Understanding these concepts is vital for anyone looking to participate in the ecosystem.

Network Nodes

On Solana, there are two main types of nodes, both running the same client software but serving different roles:

• Consensus Validators: These nodes validate transactions, propose new blocks, and participate in the consensus process. The more SOL a validator has delegated to it, the more weight their vote carries. These nodes are what makes the network stay decentralized and secure.

• RPC Nodes: These nodes respond to requests from developers and users but do not participate in the consensus process. They are essential for facilitating interactions between the chain and the protocols or users. They are basically how we communicate with the network.

Validators are responsible for several functions, including transaction validation, block production, and consensus participation. Validators verify transactions to ensure they comply with network rules, such as checking transaction signatures. The leader validator, chosen randomly based on weighted staked SOL, groups transactions into a block and broadcasts them to the network. Validators also broadcast newly created blocks for other validators to confirm, with Solana’s consensus mechanism requiring at least two-thirds of validators to vote on a block for it to be confirmed.

Validators can choose from several validator clients to run their nodes, contributing to the network’s client diversity. This diversity reduces the risk of a single point of failure and enhances network security. Currently, there are two clients live on the mainnet: the original one from Solana Labs, now being further developed under the name Agave by Anza, and a fork by Jito Labs that can capture Maximum Extractable Value (MEV). As of July 2024, several new clients are in development, such as Firedancer by Jump, and Sig by Syndica.

Validators earn revenue in three different ways:

• Commission on Inflation/Stake Rewards. Solana runs on an inflation schedule where new tokens are created and distributed at the end of each epoch to stake-holders. To stay profitable, validators typically charge a commission on these rewards earned by delegators as a percentage in exchange for their service.

• Commission on earned MEV. Maximum Extractable Value or MEV refers to the additional profit that can be extracted from the ordering of transactions within blocks. On Solana, certain validator clients, like the one developed by Jito Labs, enable the capture of MEV. These clients allow validators to strategically include, exclude, or reorder transactions to maximize their earnings beyond the standard rewards and fees. Validators commonly give these rewards to stakers and might charge an MEV commission. This additional revenue stream is becoming increasingly important as it offers better financial incentives for validators to optimize operations and use advanced clients.

• Block Rewards. Solana’s transaction fees are composed of base fees and priority fees. Base fees are a standard charge for each transaction. Priority fees are optional and paid by users to expedite their transactions, ensuring they are processed faster. Validators earn half of these fees, with the other half burned to help control inflation and maintain economic balance. Recently, the increase in priority fees has significantly boosted validator profitability, often exceeding earnings from commissions, with many validators reducing their commissions to 0% to help attract more delegated stake. There is currently no simple way for a validator to share these rewards with stakers.

Staking

Staking on Solana means creating a stake account and delegating it to a validator. In return, you earn rewards based on the performance of the validator and the amount of SOL you staked. There are 2 main ways how you can do that:

Types of Staking

• Native Staking. This straightforward method delegates your SOL to the validator and your wallet owns the delegated stake account. You’ll receive rewards at the end of each epoch (approx. every 2 days) that’s auto-compounding to the same stake account. You can split, merge, un-delegate or delegate it to a different validator. We recommend native staking because of the lower risks and full control. It also often helps with the temptation to spend your precious SOL :D

• Liquid Staking. If you stake using a Stake Pool, instead of a staking account, you get SPL tokens, also known as liquid staking tokens or LSTs, that represent your share of the pool. The main two benefits stake pools bring are:
  1) distribution of SOL across multiple validators picked by performance and current stake, helping decentralization and reducing the reward variation
  2) the ability to still have a “liquid asset” you can still use on various platforms.
  This method is supposed to provide protection against any one validator’s downtime, help decentralization and promote the DeFi ecosystem. However, recent liquid staking tokens are often single-validator, which diminishes these benefits. The price of liquid staking tokens (LSTs) reflects the native token’s value plus accrued rewards.

Native staking is completely safe, and the only risk comes in the form of earning lower rewards if a validator underperforms or goes down. Liquid staking adds a marginal, but still present, additional smart contract risk.

Staking on Solana provides multiple ways to earn rewards while supporting the network. Whether you choose native staking for its simplicity and lower risks or liquid staking for its flexibility, understanding how each method works will help you make informed decisions.

Stake accounts are used to delegate tokens to validators and manage these delegations. Each account has two key authorities: the stake authority, which handles delegating and managing the stake, and the withdraw authority, which manages withdrawals and setting new authorities. A single stake account can delegate to one validator at a time. To delegate to multiple validators, you need to create multiple stake accounts or split an existing one. Two stake accounts with the same authorities and lockup conditions can be merged if they meet certain criteria. Delegations and deactivations happen at the end of the epochs, and in some cases it can take more than one epoch to complete (if the total change of chain’s stake could put the network health in danger).

Lockups on stake accounts prevent tokens from being withdrawn before a set date or epoch. For example, students of the Academy locked up their funds for extra rewards. While locked up, you can still delegate, deactivate, split, merge your stake, and change stake authorities, but withdrawals are restricted until the lockup period ends.

 Support validators that align with what you believe in and contribute positively to the ecosystem. This could be those who are active in governance, support network upgrades, push community initiatives, or support cool projects. Avoid validators run by centralized exchanges. Stick with validators who put the network’s health first. This keeps the spirit of decentralization alive. Validators have a say in important network decisions, and their voting power comes from their total stake.

By choosing the right validator, you’re making sure your staked SOL is delegated to those who are committed to keeping the network healthy and decentralized. Focus on performance, reputation, real yield, decentralization, and your values to make a choice that benefits both you and the Solana ecosystem.