What Is Staking Solana?
On the Solana blockchain, staking is the process of assigning your tokens to a validator node. Staking Solana (SOL) allows you to "vote" for the validator you trust. The more votes a validator has, the more weight it has in the consensus process. As a reward, you receive a staking yield based on the amount you have staked.
You can stake your Solana tokens from a compatible cryptocurrency wallet that is connected to a validator node. Staking wallets and validator nodes can be managed independently or by a third-party service, such as a staking pool or staking-as-a-service.
Key Takeaways
- Solana's staking mechanism rewards a share of newly minted tokens and transaction fees to users who delegate SOL to validators in charge of processing transactions and securing the network.
- The upsides of staking Solana include earning passive income and contributing to network security, but the downsides include financial penalties, market volatility, and technical issues.
- You need a software wallet and a powerful hardware setup to stake Solana independently, while a third-party service typically requires just an online account and minimal technical knowledge.
Understanding Solana Staking
Solana was designed as a high-performance solution to combat scalability issues plaguing other blockchains. Unlike Ethereum, which struggles with a few dozen transactions per second, Solana claims the ability to process thousands. This network throughput has catapulted Solana to becoming a favorite for decentralized application (dApp) development, particularly for decentralized finance (DeFi) services related to lending, trading, and borrowing.
Proofs
To facilitate faster transaction speeds and lower fees, Solana secures its network with Proof-of-Stake (PoS) and Proof-of-History (PoH) consensus mechanisms. This contrasts Bitcoin's Proof-of-Work (PoW) consensus mechanism, where miners use computational power to solve cryptographic puzzles.
The PoS and PoH consensus mechanisms allow validators to keep Solana running asynchronously by simply staking SOL cryptocurrency tokens that have been delegated to them by users. The PoH consensus mechanism's cryptographic function generates readily available block timestamps to allow validators to agree on the order of transactions without needing to wait for external time sources and confirmations from others, significantly speeding up transaction times.
Staking
When the staked SOL is locked up, it cannot be used or traded by the users who delegated the token. Validators control the SOL tokens for a certain period so that they can run groups of specialized computer nodes to process transactions and add them to the blockchain. The greater the amount of delegated SOL, the greater the probability a validator will be chosen to perform assigned network tasks and earn rewards in the form of additional SOL tokens.
Rewards
The majority of Solana's staking rewards consist of newly minted SOL tokens that are automatically distributed to validators and delegators based on their stake weights and network inflation rate, which will gradually decrease over time until it reaches a sustainable level. The other fraction of rewards is transaction fees paid by users when they send transactions on the Solana network. Validators collect these transaction fees and share a portion with their delegators at a rate that depends on their transaction processing volume and the percentage the delegator has staked.
Independent Staking
Staking independently offers greater control and privacy than third-party staking. When you stake on your own, you aren't subjected to customer screening; you can directly interact with the Solana blockchain, and you can hold onto your tokens yourself, assuming you choose a non-custodial wallet that places private keys squarely in your possession. However, to pull off solo staking successfully, you will need technical expertise, coding knowledge, financial resources, and dedicated hours of effort.
Carefully shopping around for and setting up the validator node's hardware and wallet are musts in order to avoid going over budgetary constraints and opening yourself up to cybersecurity risks. Experience with computer programming and electronic goods is required to install and execute commands from a command-line interface, to synchronize the software with the hardware for the validator node, and to physically integrate the hardware parts into a working system.
Staking Services
Staking your SOL is a relatively simple process, if you decline to run your own validator node and accept that you will give control of your tokens to a third-party staking service. All you need to do to stake cryptocurrency with a staking service is complete a sign-up form, provide personal information to satisfy Anti-Money Laundering (AML) and Know-Your-Customer (KYC) checks, and let it automatically handle the staking process for you.
A third-party service's staking wallet is almost always included with the service and can be accessed through conventional website and mobile app interfaces without needing to save and enter wallet keys every time you want to log in and monitor your staking performance. The staking service owns the wallet keys and seamlessly authenticates it for you.
A staking pool won't require you to run your own validator node, but it will require more effort than a staking service to set up a wallet. While staking services oversee both the validator and wallet on your behalf, a staking pool asks you to open a wallet and hook it up to one of the pool's many validator nodes by yourself, just as if you were staking independently.
Benefits and Risks of Solana Staking
Staking SOL provides a recurring, low-effort source of passive income that doesn't need to be actively managed unless you are staking independently. With the rapid growth and development of the Solana's network, the staking rewards could potentially even increase and become a lucrative long-term investment opportunity.
Staking also contributes to the security, stability, and decentralization of the Solana network. Staked SOL incentivizes validators to participate in the network while behaving honestly and upholding the network's rules. More participants means more voices can shape the future of the Solana network and defend it from attacks. Power can become distributed across the Solana community rather than concentrated in the hands of a few large entities when governance proposals are considered, leading to a more decentralized, resilient, and censorship-resistant network.
Nonetheless, staking cryptocurrency involves certain technical, financial, centralization, and regulatory risks that investors should be aware of before participating. It's important to conduct thorough research and understand these risks before making any investment decisions.
Technical Aspects
As with any technology, the Solana blockchain and its software are susceptible to bugs and vulnerabilities, and validator nodes rely on hardware components that can fail. Downtime and outages could lead to the loss of staked SOL and interruptions in your staking rewards due to security breaches and missed validation opportunities. When using a custodial wallet, staking pool, or staking service, you are trusting a third party with your SOL and exposing yourself to the risk of insolvency or mismanagement.
Financial Aspects
Staked SOL is locked up for a period of time and inaccessible for trading or other purposes, eliciting an opportunity cost if other investments you could have alternatively made perform more positively. During that time, the price of SOL can also be volatile, causing the value of your staked SOL and earned rewards to fluctuate significantly and potentially drop in value. If your chosen validator engages in malicious activity or performs poorly, you could also lose a portion of your staked SOL as a penalty. The Solana network punishes errant behavior and confiscates staked SOL in a process known as slashing.
Centralization Aspects
Solana tries to stay decentralized, but the network is still under development and relies on a relatively small number of validators, raising centralization issues. A small group of validators has an easier chance of rewriting the rules of a blockchain and manipulating the network in their favor through collusion, rent capture, abusive slashing, or network forks, potentially imperiling the value of the SOL cryptocurrency and staking rewards.
Collusion could involve agreements to exclude certain validators from receiving rewards and artificially inflate the stake weight of specific validators. Rent capture, also called rent seeking, could involve capturing a greater share of the network's inflation rewards. This could cause the overall rewards available to individual stakers to become lower. It wouldincrease the minimum stake requirement, introduce new fees for participants, and reduce the network inflation rate.
Abusive slashing mechanisms could involve fabricating evidence of malicious activity or manipulating votes to trigger unwarranted slashing events, unfairly penalize other validators, and gain an advantage in terms of stake weight and rewards. Soft forks and hard forks—splitting into two separate chains—could involve disagreements among validators regarding protocol changes or network governance that affect the value of SOL and the distribution of staking rewards.
Regulatory Aspects
Depending on your jurisdiction, taxation and regulatory changes could impact the profitability and legality of staking practices. Staking rewards are considered taxable income in many countries, and tax burdens reduce the overall returns from staking and could potentially be raised by law over time. New regulations could introduce additional compliance requirements for staking providers and participants. Regulations could impose restrictions on staking activities, increasing administrative complexity and costs and limiting staking accessibility and rewards.
The average annual percentage yield (APY) on Solana staking is around 7.41%, as of March 2024.
Factors to Consider When Choosing a Staking Method
Taking into account the quality, costs, and commitment of certain wallets and validators can help ensure the safety and profitability of your staking investment. Here is a discussion of factors to look for when choosing a third-party service that provides a staking wallet and validator node:
Cybersecurity
A staking platform that protects your private keys and other sensitive information can prevent losses from hacking and thefts. Lean towards wallets and validators with proven track records of independent security audits and little to no vulnerabilities. Look for proactive vulnerability resolution, cybersecurity management and insurance, and wide selections of available security features, such as private key storage with multi-signature options.
Staking Fees
Fees from both wallets and validators will directly reduce your staking rewards and a higher fee structure will result in a lower net return on your staked SOL. Every transaction on the Solana blockchain incurs a network fee, and wallet providers and validator nodes charge commission, referral, deposit, or withdrawal fees to cover their operating cost.
Customer Service
Customer service provides crucial assistance in troubleshooting technical issues, resolving errors, and keeping users informed of updates, notifications, and risks. Certain security concerns that aren't addressed or raised promptly could lead to issues becoming more severe or permanently unresolved down the line.
Validator Uptime/Reliability
Staking wallets and validator nodes that are frequently offline or functioning incorrectly can cause you to lose your rewards and staked crypto to network penalties. The risk of experiencing slashing penalties increases if a busy schedule distracts you from attending to validator tasks or you choose a staking service that isn't reliable and online consistently.
Distribution Time
Knowing the exact time your rewards will be distributed allows for better budgeting and financial planning. You can anticipate the influx of funds and allocate them towards specific goals, investments, and expenses. If you receive your earned staking rewards sooner, you can reinvest them into staking or other purposes more quickly for higher returns.
Coding Ability
Going it alone or using a pool for staking involves making decisions and troubleshooting technology-related errors. Not having the appropriate technical expertise for a staking platform could put you at a severe disadvantage and potentially lead to financial losses.
You'll need the skills and knowledge to set up software and hardware, diagnose problems, identify solutions, and build and modify programming scripts to better suit your needs or automate certain aspects of staking.
Staking Independently
Here is a breakdown of how to set up a validator node if you are staking SOL by yourself. A validator node can be connected to both non-custodial and custodial wallets. Anyone can be a validator on the Solana network.
- Set up the validator. Obtain a server with the required hardware specifications. Aim for a CPU with high core count and clock speed, at least 64GB of RAM, a solid-state drive with high read/write speeds, a reliable and high-bandwidth Internet connection, and a redundant power supply to handle the demands of an uninterrupted staking operation.
- Install software dependencies. Ensure you have the necessary dependencies like libssl-dev, libffi-dev, and libdb-dev installed to run the Solana validator software.
- Set up the software. Install the Solana command-line interface and the latest version of the Solana validator software on your operating system. Download and follow the installation guides for your operating system if you need more information.
- Create keys. Generate your validator identity keypair and a separate vote account keypair using solana-keygen and other commands.
- Configure the validator. Edit configuration files, such as validator.toml, to specify your keys, stake amount, network settings, and other parameters.
- Create a vote account. A vote account can be spun up by using solana create-vote-account and other commands.
- Fund the validator. Transfer enough SOL to your validator identity keypair to cover your desired stake amount.
- Start the validator. Run the solana-validator command and other arguments to start the validator process.
Staking Via Non-Custodial Wallets
Here is a breakdown of how to stake SOL with a non-custodial wallet. A non-custodial wallet can be connected to a third-party staking service or a personal validator node.
- Download and install a wallet. Non-custodial wallets let you self-custody and hold onto your SOL tokens and wallet keys.
- Choose a validator.If you don't want to run your own validator while using a non-custodial wallet, research and select a reputable third-party validator. Consider factors like stake weight, commission rate, uptime, and community reputation. You can find validator information on websites like SolanaBeach.io or StakingRewards.com.
- Delegate your SOL. Connect your wallet to the Solana ecosystem through a decentralized app (dApp) like Solflare or Phantom. Find the "Stake" or "Delegation" section and follow the instructions in your wallet. Select the chosen validator and enter the amount of SOL you wish to delegate. Confirm the transaction and pay the associated network fees.
- Monitor your stake. Your wallet will display your staked SOL and accumulated rewards. You can track your validator's performance and network inflation rate to estimate your potential earnings.
Staking Via Custodial Wallets
Here is a breakdown of how to stake SOL with a custodial wallet, the type of wallet usually associated with third-party staking services that aren't staking pools.
- Choose a wallet. Several reputable custodial wallets offer SOL staking services.
- Create an account. You may need to provide your personal information and verify your identity.
- Fund your account. Transfer SOL to your custodial wallet from an exchange or another wallet. You may need to use the wallet's address or QR code to receive the SOL.
- Find the staking option. You should see an option for SOL staking in your account.
- Choose your stake amount. Enter the amount of SOL you want to stake. The minimum stake amount will vary depending on the platform.
- Select a staking period. Some custodial wallets offer the option to choose a staking period that determines how long your SOL will be locked up. A longer staking period may offer higher rewards.
- Confirm your stake and monitor your rewards. Review the details and confirm the transaction. Your SOL will be staked and you will start earning rewards. You can track your accumulated rewards and the estimated annual percentage yield (APY) through the wallet's interface.
How Long Does It Take to Earn Solana Staking Rewards?
You can generally expect to see your first Solana staking rewards within two days of delegating your SOL to a validator, plus an additional buffer time for those relying on third-party services. Solana staking rewards are calculated and distributed once per epoch, a timeframe used for network management and consensus that lasts approximately two days long.
How Much Can You Earn Staking Solana?
There isn't a guaranteed amount to be earned from Solana staking. If you are staking independently, you can estimate your yield by using the Solana network's formula, which multiplies the network's inflation rate, the validator's uptime, the difference between one and the validator's fee, and the quantity of one divided by the percentage of SOL staked, where the percentage of SOL staked is the total SOL staked in the Solana network divided by the total current supply of SOL.
What Staking Behavior Does the Solana Network Penalize?
Staked SOL can be removed from circulation and taken away from validators who experience downtime, vote for conflicting block proposals, double sign the same block, maliciously slash other validators by submitting false reports, and commit other protocol violations. Solana is exploring partial slashing penalties that will still continue to incentivize validators to maintain high uptime, act honestly, and contribute to the network's security and efficiency.
How Long Do I Need to Wait to Stake and Unstake SOL Tokens?
Regardless of the staking method, you must wait days to weeks for the staked SOL to become accessible to the validator node during a warm-up period, and you must keep your SOL on the Solana network for a minimum amount of time during a validation period. You can withdraw, or unstake, your SOL and access your tokens at any time to maintain liquidity and flexibility, but there is a cooldown period of typically two to three days when your SOL will continue to be temporarily locked up.
The Bottom Line
Staking SOL on the Solana blockchain offers passive income through rewards on your SOL holdings. Profitability depends on variousors, particularly wallet and validator selection, the amount of staked cryptocurrency, market and network characteristics, and compliance with staking rules.
