What you need to know when Staking in the Cosmos Ecosystem
Hello to all Cosmonauts!
Thus, this article attempts to guide people a. on what they should pay attention to when delegating their tokens while b. answering frequently asked questions.
Sample list of Cosmos delegated Proof-of-Stake Projects
The Cosmos ecosystem now consists of a vast and ever expanding universe of sovereign projects (chains). At the moment there are in excess of 150 active projects! Some of the Cosmos ecosystem’s popular Proof-of-Stake projects include the following:
Cosmos Network (ATOM);
Akash Network (AKT);
Sentinel (SENT) (staking will be available with main net release);
Persistence (XPRT) (staking will be available with main net release).
It is important to remember that all the above projects are independent, sovereign chains.
Concerns & Questions this article addresses
We — as delegators — are often presented with compelling and overwhelming questions such as whom should i delegate to, which wallet should i use, how should i choose between so many different validators, how long are my coins bonded for, what are the associated risks when staking and how do i mitigate those risks, and more. Through my participation on Cosmos community channels, I come across these questions on a daily basis.
In the following passages I will attempt to provide advice based on my experience thus far, in respect to 3 main areas:
- Universal Rules/Risks that apply when Staking in the Cosmos ecosystem;
- How to Choose between different Validators in order to mitigate risks associated with staking;
- Ideal Wallets on the Cosmos ecosystem;
1. Universal Rules/Risks that apply when Staking in 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:
Delegation of Cosmos Proof-of-Stake (POS) tokens as a means of securing the network and earning staking rewards.
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.
Undelegation / 21 day unbonding rule (some chains have 28, some 14 days)
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 adviseable to stake your coins at all times.
2. How to Choose between different Validators in order to mitigate risks associated with staking?
At the time of writing this article there are 125 validators on Cosmos Network, 40 on Secret Network, 54 on Akash Network, 87 on Kava, 100 on Iris Network and so on. How do I choose between them?
Some hints have been given in the previous sections. This section is dedicated to the end of providing some basic guidance/tips on choosing the validator that matches your needs more closely.
This topic has been discussed and analyzed through articles in the past. I found one article particularly useful when i was researching which validator to choose as a new Cosmonaut months ago, written by Mira Storm.
Mira has compiled a validator Selection Criteria Checklist when you conduct your due diligence to which i have added three points namely the uptime of a validator, the ability of delegators to participate on governance and vote and finally slash protection offered.
Selection Criteria Checklist
- Technical setup of the validator
- Amount of self-bonded coins of the validator
- Current commission rate, commission change rate and maximum commission
- Total amount and number of delegations
- Community Involvement and Longevity
- The level of network decentralization
- Uptime of the validator
- Ability of delegators to vote and participate on governance
- Slash Protection
- Expertise of the validator or their providers
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).
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.
This is another important point of concern. Your validator and their providers should have technical competence regarding their operations.
3. Ideal Wallets on the Cosmos ecosystem
Based on the above analysis and taking into account that a wallet needs to:
a. provide maximum freedom to users such as the ability to participate on governance;
b. ensure the user is able to choose among all available validators (some wallets such as Atomic Wallet or Trust Wallet have pre-selected validators for ATOM for example),
there are two main full feature wallets for the Cosmos ecosystem namely Keplr and Cosmostation.
Both also provide support to a variety of Cosmos projects.
Lunie is another great wallet but they will be ceasing operations in November 2020. [Tendermint announced on November 6th, that Lunie 3 will be coming out with Stargate & IBC Support].
How to use Keplr Wallet
Introduction & tutorial of the Wallet that puts the user experience at the heart of its design.
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.