▶️Proof-of-Stake Blockchain Primer

Proof-of-stake blockchain protocols achieve network security by allowing token holders to lock up, or "stake," assets in return for staking rewards. Assets are locked to protect chains against certain classes of attacks. This is beneficial for security, but it also prevents staked capital from being utilized for other means, such as participating in decentralized finance.

In most proof-of-stake blockchains, including Cosmos SDK chains, staking comprises two parties: validators and delegators. Validators maintain server infrastructure and operate software to propose and validate blocks on the chain in consensus with other validators. To prevent misbehavior by validator operators, delegators put up capital in the form of the chain's native staking token through a security deposit. In the event of misconduct—accidental or malicious—some portion of the staked deposit is burned or "slashed" as punishment. This penalty can range between 0.1% for persistent downtime and 5% for a double-signing violation (whereby the validator signs more than once for a given block height).

As compensation for providing this security deposit, delegators earn staking rewards proportional to the value of their staked assets for each block validated. Validators, in turn, charge a commission upon these rewards for providing the validator service.

Several proof-of-stake consensus algorithms, including Tendermint consensus, implement an unbonding period during which time staked assets remain locked, generally between 14 - 28 days. Unbonding periods were introduced as a way to mitigate the nothing at stake problem* where "participants have nothing to lose by contributing to multiple blockchain forks."

As validators earn commission on block rewards proportional to their delegated stake, it is in the best interest of validators to ensure they behave appropriately and efficiently in validating the chain.

Curently, delegators on the majority of Cosmos SDK chains may undergo a maximum penalty of 5% of their staked assets, thus leaving 95 percent of capital illiquid and unutilized.

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