Token Staking

Staking is the foundational activity for Proof-of-Stake (PoS) and its variants (DPoS, LPoS). Validators are chosen to propose and validate new blocks based on the size of their stake (locked tokens), rather than computational work. This provides network security and finality.

• Slashing: Penalizes malicious validators by destroying a portion of their stake.
• Finality: Achieved when a block is cryptographically settled and cannot be reverted.

Stakers earn rewards for contributing to network security and operations. Rewards typically come from two sources:

• Block Rewards: Newly minted tokens issued as inflation.
• Transaction Fees: A portion of fees paid by users.

Rewards are distributed proportionally to the staked amount and are often compounded when re-staked. Delegators in delegated systems share rewards with their chosen validator, minus a commission fee.

In many networks, token holders can delegate their stake to a professional validator node instead of running one themselves. This lowers the barrier to participation.

Key aspects include:

• Validator Set: A limited number of active validators are chosen per epoch based on total stake.
• Commission: Validators charge a fee (e.g., 5-10%) on delegators' rewards.
• Validator Reputation: Delegators must assess a validator's uptime, commission rate, and slashing history.

A derivative model that issues a liquid staking token (LST), like Lido's stETH or Rocket Pool's rETH, in exchange for staked assets. This solves the liquidity problem of locked capital.

• Users retain liquidity and can use LSTs in DeFi protocols while still earning staking rewards.
• The LST's value accrues relative to the base asset as rewards compound.
• Introduces smart contract and centralization risks associated with the staking pool.

Staked tokens are not instantly withdrawable. Most networks enforce an unbonding period (e.g., 7-28 days) where assets are locked and non-transferable after unstaking is initiated.

Slashing is a critical risk where a portion of the stake is burned due to validator misbehavior:

• Double Signing: Proposing two conflicting blocks.
• Downtime: Being offline during validation duties. Slashing penalties protect the network but pose a financial risk to stakers and their delegators.

Staking often grants governance rights, making the staked token a governance token. Holders can vote on protocol upgrades, parameter changes, and treasury allocations.

• Voting Power: Typically proportional to the amount staked.
• Delegated Voting: Votes can often be delegated to representatives.
• Snapshot Voting: Off-chain signaling used by many DAOs, which may or may not require actively locked tokens.

In blockchain-based games, staking native tokens is often required to operate a validator node or a delegate, securing the underlying network. This is a primary use case for Proof-of-Stake (PoS) and Delegated Proof-of-Stake (DPoS) chains where games are built. Stakers earn block rewards and transaction fees for providing this service, which is fundamental to the game's infrastructure.

• Example: Staking AXS to run a Ronin chain validator for Axie Infinity.
• Mechanism: Tokens are locked in a smart contract, with penalties (slashing) for malicious behavior.

Players stake tokens to generate or upgrade non-fungible NFT assets like characters, land, or equipment. This creates a direct sink for the game's utility token and ties player investment to asset progression.

• Asset Minting: Staking a base NFT and tokens to "breed" or craft a new, unique asset over time.
• Power Boosts: Staking tokens to temporarily increase an asset's stats, earning potential, or unlock special abilities within a gameplay season.
• Example: Staking SAND and an Estate NFT in The Sandbox to generate passive GEM resources.

Staking tokens grants governance power, allowing players to vote on proposals that shape the game's economy and development. This aligns long-term token holders with the project's success.

• Typical Votes: Treasury fund allocation, new feature rollouts, in-game economic parameter changes (e.g., minting costs, reward rates), and partnership decisions.
• Mechanism: Voting power is often proportional to the amount and/or duration staked (veToken model).
• Example: Staking ILV for veILV to vote on Illuvium's reward distribution and game mechanics.

The most common use case, where users stake liquidity pool (LP) tokens or single assets to earn additional tokens as rewards. This incentivizes liquidity and long-term holding.

• Single-Asset Staking: Lock a game's native token to earn more of the same token or a related reward token.
• Liquidity Provision Staking: Provide token pairs to a Decentralized Exchange (DEX) pool, stake the received LP tokens in the game's farm to earn high Annual Percentage Yield (APY) in governance or utility tokens.
• Purpose: Bootstraps liquidity, controls token emission, and rewards early adopters.

Staking acts as a commitment mechanism, gating access to exclusive game features, higher-yield activities, or premium content. This creates player tiers and reduces sell pressure from casual users.

• Examples:
  • Staking a minimum amount of tokens to access a raid, tournament, or land sale.
  • Staking tiers that unlock increasing percentages of bonus rewards on all in-game earnings.
  • Gating the ability to rent out high-value assets via scholarship programs.

Game developers implement staking mechanisms as deliberate token sinks to manage inflation and stabilize the in-game economy. By locking up circulating supply, staking reduces sell-side pressure on secondary markets.

• Inflation Control: Staking rewards are often funded by token emissions; staking locks these new tokens before they hit exchanges.
• Velocity Reduction: Encourages holding (HODLing) rather than frequent trading, increasing token scarcity.
• Design: Often combined with lock-up periods and unstaking cooldowns to enhance economic stability.

Slashing is a protocol-enforced penalty where a portion of a validator's staked assets is destroyed for malicious or negligent behavior, such as double-signing blocks or prolonged downtime. This mechanism is a core security feature of Proof-of-Stake (PoS) networks like Ethereum, designed to disincentivize attacks and ensure network liveness. The severity of the penalty varies by protocol, but it directly impacts the validator's capital at risk.

When staking via a decentralized application (dApp) or liquid staking protocol, user funds are custodied by a smart contract. The security of the staked assets is therefore dependent on the integrity of that contract's code. Risks include:

• Bugs or vulnerabilities that could be exploited to drain funds.
• Admin key compromises in contracts with upgradeable or privileged functions.
• Oracle failures affecting staking derivatives. This risk is separate from the underlying blockchain's consensus security.

A high concentration of staked assets among a few large validators or staking pools undermines the decentralization and censorship-resistance of a network. This creates systemic risks:

• Collusion potential for chain reorganization or transaction censorship.
• Single points of failure if a major provider experiences an outage.
• Governance capture where large stakers exert disproportionate influence over protocol upgrades. Monitoring the Gini coefficient or Nakamoto Coefficient of the validator set is crucial for assessing this risk.

Staked tokens are typically locked or subject to an unbonding period (e.g., 7-28 days on Cosmos, ~27 hours on Ethereum) before they can be withdrawn and traded. This creates significant risks:

• Illiquidity: Inability to sell assets during market downturns.
• Opportunity Cost: Capital is immobilized, potentially missing other yield opportunities.
• Slashing During Unbonding: Some protocols allow slashing penalties to be applied even during the unbonding period, increasing the risk window.

Staking rewards often consist of newly minted tokens (inflation). If the annual inflation rate exceeds the real yield generated by the network (e.g., from transaction fees), the value of the staked assets can be diluted. This is an economic security risk where the nominal APR may not reflect the real APR after adjusting for inflation. Participants must analyze the token's emission schedule and the network's sustainable economic model to assess long-term viability.

The security model differs drastically based on who controls the staking keys:

• Non-Custodial (Self-Staking): The user retains full control of their validator keys, bearing full responsibility for slashing risk and node operation, but maintains sovereignty.
• Custodial (Exchange/Pool Staking): A third party (e.g., Coinbase, Binance) controls the keys. This reduces operational complexity but introduces counterparty risk, including exchange insolvency, regulatory action, or withdrawal freezes. It also contributes to validator centralization.