Owners of digital assets from proof of stake (PoS) protocols can do more than simply hold the assets in their wallet of choice. One option is to delegate their crypto tokens, a process of contributing their digital assets to a public validator node to help that node conduct PoS validation. By delegating to trusted validators on protocols such as Polkadot, Tezos, Celo, or NEAR, assets are put to work securing the network and in exchange may earn rewards in the form of more tokens.
With proper consideration of the risks and trade-offs involved, delegation can be an opportunity for token holders to support and participate actively in blockchain networks and to earn more digital assets while doing so.
Many aspects of delegation are common across PoS protocols, though the process for each different network can have its own specific nuances. To understand how delegation functions within a PoS protocol, it's helpful to understand the difference between proof of work mining and proof of stake validation.
The earliest blockchain protocols used proof of work mining (PoW) to secure the network and validate the transactions included in each block. In PoW mining, network participants use either general purpose computer hardware (CPUs or more expensive but more efficient GPUs) or purpose-built application-specific integrated circuits (ASICs) to find the answer to a mathematical problem in order to certify the transactions included on the chain.
In exchange, those participants earn rewards in the form of crypto coins or tokens. This process is referred to as mining, and being a miner can be lucrative. At the time of writing, mining just one block on the Bitcoin blockchain can earn a miner the equivalent of approximately $250,000 USD in block rewards—not inclusive of transaction fees.
Critics argue that PoW mining tends towards centralization, a trait with potential negative implications for security and accessibility. The increasing cost of participating in PoW mining has led to the consolidation of miners into mining pools, and broad or even hobby-level participation in PoW networks is limited both by the arms race for increasingly tailored computers and the high cost of entering and operating within the market. Miners are further consolidated within regions with cheaper electricity sources and preferable conditions for operating. Proof of stake validation was developed, in part, to lower these exclusionary barriers and to reduce the energy expenditure required by PoW mining.
Whereas proof of work miners operate a mining setup to keep the network secure, proof of stake participants operate a node on the network to validate transactions and create blocks, and, in return for executing this work, earn block rewards. A set amount of value must be locked, or “staked,” to the node in order for it to become active as a validator on the network. Once active, it is eligible to produce work on-chain in exchange for rewards, but on some PoS protocols it is also at risk for losing a portion of their rewards if they behave poorly or maliciously—commonly referred to as slashing. The incentive of rewards for good behavior and penalties for bad behavior are critical to maintaining the security of a network.
Generally, a PoS node is selected to validate a block based on the amount of tokens that are staked to that node. As such, the more tokens staked to a node, the higher the likelihood that node will be selected to perform work and earn block rewards.
Certain PoS protocols allow for delegation, or the ability for a holder of that network’s tokens to earn a slice of block rewards by adding their asset to the staked tokens on someone else’s node. In exchange for locking the value of their tokens to a validator node, the delegator earns a percentage of the block rewards earned by that validator.
As having more tokens staked to a node increases the likelihood that the node will be selected to perform work and earn rewards, PoS validators benefit from delegation as it increases their reward-earning opportunities.
Delegators benefit from delegation, as they can earn a percentage of block rewards without needing to become a validator themselves. Digital asset holders, who don’t have the resources or technical know-how necessary to operate validator nodes but still want to earn rewards, may choose to delegate.
Operating a validator is often difficult and time consuming. Validators must be active and viable participants in a network in order to earn rewards; they must be built and managed with proper consideration for uptime, participation, and to the oftentimes-complex specifications of each protocol team’s code base. Although one can use an infrastructure-as-a-service provider such as Bison Trails to run a node on one’s behalf, many casual token holders do not have the quantity of digital assets that would make paying to run validators with a premium infrastructure provider worthwhile.
On many protocols there is no minimum number of tokens required for a token holder to delegate their assets to an active validator node. Therefore, even digital asset holders without many tokens can participate in a network through delegation.
Delegators have the flexibility to unbond, or remove, their tokens at any time (subject to each protocol’s unbonding period), and only pay a small percentage of their rewards as a fee for the service provided by the validator. By delegating to a public validator node, even those token holders with very limited quantities of digital assets can still help to secure the network and put their assets to work earning rewards.
On the Tezos network, for example, there is no minimum required amount of XTZ to delegate to a validator, and the cost of one XTZ is currently the equivalent of about $2.66 USD. With the current rewards rate on the network around 6% annually (120 times the average interest rate on savings accounts in the US), even after paying a 10% validator service fee a person delegating as few as 100 XTZ could still receive an additional 0.45 XTZ after just 30 days of delegation—and an additional 5.47 XTZ over the course of a year, all network variables remaining stable.
One must also consider that there is no unbonding period on the Tezos network, meaning that one could cash out their delegated XTZ immediately if they needed to utilize those funds. As such, delegation on the Tezos network, as an example, may be a good choice for someone who wants to earn more XTZ with a very low amount of effort, while still retaining their XTZ as a liquid asset.
Every blockchain network operates by its own protocol parameters; it’s important to understand the specifications of the network before you delegate to ensure it is a good fit. A few key considerations include:
In most PoS networks, delegators are subject to a portion of the losses incurred by a validator if the node is slashed. Slashing is when a predefined percentage of a node’s tokens are lost because it behaved maliciously or abnormally on the network. Conditions for slashing can include downtime, or a node being offline, and double-signing transactions. Potential delegators should delegate their tokens to a trusted validator to ensure their assets are not at an undue risk for loss due to their selected validator having minimal protection from slashing or attack.
There is no single way to delegate digital assets to a blockchain protocol; each protocol has its own process and uses tools to enable delegation such as CLI developer tools, a mobile or web-based wallet, custodial providers, or hardware wallet interfaces. Given these differences in delegation methods, researching the open-source developer tools for each protocol is a great way to learn how to delegate specific tokens.
Many protocol teams also provide lists of the active public validators on their block explorer sites, often including links to the relevant social media or websites for the node operators. These lists provide a good starting point for researching the available node operators in order to ensure they meet your standards for security and performance.
Once you have conducted the necessary research on the available public validators, you will use the protocol’s specified delegation tools to delegate your desired number of tokens to the validator of your choice.
If you don’t want to conduct your own research of all your options, Bison Trails’ public delegation guides offer step-by-step instructions for how to delegate to our public validators, along with information regarding each protocol’s warm-up period, unbonding period, expected rates of inflation and returns, and other important considerations for delegating on each of the supported blockchains.
Bison Trails’ non-custodial public validators operate with the same node infrastructure used for the participation infrastructure of multi-billion dollar investment funds; by staking your tokens to Bison Trails’ public validators you can earn rewards securely by benefiting from their enterprise-grade security.
You can delegate your assets to Bison Trails’ public validators for a number of different protocols, including Celo, Cosmos, Edgeware, Flow, Kusama, Livepeer, Near, Oasis, Ontology, Polkadot, Solana, Terra, and Tezos. Provide your email address on each protocol’s delegation instruction page in order to be notified of important protocol updates, including changes to reward structures, updated delegation fees, and other updates from Bison Trails’ team of protocol experts.
Bison Trails is a blockchain infrastructure platform-as-a-service (PaaS) company based in New York City. We built a platform for anyone who wants to participate in 23 new chains effortlessly.
We also make it easy for anyone building Web 3.0 applications to connect to blockchain data from 33 protocols with Query & Transact (QT). Our goal is for the entire blockchain ecosystem to flourish by providing robust infrastructure for the pioneers of tomorrow.
In January, 2021, we announced Bison Trails joined Coinbase to accelerate our mission to provide easy-to-use blockchain infrastructure, now as a standalone product line. The Bison Trails platform will continue to support our customers. With Coinbase’s backing, we will enhance our infrastructure platform and make it even easier to participate in decentralized networks and build applications that connect to blockchain data.
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