Proof of Stake networks primarily support two methods of earning yield on tokens: Staking and Delegating.
Staking requires users to participate as validators. This means they need to stake the necessary amount of tokens, and set up, run, and maintain the validator node all by themselves. It typically provides higher yield rewards compared to delegating, but also demands more effort from users and is more of an active investment. This method is more popular among participants who possess the relevant skills, prefer to manage their own validators, and have a higher risk tolerance.
On the other hand, delegating is a safer and more convenient method for users who want a simpler process and do not want to deal with logistics, such as operation or node management.
When a user delegates their tokens to a validator they trust, they get to enjoy a portion of the rewards without having to perform any of the operational aspects themselves. Meanwhile, the user still maintains full ownership of their tokens. Delegating might provide lower yields than staking, but it doesn’t demand much effort and is more of a passive investment.
As it offers the opportunity to earn yields in a relatively safe and simple manner, delegating has become a prominent option for many users.
Being a validator is generally difficult and time-consuming, as they are required to operate a validator node and be an active participant to earn rewards. The validator nodes also need to be compliant with the complicated specifications of each protocol’s codebase. Token holders who do not have the technical knowledge or resources required to operate validator nodes, but still wish to earn rewards, may opt to delegate instead.
Some Proof of Stake protocols allow token holders to add their tokens onto the staked tokens of an existing validator’s node. In exchange, the delegator receives a portion of the rewards earned by the validator without needing to become one themselves.
Having a higher amount of staked tokens on a node increases the chance for it to be chosen to validate transactions and earn rewards. Therefore, delegation increases both the selected validator and the delegator’s opportunity to earn rewards.
Most PoS protocols do not have a requirement for a minimum number of tokens to be a delegator. As such, even users who only hold a moderate amount of tokens are allowed to delegate, earn yields, and help secure the network.
Delegators also have the flexibility to unbond (remove) their tokens at any time, although the time it takes for them to regain full access to their holdings depends on the individual protocol’s unbonding period. In exchange for the convenience and opportunity to earn rewards, they typically only need to pay a small commission fee to the validator for their service.
An unbonding period is the amount of time a delegator needs to wait before regaining access to their tokens.
Not all cryptocurrencies offer staking and delegating. Therefore, in order to earn staking rewards, you need to first buy a cryptocurrency that validates transactions with the Proof of Stake mechanism. Some major cryptocurrencies you can stake are: Solana (SOL) and Cosmos (ATOM).
When choosing the cryptocurrency, you might also want to consider its blockchain network’s warm-up and unbonding periods.
Warm-up periods refer to the amount of time it takes for your tokens to earn rewards after delegating to a validator.
After you buy your cryptocurrency, it will be available in the exchange where you purchased it. You will then need to move your funds to a crypto wallet. Crypto wallets are generally considered the best way to store cryptocurrency safely. There are several types of crypto wallets, both online and offline based.
The crypto wallet you need to delegate your tokens depends on each network specifically. For example, if you wish to delegate Solana (SOL), you may use Phantom Wallet or Solflare. If you wish to delegate Cosmos (ATOM), Kava (KAVA), or Akash (AKT), you may use Keplr Wallet or Cosmostation.
For investors who are not familiar with the technical processes of staking, delegating their tokens to an established validator simplifies the process significantly.
Typically, there are a few factors you want to look into before choosing a validator.
Most validators charge a commission fee (a percentage of the staking rewards) to the delegators for the service provided. Be wary of validators who charge 100% fees, as that means that they will be receiving all of your staking rewards.
At the same time, however, also be a bit wary of picking validators with 0% commission fees, as that can hinder you from receiving airdrops that blockchain protocols sometimes provide to encourage users to stake. Users should also be keep in mind that some low-fee validators may not always put the most effort on security and, hence, be potentially riskier than validators who charge more.
You can also take self-delegated amount into consideration, which is how much ‘skin in the game’ they have. In other words, it is the amount of tokens they have delegated to their own node. Self-delegated amount is a decent indicator of how much trust they have in their own infrastructure.
Uptime refers to the time during which a server is in operation. Since you do not earn rewards while your staking pool’s servers are down, it’s best for you to pick a validator that has an uptime as close to 100% as possible.
Validators with smaller amounts staked to them and fewer delegates are less likely to be selected to validate transactions. However, they also provide larger rewards when chosen, as they do not need to divide the rewards with as many delegates.
The opposite is the case for validators with larger amounts staked to them: They are more likely to get chosen but also provide smaller rewards when chosen as they have to split the rewards between many delegators. Another reason to not select the top validators is because the idea with PoS chains is that you want to decentralize the blockchain and hence, pick smaller validators.
As an investor, you want to select a validator that is neither too small to potentially fail, nor too big to the point of over saturation and limited rewards. Hence, mid-sized validators are typically seen as the way to go.
MANTRA has an impeccable track record as a validator, having reliably operated validator nodes on 30+ PoS networks with no slashing and minimal server downtime. Some nodes where users can decide to delegate to MANTRA include:
Not just that, MANTRA also offers tailored validator node services for institutions. Learn more about MANTRA Nodes here.
As an example, we have included the guide to delegating your $ATOM to MANTRA’s node below.
First, install and set up your Keplr wallet. You can download the web browser extension on your Google Chrome.
Remember to store your mnemonic seed securely.
Once you have set up your Keplr wallet, make sure to send as much $ATOM tokens as you wish to delegate in it. You can buy or trade in $ATOM from several exchanges, both centralized and decentralized. Then, click on the Keplr Wallet extension and select ‘Stake’.
Once you reach, the page full of validators, you can type in ‘MANTRA’ at the Search bar.
Then, click ‘Manage’.
Then, input the amount of ATOM tokens you want to delegate and click ‘Delegate’. However, make sure you leave some $ATOM for gas fees.
After that, you may approve the transaction in your Keplr wallet, and you’re done! Now you can just enjoy the yields.
While delegating your tokens is a great way to earn yields, there is a risk you should be aware of: Slashing.
When a smart contract detects a malicious attempt on the blockchain, it programmatically punishes the perpetrators by ‘slashing’ their staked amount. This means the validators lose that specific amount. The conditions for validators being slashed can include double-signing transactions and downtime, which refers to a node being offline. If the node is slashed, delegators are also subject to a share of the losses experienced by the validator. Hence, it is crucial for users to delegate their tokens to a trusted validator.
This material is intended to be of general interest only and should not be construed as individual investment advice or a recommendation or solicitation to buy, sell or hold any security or to adopt any investment strategy. It does not constitute legal or tax advice. The views expressed are those of the author and the comments, opinions and analyses are rendered as of the publication date and may change without notice. There is no guarantee that any forecasts or predictions made will come to pass. The information provided in this material is not intended as a complete analysis of all material facts or circumstances regarding any country, region or market. All investments involve risks, including possible loss of principal.
Risk management does not imply elimination of risks, and not all investments are suitable for all investors. The information and opinions contained in this material are derived from proprietary and non-proprietary sources deemed by MANTRA to be reliable, are not necessarily all inclusive and are not guaranteed as to accuracy. Data from third party sources has not independently verified, validated or audited. MANTRA accepts no liability whatsoever for any loss arising from use of this information; reliance upon the comments, opinions and analyses in the material is at the sole discretion of the user.
Any products, services and information in this material may not be available in all jurisdictions and are offered local laws and regulation permit. Please consult your own financial professional or legal advisor for further information on availability of products and services in your jurisdiction. Please also see the disclaimer which is found at the bottom of this website under the heading “Important Disclosures”.