Beginner

June 22, 2022

Copy

How to stake Solana (SOL)?

Introducing Solana staking & rewards

In the rapidly evolving landscape of cryptocurrency investments, staking has emerged as a popular method for generating passive income. Solana, with its high-performance blockchain and growing ecosystem, offers particularly attractive staking opportunities. This comprehensive guide explores how to stake Solana effectively, covering the fundamentals of the Solana staking mechanism, recommended platforms, validator selection criteria, and risk management strategies.

Solana staking represents a method of participating in the network's security while earning rewards. When users stake Solana (SOL), they delegate their tokens to validators who process transactions and maintain the blockchain's integrity. In return for this contribution to network security, stakers receive rewards generated from a portion of transaction fees and token inflation.

The Solana network operates on a Proof-of-Stake consensus mechanism, which is significantly more energy-efficient than Proof-of-Work systems. The current annual percentage yield (APY) for Solana staking typically ranges between 5-7%, making it an attractive option for long-term holders, though this rate fluctuates based on network parameters and total stake.

Key benefits of Solana staking include:

Passive income generation through regular staking rewards
Contributing to network security and decentralisation
No minimum staking requirement at the protocol level, though some platforms or validators may impose their own minimums for practical reasons
Relatively high APY compared to traditional savings accounts

To stake Solana effectively, one must understand the underlying mechanism, select appropriate platforms and validators, and implement strategies to mitigate potential risks.

How Solana proof-of-stake works

The Solana blockchain utilises a unique consensus mechanism called Proof-of-History (PoH) combined with Proof-of-Stake (PoS). This hybrid approach enables Solana to achieve remarkable transaction speeds—theoretically up to 65,000 transactions per second—while maintaining security and aiming for decentralisation.

In the Solana staking ecosystem:

Validators operate nodes that process transactions and produce blocks.
Token holders delegate their SOL to validators of their choice.
Validators earn rewards based on their stake weight, which is the total SOL staked to them, and their performance, such as uptime and participation in consensus.
Stakers, also known as delegators, receive a portion of these rewards after the validator deducts their commission fee.

The Solana epoch, which lasts approximately 2-3 days, represents the reward distribution cycle. At the end of each epoch, staking rewards are typically calculated and made available for distribution to delegators based on their stake amount and the validator's performance during that epoch.

An important technical aspect of Solana staking is the concept of stake activation and deactivation. When SOL is staked, it undergoes an activation period, often referred to as a warm-up period, typically lasting one epoch before it starts earning rewards. Similarly, when unstaking, tokens enter a cooling-off period, or cool-down period, of one epoch before becoming liquid and transferable again.

Best platforms & validators to stake with

Selecting the appropriate platform and validator is crucial for optimising Solana staking returns while minimising risks. Several reputable platforms offer Solana staking services with varying features and user experiences.

Centralised exchanges

Centralised exchanges provide a straightforward staking experience for many:

SwissBorg: Offers a user-friendly interface with competitive rates and robust security measures. As a European crypto platform, SwissBorg aims to provide seamless Solana staking with transparent fee structures.
Binance: Features flexible and locked staking options with varying APYs.
Kraken: Provides institutional-grade security with regular reward payouts.
Coinbase: Offers simplified staking with automatic rewards distribution.

These platforms typically handle the technical aspects of staking, making them suitable for beginners. However, they are custodial, meaning users don't control their private keys, often charge higher effective fees or offer slightly lower APYs, and staking through them may not contribute optimally to network decentralisation as stake tends to be concentrated with the exchange's chosen validators.

Non-custodial wallets

For users who prefer to maintain control of their private keys:

Phantom: A popular Solana-native wallet with integrated staking features.
Solflare: Offers comprehensive staking functionality with detailed validator information and management tools.
Ledger: Hardware wallet solution with Solana staking support, typically managed through Ledger Live or by connecting the Ledger device to a compatible software wallet like Phantom or Solflare.

When selecting a validator, consider these critical factors:

Commission rate: Lower rates generally mean higher returns for delegators; these typically range from 0-15%, with 5-10% being common.
Performance: Validators with higher uptime and voting participation provide more consistent rewards.
Stake concentration: Choosing validators with lower total stake, while still ensuring they are performant and secure, can help improve network decentralisation.
Track record: Established validators with proven reliability can reduce operational risks.

Monitoring validator performance through tools like Solanabeach.io or Validators.app can provide valuable insights for informed decision-making.

Staking risks & slashing concerns

While Solana staking offers attractive returns, it is not without risks. Understanding these potential pitfalls is essential for developing an effective risk management strategy.

Primary risks in Solana staking:

Slashing risk: Unlike some other PoS networks like Ethereum, Solana does not currently implement automatic slashing penalties for validator misbehaviour (e.g., double signing) at the protocol level that would cause a loss of a delegator's principal stake. However, validators with poor performance, such as significant downtime, may miss out on earning rewards, which in turn affects delegator returns.
Price volatility: The value of staked SOL remains subject to market fluctuations, potentially offsetting staking rewards during bearish periods.
Liquidity limitations: Staked SOL undergoes a cooling-off period when unstaking, creating temporary liquidity constraints.
Validator performance risk: Selecting underperforming or unreliable validators can result in suboptimal or missed rewards.
Smart contract vulnerabilities: Particularly relevant for liquid staking solutions, where exploits in the liquid staking protocol's smart contracts could lead to fund loss.

To mitigate these risks, consider diversifying stake across multiple reputable validators, conducting thorough due diligence before selecting platforms or validators, and maintaining a portion of holdings in liquid form for emergency needs.

Liquid staking options

Liquid staking represents an innovative solution to the liquidity constraints of traditional staking. This approach allows users to stake SOL while receiving liquid tokens, known as Liquid Staking Tokens or LSTs, that represent their staked position. These LSTs can often be utilised in DeFi applications.

Prominent liquid staking solutions for Solana include:

Marinade Finance (mSOL): A leading liquid staking protocol on Solana.
Jito (JitoSOL): Another major liquid staking provider, often incorporating MEV rewards.

These liquid staking derivatives enable users to earn staking rewards while maintaining liquidity and potentially generating additional yield through DeFi strategies. However, they introduce smart contract risks associated with the liquid staking protocol and may have varying degrees of decentralisation in their validator selection processes.

Solana vs Ethereum staking

Comparing Solana and Ethereum staking reveals significant differences in requirements, rewards, and mechanisms.

Minimum Requirement

Solana Staking: No minimum SOL requirement at the protocol level for delegation.
Ethereum Staking: 32 ETH for direct native staking to run a validator node.

Current APY (Typical Range, Fluctuates)

Solana Staking: 5-7%
Ethereum Staking: 3-5%

Unstaking Period

Solana Staking: Approximately 2-3 days, corresponding to one epoch cool-down period.
Ethereum Staking: Variable, dependent on the validator exit queue, which can range from days to weeks after the Shanghai upgrade enabled withdrawals.

Validator Setup

Solana Staking: Running a Solana validator has very high hardware requirements regarding CPU, RAM, bandwidth, and disk speed, along with significant technical expertise.
Ethereum Staking: Running an Ethereum validator also requires technical knowledge, but the hardware requirements are generally considered less demanding than those for running a Solana validator.

Slashing Risk

Solana Staking: Currently, there is no direct slashing of principal stake for validator misbehaviour at the protocol level that affects delegators. Poor performance primarily leads to reduced or missed rewards.
Ethereum Staking: Implements slashing penalties for misbehaviour such as double signing or extended offline periods, which can result in a loss of staked ETH.

Solana staking generally offers greater accessibility for delegators due to no minimum SOL requirement at the protocol level and potentially slightly higher APYs. However, setting up and running a Solana validator is a demanding undertaking. Ethereum's direct staking has a high capital requirement (32 ETH), but its ecosystem, including Layer 2 solutions and various liquid staking options, also offers diverse avenues for participation.

Check out our other articles on the Solana blockchain:

Future of Solana staking rewards

The long-term sustainability of Solana staking rewards depends on several factors, including network adoption, transaction volume (which contributes to validator income via the non-burned portion of fees), and the protocol's inflation schedule. As the Solana ecosystem continues to expand, several trends may influence future staking dynamics:

Reward rate adjustments: The current inflation schedule is designed to decrease gradually over many years, which will reduce the portion of staking rewards coming from new SOL issuance.
Increased transaction fee contribution: As network usage grows, the non-burned portion of transaction fees (currently 50% of each fee) may constitute a larger percentage of overall validator rewards.
Validator competition: Rising validator numbers could lead to ongoing competition on commission rates, potentially benefiting delegators.
Institutional participation: Growing institutional interest may increase the total amount of SOL staked, potentially affecting overall APYs and stake concentration metrics.

The Solana Foundation and on-chain governance participants continue to evaluate and refine aspects of the staking mechanism to balance network security, decentralisation, and sustainable rewards.

Conclusion

Staking Solana offers an accessible method for SOL holders to generate passive income while contributing to the blockchain network's security and operation. By understanding the staking mechanism, carefully selecting platforms or validators, and implementing appropriate risk management strategies, investors can optimise their staking returns.

Whether choosing centralised exchanges for convenience, non-custodial wallets for direct control, or liquid staking solutions for flexibility and DeFi composability, the Solana ecosystem provides diverse options to accommodate various investment preferences and risk tolerances.

As the Solana network continues to evolve, staying informed about validator performance, protocol updates, and ecosystem developments remains essential for successful long-term staking strategies.