What is Staking?
Staking is the safest and easiest way for crypto users to earn more crypto while contributing to the security of a network. Proof of Stake blockchains like Umee require network participants called validators to lock up crypto as collateral in order to be eligible to validate and add transaction data to the blockchain. Validators provide collateral to prove that they have a “stake” in the network and therefore can be trusted to help keep the blockchain operational and secure – or otherwise face a financial penalty.
As the total value of assets staked to a blockchain increases, the blockchain becomes more expensive to attack and therefore is considered more secure.
In return for running and securing the network, validators earn newly minted unitys of crypto called block rewards. When a user stakes their tokens on a blockchain like Umee they’re delegating them to a validator and therefore contributing to the validator’s total stake. When validators earn block rewards, the block rewards are redistributed to the users who have delegated to them in proportion to the amount they have delegated. Therefore, those who contribute more to a blockchain's security (stake more tokens) earn greater portions of the blockchain's block rewards.
Block rewards are newly minted units of crypto that are issued to validators in return for their role in running and securing a network. On certain blockchains like Umee, validators usually redistribute block rewards to the users who have delegated to them in proportion to the amount they have delegated.
Block rewards are a form of inflation used to reward users who stake their tokens at the expense of those who don't.
Since Validators earn block rewards according to the total amount of tokens they have staked, block rewards are typically redistributed to delegators as "staking rewards." This allows users who are unable to operate a validator node to safely earn a portion of block rewards while helping secure the network.
When someone refers to "staking yield" they're referring to the annualized rate of return on staked assets. It's important to know that staking yield is calculated in the form of the asset staked, and not a stable asset like the USD. Therefore high staking yields do not always mean large profits, and vice versa.
Staking rewards act as a self-regulating incentive mechanism to help secure PoS blockchains. Assuming two blockchains have the same exact token inflation parameters, the blockchain with a lower percentage of the total supply staked will offer greater staking yield than the blockchain with a higher percentage of supply staked. This is because block rewards are being distributed amongst fewer stakers, meaning each token staked is entitled to a greater portion of the rewards.
Staking rewards are considered the steadiest, lowest risk yield in crypto.
Since staked tokens are a form of collateral used to ensure validators do their job, if a validator misbehaves a portion of their total stake is removed or “slashed.” This means that everyone who has delegated tokens to this validator will have their tokens slashed proportionately.
Slashing is very rare because validators are financially incentivized to do their job.
The most severe offense a validator can commit on the Umee blockchain results in 5% of their total stake being slashed, meaning that delegators would lose 5% of the tokens they delegated to this validator if the validator misbehaves.
Staking tokens usually enables the staker to participate in a blockchain's governance processes, since they have a proven stake in the network. Stakers are eligible to submit and vote on governance proposals to help shape the future of a blockchain.