Staking on the Secret Network

Staking $SCRT helps secure the network and lets you participate in community governance. Currently annual rewards are 25% if you compound weekly.

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Source: scrt.netwrok

This article aims to introduce you to staking on the Secret Network, a Cosmos SDK/Tendermint Core decentralized blockchain implementing breakthrough (privacy preserving) technological solutions.

Introduction to the Secret Network: Privacy is a fundamental value

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Source: https://twitter.com/secretETH

Secret Network is the first blockchain with privacy-preserving smart contracts. That means applications built on Secret can utilize encrypted data without revealing it to anyone, including the nodes in the network. According to the claim from Secret Network, for the first time, Secret Network allows developers to build powerful, permissionless, privacy-preserving applications — Secret Apps.

Public permissionless Blockchains fail to protect privacy by default. This means that all the data used in smart contracts is exposed to everyone. For blockchain technology to achieve global adoption, users and organisations need control over how their data is used — they can’t just expose it to everyone. Secret Network solves the problem of privacy, helping to secure and scale the decentralised web. Secret Network’s technology could be implemented on numerous legitimate use cases.

The following technologies are already being implemented on Secret Network:

Cross-chain privacy tokens ((secretSCRT already on main net: Combining the programmability of ERC-20s with the privacy of Zcash or Monero, “Secret Tokens” unlock important use cases and create new value. The first Secret Token is now live on Secret Network’s mainnet, “SecretSCRT” (sSCRT) is the first implementation of the SNIP-20 standard!)

Ethereum bridge (a new bridge connecting Ethereum and Secret Network, currently live on testnet, arriving on December 14th to mainnet)

Privacy-preserving smart contracts (already on main net)

Interoperable with Cosmos Network ⚛️ ecosystem

Interoperability with heterogeneous blockchains through IBC (IBC will be on Cosmos main net by 1st quarter 2021)

SNIP-20 (like ERC-20) & SNIP-721 (NFTs) privacy standards

Tendermint Consensus Byzantine Fault Tolerance (BFT) delegated Proof-of-Stake (POS)

Also there teams are deliberating over implementation of the following:

Secret Oracles

Secret NFTs

1. Rules & Associated Risks when Staking in the Secret Network and Cosmos SDK/Tendermint Core Chains

This article’s purpose is to focus on staking within the Secret Network.

Please note that this guide also applies (to its greater extent) to other chains and tokens within the Cosmos Ecosystem.

Whereas there are characteristics unique to each Cosmos project such as inflation or the rate of bonded tokens at any given time (with the former being decided via governance) that both affect the ratio of staking rewards, there are elements of the architectural design of the Cosmos SDK/Tendermint Core technology that apply universally on POS Cosmos projects.

Some of these elements are important in identifying/assessing how us (as delegators) are affected.

Cosmos SDK/Tendermint Core projects have the following main common characteristics:

Tendermint consensus, relies on a set of validators to secure the network. The role of validators is to run a full-node and participate in consensus by broadcasting votes which contain cryptographic signatures signed by their private key. Validators commit new blocks in the blockchain and receive revenue in exchange for their work. They must also participate on governance by voting on proposals. Validators are weighted according to their total stake.

Delegators (us) — in turn — delegate our tokens to validators so that the network is secured. In return we get staking rewards.

Staking is, thus, a more active form of HODLing that puts our tokens to work while also allowing us to secure the network and directly participate on governance of the network (through voting on proposals).

Therefore us, delegators play an important role within the ecosystem. Being a delegator is not a passive role: We should thus ensure that we: a. actively monitor the actions of our validators (see an important reason why on the soft/hard slashing section below) and b. participate on governance.

Our tokens never leave our possession when delegating to a validator as long as we do not stake through an exchange. Remember not your keys, not your tokens! Most of us community members on Cosmos advise against staking through exchanges.

Another common characteristic of Cosmos Proof-of-Stake chains is the 21 unbonding/undelegating rule.

There is usually a misconception that after i have bonded my tokens for 21 days i am free to e.g. send them to an exchange and trade. This is a wrong assumption.

Once we delegate our tokens, they remain perpetually bonded, meaning that we can only use them after we unbond/undelegate manually through our wallet.

Thus, when a delegator (a person who has delegated their tokens) requests undelegation from a validator, the amount of tokens requested for undelegation will instantly transition to unbonding state for 21 days.

After the 21 day period passes, the delegator (the person who has delegated his/her tokens) will be able to make transactions with the tokens that were in unbonding state for the past 21 days.

Another common misconception among newcomers to Cosmos ecosystem chains is that they must undelegate their coins so that they delegate to another validator. Again this is a wrong assumption that may cost in both money (resulting in missing staking rewards) and time (waiting for tokens to undelegate).

Thus, you can redelegate from Validator A to Validator B at any point in time after you first delegate your tokens (e.g. after you sent them to your wallet from an exchange or after they were undelegated and you changed your mind).

Please remember that you are not required to unbond/undelegate if you want to move from one validator to the other.

However this is not an option that is unlimited, namely you cannot engage in validator hopping.

Therefore, redelegating from Validator A to Validator B, then consecutively redelegating from Validator B to Validator C is not allowed.

There is a 21 day cooldown that applies to a subsequent redelegation i.e. delegating from Validator B to Validator C and that cooldown starts counting from the second you redelegated from Validator A to Validator B.

Thus, once you redelegate from Validator A to Validator B, you will not be able to redelegate from Validator B to another validator for the next 21 days.

PLEASE NOTE: During this 21 day redelegating cooldown, you will still be able to undelegate from (subject now to the aforementioned 21 day unbonding/undelegating rule) or make some additional delegations to this validator.

Since we share revenue with our validators (those charge commission to our rewards that is), us, delegators also share and bear risks. Should a validator misbehave, each of their delegators will be partially slashed in proportion to their delegated stake. This is why us delegators should perform due diligence on validators before delegating, as well as spread our stake over multiple validators in order to mitigate the risks above.

There are two types of slashing namely a. soft slashing and b. hard slashing. The best way to explain what happens on each instance could probably be through the following incident that occurred in 2019:

On June 27 of 2019, CosmosPool a former Cosmos validator, experienced a server outage on their main node; downtime that resulted in its validator being temporarily jailed and its stake being slashed by 0.01%, including that of its delegators. This was what we call a downtime slashing incident (soft slashing) whereby the validator and delegators were punished for downtime proportionally to their stake on the network.

On top of the above, that outage required a restart and an unjail transaction, and while troubleshooting, CosmosPool’s (the validator’s) backup node accidentally participated in consensus, violating Cosmos Hub protocol rules.

As a result of evidence of double signing a block , CosmosPool and its delegators’ stakes were slashed by 5% and this validator was permanently removed from the active validator set (aka ‘tombstoned’). Mintscan shows the post-slashing delegation amounts. Double-signing on a block is one of the instances of what we call as a Consensus Fault Slashing or Hard Slashing and is penalized with a harsher penalty.

Although hard slashing instances are extremely rare, we should still be aware of the dangers and conduct due diligence on our validators. There are validators that offer downtime or hard slashing protection. We will see how to choose between validators in the section that follows.

When opting out of staking, holders’ tokens become diluted. This is exacerbated on projects with higher inflation settings such as the Secret Network, Akash etc. It is thus strongly advisable to stake your coins at all times.

2. Staking on the Secret Network

As mentioned above, Secret Network is a Cosmos SDK/Tendermint Consensus blockchain project. The superior delegated POS staking technology and the slightly higher inflation than some Cosmos chains like ATOM, makes it attractive for — among other things — the staking rewards offered (note there are chains that currently offer even higher rewards such as Akash network). This means that holders of SCRT can delegate their stake to a block validator of their choice. This validator earns rewards by processing transactions and computations on Secret Network, then shares some of these rewards back to their delegators according to the size of their deposits.

Validators on Secret Network are known as “secret nodes” — and they have an extremely important job. All validators on the network must maintain high uptime and utilize compliant hardware (enabled with Trusted Execution Environments) in order to remain active. With Secret Network, the teams have taken extra effort to ensure all validators are running the latest patched versions of TEEs in order to keep the network secure.

This is very hard work for validators, so the incentives need to be strong! In return for their effort, validators receive block rewards as each new block is generated on Secret Network. (This means Secret Network is inflationary, with new SCRT being created over time as a percentage of the current total supply.) Then validators pass on a percentage of these rewards to delegators while keeping some as a commission. This commission helps to fund their operations, ensuring that they can continue operating and that Secret Network can remain sustainable.

You can see a list of active validators and their commissions on any Secret Network block explorer. The most popular block explorer for the network is Puzzle, run by the Secretnodes.org validator team.

Cashmaney is another great explorer.

Calculating exact rewards can be challenging because there are many inputs to the equation. One input is network inflation — how many new SCRT are created each block? Another is the staking rate — what percentage of SCRT are currently being staked or delegated? Depending on the above inflation is adjusted with the minimum rate being 7% and a maximum inflation of 15%. Then there is the validator commission to consider, some network taxes (community tax and foundation tax ), the number of blocks per year. Calculating can thus be a cumbersome task.

Luckily there are some great tools like stakingrewards.com or a validator run calculator by validator and reputable community contributors Stake-or-Die whereby you can automatically calculate your rewards.

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As seen on the graph above there has been a steady increase on total unique delegators and numbers will be going up as the project gets more traction in the coming months. At the time of writing there are about 1200 individual delegators on the network and the number is rising.

Compounding is a great tactic for delegators as it can increase your staking rewards. For example, currently, when staking 1,000 SCRT you will get 262.1 SCRT per year or 26.21% APY. If you compound weekly, i.e. if you delegate your rewards you will be able to receive 293.85 or 29.38% APY (calculated in November 2020)!!! That is a hefty increase!

3. How to Choose between different Validators in order to mitigate risks associated with staking?

Unlike with other networks one thing that can be immediately noticed within the Secret Network is the team, family spirit between validator node operators.

Still there may be differences between one over the other. Below follows a validator Selection Criteria Checklist when you conduct your due diligence on whom to choose when delegating your SCRT.

Selection Criteria Checklist

  1. Technical setup of the validator
  2. Amount of self-bonded coins of the validator
  3. Current commission rate, commission change rate and maximum commission
  4. Total amount and number of delegations
  5. Community Involvement and Longevity
  6. The level of network decentralization
  7. Uptime of the validator
  8. Ability of delegators to vote and participate on governance
  9. Slash Protection

Technical setup of the validator

This is the most compelling part when choosing a validator as it involves some form of technical expertise. Some validators offer detailed info on their technical set up whereas others don’t. As Mira Storm advises:

We encourage you, reaching out directly to validators to get more details. Some things that you should pay particular attention to:

  • Is the software run on a physical server or in a cloud? (Listen carefully for the reasons why the operator choose one over the other)
  • How is validator private key secured? Do they use a hardware security module (HSM)? How about the Key Management Service (kms)?
  • Do they have a reliable way to restart the node if the software or hardware fails?
  • How are they making sure double-signature doesn’t occur?
  • What will happen if the node is censored or under the network attack?

It has also been recommended to check if a validator node is shielded behind a layer of private and public sentries. This type of set up is recommended by the community to protect the node against malicious blocks and network attacks.

Some projects within the Cosmos ecosystem have stricter requirements for node operators. One such instance is the Secret Network where — in order to enable Secret Contract functionality — validators are required to run nodes equipped with the latest version of Intel SGX.

Amount of self-bonded coins of the validator

This is another important criterion providing a clear view on how serious a validator is, how much trust they have on their own infrastructure, or even whether they can deliver their warranties (e.g. when offering slash protection/refund)

Current commission rate, commission change rate and maximum commission

Commission rates are important and a determining factor to a majority of people delegating their coins, but it is equally important to review the finer print i.e. what is the commission change rate and how much the maximum commission. For example you may be delegating to a validator charging 5% commission. If they have a max rate of 20% and a Max Change Rate of 10% you may wake up to a 20% commission in no time.

Total amount and number of delegations

People also seem inclined to delegate to node operators that have a large number of coins or delegations although this should be counter-balanced by a spread of delegations among more validators in order to decentralize the network.

Community Involvement and Longevity

Validators that are involved in the community, spend resources on improving the network’s infrastructure or provide educational material, apps, dApps are the ones most likely to stay in the network longer.

The level of network decentralization

It has been argued that a centralized network could be prone to double-spending atacks whereas at the same time the overall value of a staking token that by design is supposed to be part of a decentralized network may be reduced.

Uptime of the validator

The uptime of a validator is also another important metric that delegators take into account. Most validators usually have a 99–100% uptime on the Cosmos ecosystem.

Ability of delegators to vote and participate on governance

If you stake through an exchange, or through wallets that do not support voting on governance proposals (e.g. Trust Wallet) you are left out of one of the most important features of the Cosmos ecosystem: voting. It is quintessential that you opt both for wallets that support this feature while steering away from staking through exchanges (that by default have the voting feature disabled) and finally ensure that your wallet provides access to all validators (some don’t).

Slash Protection

There is an increasing trend among the Cosmos ecosystem’s validators to offer soft or even hard slash protection. This is an important new feature that has been attractive to people who delegate their coins and need the peace of mind that a. their coins will not be slashed and b. their rewards will be guaranteed.

4. Ideal Wallets on the Secret Network

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Keplr is an ambitious project and a wallet (currently available in the form of a Chrome browser extension) developed by Chainapsis. It is anticipated that Keplr will be central to the Cosmos ecosystem post IBC protocol’s implementation. We can safely assume that Keplr will be to Cosmos what Metamask is to the Ethereum ecosystem.

Keplr is also the first decentralized wallet with access recovery available in the Cosmos ecosystem, marking a milestone for the entire Cosmos community!

For a great guide on how to use Keplr please see the article by Daniela Pavin here: https://catdotfish.medium.com/how-to-use-keplr-wallet-40afc80907f6

Cosmostation is another great wallet with a second to none interface available also on iOS and Android. It is fully featured too and was the first decentralized mobile wallet for the Cosmos hub. For more info and guides on Cosmostation please visit: https://medium.com/cosmostation

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The wallet will soon be available on iOS and Android too.
For more info check: https://medium.com/citadel-one/citadel-one-overview-secret-network-1289227545d9

Blockchain advocate & sceptic | Cøsmos denizen & degenerate ⚛️ | Organic grower & physiolater 🍃

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