Solana Consensus Mechanism
Solana is a fast, secure, and censorship-resistant blockchain providing the open infrastructure required for global adoption. It differentiates itself from other blockchains by processing transactions as they come in, rather than on a block by block basis. This achieves a high-performance ideal for the future of decentralized applications.
A blockchain is a trustless, peer-to-peer network of decentralized nodes all verifying transactions for a digital ledger. Blockchains such as Bitcoin batch baskets of transactions into blocks, which are then confirmed and added to the chain. This process of confirming transactions is relatively slow, to minimize the chances of multiple validators producing a new, valid block at the same time. Such a constraint doesn’t come into play in Proof of Stake systems, however, without a reliable source of time, it is difficult for network validators to determine the order of blocks as they come in. Bitcoin’s Proof of Work algorithm essentially acts as a decentralized clock for validators to determine the order of incoming blocks. Solana’s innovative Proof of History (PoH) protocol is a cryptographic way to reliably order transactions and events recorded on the decentralized ledger. Its architecture enables transactions to be ordered as they enter the network, rather than by block. This solves the problem of agreeing on time while granting instant finality for hundreds of thousands of transactions per second. The high throughput that Solana achieves through its innovative PoH system makes it ideal for decentralized applications (dApps), by offering a more scalable platform with lower transaction costs while maintaining composability for dApps to talk to and build upon each other. Its ecosystem of dApps includes decentralized exchanges (DEXes), stablecoins, payment, gaming, cloud, oracle and many others.
PoH is not, however, the consensus mechanism for Solana. It is simply the way the network improves the performance of Solana’s Proof of Stake (PoS) consensus mechanism. In this post, we’ll be looking at Solana’s staking, why it matters, and the advantages of participation.
What’s the Purpose of Solana’s Proof of Stake System?
Solana’s Proof of Stake is designed for quick confirmation of the current sequence of transactions produced by the PoH generator, for voting and selecting the next PoH generator, and for punishing misbehaving validators. Unlike traditional blockchains, transactions in Solana are not batched into blocks. Rather, blocks are broken up into smaller batches of transactions known as entries. A block in the context of Solana is simply the term used to describe the sequence of entries that validators vote on to achieve confirmation. Validators within Solana’s PoS consensus model are the entities responsible for confirming if these entries are valid.
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How to Participate in Solana staking?
Stakers delegate Solana’s native token SOL to validators to help increase these validators’ voting weight. Such action indicates a degree of trust in the validators. Stakers delegate to ensure validators cast honest votes and hence ensure the security of the network. If a network malfunction is detected, halting will occur and culprits will be penalized. The details on how this is assessed will change over time as specific slashing rules and penalties are under protocol’s active exploration.
To participate in staking, it’s important to differentiate between the two different accounts that exist in Solana. The account necessary for delegating stake to a validator’s vote address account is the stake account. The stake account can be used to delegate tokens to validators on the network to potentially earn rewards for the owner of the stake account. The validator nodes that this stake is delegated to have the opportunity to vote on the current state and PoH height by signing a transaction into the PoH stream. No minimum delegation amount is set, meaning anyone can participate. Delegating a stake is a shared-risk shared-reward financial model that may provide returns to holders of tokens delegated for a long period. This is achieved by aligning the financial incentives of the token-holders (delegators) and the validators to whom they delegate. The more stake a validator has delegated to them, the more often this validator is chosen to write new transactions to the ledger.
Each epoch of Solana’s staking lasts roughly two days. An epoch is the time in which a sequence of leaders is selected to append entries to the ledger. The warm-up period is the timeframe before the staked amount is counted as stakable balance. During this period, some portion of the stake is considered “effective”, the rest is considered “activating” and is not eligible to earn rewards until fully activated. Changes occur on epoch boundaries. The cooldown period is the timeframe before the newly un-delegate tokens are available to withdraw. Once a stake is deactivated, some part of it is considered “effective”, and also “deactivating”. As the stake cools down a portion of it continues to earn rewards and be exposed to slashing, but eventually becomes available for withdrawal after the full period is complete.
Earning Staking Rewards in Solana
The network pays rewards from a portion of network inflation. The rewards per epoch are fixed and must be evenly divided among all staked nodes according to their relative stake weight (stake proportional) and participation. Staking yields are based on the current inflation rate, the total number of SOL staked, and individual validator uptime and commission. A validator’s commission fee is the percentage fee paid to validators from network inflation. Validator uptime is defined by a validator’s voting. One vote credit is earned for each successful validator vote and votes are tallied at the end of the epoch for reward calculation.
Validators can earn aproximately a 5% annualized reward rate. Solana’s initial inflation rate is 8% annually, decreasing by 15% YOY, reaching a long-term fixed inflation rate of 1.5% annually. 100% of the inflationary issuances (rewards) are delivered to delegated stake accounts and validators. Rewards are distributed every epoch (~2 days) and deposited into the stake account that earned them. Stake rewards are automatically re-delegated/compounded as active stake.
What are the requirements for validating?
Staking in Solana requires a bond. A bond in PoS is the equivalent of the capital expense needed in PoW systems. In the Bitcoin ecosystem, a miner invests in hardware and electricity infrastructure and commits to running a node on a single branch of the blockchain. Within Solana, the bond is the number of tokens the validator commits to the system as collateral while they validate transactions. Bonding moves coins to a bonding account within the users’ identity. However, these funds cannot be moved and must remain in the account until they’re removed by the validator. Bonds are valid after the supermajority of current stakeholders has confirmed the sequence within the blockchain.
What are the risks of staking?
Validators are at risk of slashing for poor performance. This occurs when a validator votes on two separate sequences in the blockchain. A malicious vote will remove a validator’s bonded tokens and add them to the mining pool. Slashing also occurs if a vote is cast for an invalid hash generated by the PoH generator.
Delegated funds, however, are never at risk of theft. These remain in control of the delegators at all times.
Solana is positioning itself as a world-class, high-performance blockchain, optimal for dApps of all varieties. By combining an innovative Proof of History, in which leader nodes “timestamp” blocks with cryptographic proofs that some duration of time has passed since the last proof, with Proof of Stake, Solana is not hamstrung by the same performance constraints as legacy blockchains such as Bitcoin and Ethereum. By participating in Solana’s staking ecosystem, anyone can help secure the network while earning rewards for doing so. Blockdaemon, as a world-leading blockchain infrastructure provider, is committed to supporting staking for Solana.