Staking in Proof-of-Stake Blockchain Protocols

Overview

In Proof-of-Stake (PoS) blockchain protocols, network security is achieved by allowing token holders to lock up (or “stake”) their assets in exchange for staking rewards. This lock-up mechanism helps protect the chain against certain types of attacks, as validators must act responsibly or risk having a portion of their staked assets slashed in the event of misbehavior. While essential for security, staking in its basic form prevents the staked capital from being used for other purposes, such as participating in decentralized finance (DeFi). This results in capital inefficiency: the majority of staked tokens remain illiquid until they are unstaked and pass through an unbonding period.

Validators and Delegators

Most PoS blockchains—including those built using the Cosmos SDK—feature two primary parties in the staking process: validators and delegators.

Validators

Responsibilities: Validators maintain server infrastructure and operate software to propose and validate blocks. They work in consensus with other validators to secure the chain.
Security Bond: Validators must lock up a certain amount of the network’s native staking token as collateral. This deposit can be slashed (burned) if they act maliciously or fail to meet network requirements.

Delegators

Role: Delegators stake their tokens by “delegating” them to a chosen validator, effectively granting that validator more voting power in block validation.
Security Deposit: The delegator’s staked tokens also serve as a security bond; if the validator misbehaves, a portion of the delegator’s stake may be slashed as well.
Risk/Reward: In return for helping secure the network, delegators earn staking rewards proportional to the value of their staked assets. However, they may face penalties if their chosen validator is penalized for downtime or double signing.

Slashing Conditions

Slashing is a penalty applied when validators (and indirectly their delegators) fail to follow protocol rules. The penalty reduces a percentage of the staked tokens:

Persistent Downtime A lower slashing penalty (e.g., 0.1%) occurs when a validator fails to participate in consensus for a significant period.
Double Signing A higher slashing penalty (e.g., 5%) occurs when a validator signs multiple blocks at the same block height, threatening chain security.

Staking Rewards and Commissions

As a reward for securing the network, each validated block generates staking rewards. These rewards are distributed in proportion to the amount staked. Validators typically charge a commission on these rewards—usually a percentage—compensating them for operating and maintaining the validator infrastructure. The remainder of the rewards is then distributed to the delegators who have staked with that validator.

Unbonding Period

A key feature of many PoS chains, including those that utilize Tendermint consensus, is the unbonding period. After a delegator decides to unstake (or “unbond”) their tokens, those assets remain locked for a duration—often between 14 and 28 days—before they become transferable again. This mechanism:

Mitigates the “Nothing at Stake” Problem: By locking tokens after unstaking, the protocol ensures that participants cannot instantly switch between multiple competing chain forks without consequence.
Introduces Capital Inflexibility: During the unbonding period, tokens cannot be traded or otherwise used in DeFi activities, creating an additional window of capital inaccessibility beyond the normal staking lock-up.

Validator Incentives

Since validator rewards (commission) scale with the amount of stake delegated to them, it is in a validator’s best interest to:

Behave reliably (no downtime).
Ensure secure and honest participation (avoid double-signing).
Maintain a strong reputation to attract more delegations, thus increasing their share of block rewards.

Current Limitations

On most Cosmos SDK chains, delegators face a maximum penalty of 5% of their staked assets in the worst-case scenario (e.g., double-signing). Even though the penalty is relatively small, the majority of staked capital remains illiquid (up to 95%) and cannot be utilized for other blockchain activities, including DeFi. This leads to an opportunity cost for participants who wish to both secure the network and engage with DeFi protocols.