The rise of alternatives to Ethereum did more than offer investors many new tokens to trade. Newer cryptocurrencies such as Solana also provided users with novel ways to build and maintain blockchains. This activity is called staking. 

In contrast to Bitcoin mining, which is based on competition and massive amounts of computing power, Solana is driven by collaboration between users who put up, or stake, their coins to maintain the network. The end result is the same—investors who participate in staking earn rewards in the form of tokens or interest.

What is Solana staking?

Solana is a high-volume network designed to support decentralized applications (dApps) and smart contracts, which are programs that automate agreements. As with virtually all cryptocurrencies, Solana’s backbone is its blockchain, a digital ledger that processes and records transactions and is publically accessible on the internet. It also has its own native token, called SOL. It’s known as a Layer 1 blockchain because it builds on Ethereum, deemed Layer 0.

To make its blockchain work, Solana uses a consensus mechanism—an algorithmic protocol. Called Proof-of-stake (PoS), this method lets token holders use their SOL to take part in evaluating and approving transactions and applications entered on Solana’s system. 

Validators vs. delegators

The Solana system is largely maintained by two groups of participants:
Validators. These are holders of SOL coins who take the lead in the consensus process and add new blocks of data to Solana’s chain. They are not passive investors but active players in the Solana network and are often steeped in the intricacies of cryptocurrencies and blockchain mechanics. Validators offer their services to holders of SOL who want to profit from staking but do not want to participate in the nitty gritty process of adding blocks of data to the chain. This latter group comprises delegators.
Delegators. These people who also hold SOL coins but tap validators to do the heavy lifting for them. Delegators assign their tokens to a chosen validator, which then pools them with SOL from other clients. This approach lets delegators profit from staking without going to the trouble and expense of joining the validation process. SOL delegated to a validator is still owned by the delegator.

What should investors consider when choosing a validator?

• Identity and credibility.

  Crypto is filled with bad actors so it’s critical to verify the identities and credentials of validators. The good news is that Solana is an open-source network so verifying the track records of validators is relatively easy. Solana runs a forum where validators introduce themselves and share details of their operations. Solana also recommends checking out performance metrics for validators at two other sites: Solanabeach.io and Validators.app.‍

• Stake size.

  Validators with the reach to amass large stakes of SOL have better chances of approving blocks for the Solana chain and reaping richer rewards. Larger stakes, or weightings, also mean the validator is respected by other delegators.‍

• Fees.

  Validators charge delegators anywhere from nothing to as much as 10% commissions for staking SOL and earnings rewards. Investors can use online staking calculators to determine if the commissions are too high. Validators with good track records and sizable stake weightings tend to charge higher fees.‍

• Security.

  Validators, like many other crypto players, are vulnerable to hacks. It’s important for delegators to verify where validators are running their computer operations, or nodes, and how they are securing the network and protecting the cryptographic keys used to access and stake SOL tokens from staking wallets. 

How does staking on Solana work? 

Anyone has the right to stake Solana’s coins. Here’s how to stake SOL:

1. Set up a crypto walletthat supports staking. This is a digital account designed for transferring SOL to validators and receiving staking rewards in the form of the digital token. Solana maintains a guide for proper wallets.  
2. Purchase SOL from a crypto exchange and deposit the tokens in the wallet. Determine how big you want your stake to be. Consult online guides to see what a typical entry level stake is.
3. Learn how to use commands and tools to perform staking operations. This is no different than learning how to use an application on a computer and doesn’t involve coding or complex tasks. 
4. Set up a staking account. This is separate from the staking wallet. 
5. Select a validator. Staking wallet programs usually have a function to help find a validator, which are often pre-screened by the wallet provider. Otherwise, use Solana’s online resources or other guides on the web to evaluate the qualifications and fees of prospective validators. 
6. Delegate a stake of SOL to the validator. In terms of timing, Solana creates new blocks on its chain every two to four days, a period called an “epoch.” It usually takes a couple of epochs for delegators to make an initial stake.

What are the risks of staking on Solana?

The PoS approach has many advantages over the Proof-of-work (PoW) consensus mechanism used by Bitcoin and Ethereum. It processes transactions faster, is cheaper to use, and consumes less electricity. Yet, one key disadvantage is security. 

Because PoS relies on collaboration between stakers, it’s more vulnerable to hackers or other bad actors who want to infiltrate a blockchain—they can pretend to be validators and disrupt the Solana blockchain or try to steal tokens. 

Solana, like other PoS-based blockchains, tries to deter such attacks by punishing malicious validators in a practice called slashing. Solana has the power to deprive misbehaving validators of staking rewards, or destroy their SOL tokens outright. 

This can spell bad news for investors who unwittingly delegate their tokens to malicious validators. They might lose some or all of their tokens. That’s why tapping validators with sterling reputations and track records is so important.  

The bottom line

As a Layer 1 blockchain, Solana is challenging Ethereum and other rivals in the race to be the fastest and most efficient decentralized network in the marketplace. Its technology has won acclaim and support from investors, which is why Solana is a top 10 cryptocurrency with a market capitalization of more than $10 billion. 

For investors who want to do more than hold tokens, Solana is one PoS system that offers a well-defined way to participate in the maintenance of its blockchain and pocketing staking rewards. Yet, having gone live in March 2020, Solana remains a young network and it has struggled with outages. There’s always the risk that malicious players will manipulate its staking process and leave ordinary stakers holding the bag.