Key Takeaways
- Decentralized Staking: Autonity provides a decentralized staking platform for permissionless markets, focusing on derivatives trading.
- Layer 1 Blockchain: Built for secure and scalable staking, Autonity ensures efficient transaction processing through its dedicated Layer 1 infrastructure.
- Validator Participation: Validators secure the network by staking tokens and are incentivized through governance and staking rewards.
- Governance: Token holders actively participate in decentralized governance to shape network decisions.
- Interoperability: Autonity's ecosystem connects with Ethereum and other chains.
Introduction to Staking and PoS Consensus
For those new to blockchain and crypto, it's important to understand staking because of its standing as a foundational economic mechanism that helps Proof of Stake (PoS) blockchains operate in a balanced and equitable manner.
Essentially, staking is a mechanism that allows token holders to support a network by bonding (staking) their tokens within an on-chain validator node in exchange for a predetermined incentivized reward rate (i.e., an APY). This process not only rewards users with staking rewards, but also strengthens overall network security because of the fact that the more bonded stake within a network, the more secure it ultimately becomes.
Staking also allows users to participate in network governance and other on-chain mechanisms that are critical to a chain’s longevity, providing a means for decentralized participatory action that benefits the entire network and its underlying ecosystem moving forward. This is important because it helps ensure the long-term development of a project is not solely in the hands of a few all-powerful founders, instead distributing the decision-making processes to a larger community of global users.
To learn more about how Autonity’s Proof-of-Stake architecture and underlying technical infrastructure works, feel free to read our previously written blog post that goes over the network’s technical intricacies in greater detail.
Staking Services vs. Direct Delegation
Although there are a wide range of staking modalities in crypto, typically, the staking process on PoS chains allows users to select one of two distinct staking models:
- Direct delegation: Direct delegation is a staking model whereby a staker delegates their assets to a validator directly from their self-custodial crypto wallet (such as Cosmos’ Keplr wallet or Solana’s Phantom wallet).
- Staking-as-a-Service: Staking-as-a-Service (StaaS) is a staking model that allows users to make use of a centralized staking service (such as Coinbase, Binance, OKX, Crypto.com, etc.) via an online website or mobile interface.
Many crypto users choose to stake their assets through their own self-custodial wallet within a validator node mainly because of the fact they remain in control of their tokens (and the private keys that control those assets) without relying on a third-party to safeguard their assets.
This direct delegation model gives the user peace of mind knowing that the potential failure of a centralized crypto exchange or staking provider (or one that at a moment’s notice initiates a withdrawal restriction on user assets) cannot impact the safety of their funds. The old adage, “not your keys, not your crypto” is significant in this regard and should not be understated. In many respects, direct delegation to a validator through a user-controlled crypto wallet is the best approach for most users.
Selecting a Staking-as-a-Service Provider
However, in the event a user/delegator chooses to select a centralized StaaS provider, several important factors must be considered. These include the reputation of the company offering the service, the reward rates offered compared to similar staking providers (i.e., the APY for each asset staked), as well as the presence (or lack thereof) of slashing protection should the validator be slashed (penalized) if it's found to be behaving maliciously.
If a validator is determined to be acting dishonestly (i.e., manipulating the larger validator set to receive more rewards than they are actually eligible to receive) by other validators within the network, it is theoretically possible for a delegator to lose their entire delegated stake via slashing.
On the other hand, if the validator in question has developed mechanisms that provide slashing protection for their users, it could mean that should the validator be slashed, that users may not be susceptible to the loss of their assets. In this respect, it is important to read the fine print on the provider's website and determine what exact safeguards the company behind the validator has in place to limit asset loss should a worst case scenario arise.
In addition, it may be critically important to investigate whether or not the validator service provider undergoes security audits and possesses an additional 1:1 backing of total assets staked (meaning for every dollar of assets, the company holds an additional dollar of assets in reserves).
On a centralized crypto exchange for example, these assets holding generally make up a portion of the company's Proof of Reserves (PoR), a system used to provide just that, its proof of total asset reserves (whether in USD dollars, various stablecoins, treasuries, BTC, ETH, or other token types).
Other considerations include the ease of use of the service (i.e., the complexity of user-facing dashboards and fund management, whether on mobile or desktop) and the reputation of the staking service provider.
To assess the provider’s reputation, perhaps the first thing to look for is whether the platform is affiliated with other well-known entities in the crypto and blockchain space. If you have heard of the companies (the more reputable they are, often the better) your potential staking provider is affiliated with, it’s generally a good sign.
Liquid Staking vs. Traditional Non-Liquid Staking
Whether you choose to select a centralized staking provider or delegate directly to a validator yourself, it is important to consider what type of staking model is right for you.
Although there are many complex variations of staking, at this current juncture, two main staking models exist: 1.) liquid staking, and 2.) traditional non-liquid staking.
The main difference between the two is that liquid staking allows users to deposit their assets within a protocol through a service provider (such as Ethereum’s Lido, Solana’s Jito, Cosmos’ Stride, or Celestia’s MilkyWay) that allows incentivized rewards to be accrued in two distinct ways.
First, the user is given regularly distributed staking rewards via a predetermined annualized percentage yield (APY) (say 7% to 20% annually depending on the predetermined rate for the specific asset within the protocol) within a larger staking pool. Second, the user is given a liquid staking token (LST) that acts as a claim (a receipt if you will) to their initially deposited assets and the staking yield they accrue from those assets.
By obtaining a LST, the user is also able to leverage these assets within their underlying DeFi ecosystem suite for use in decentralized exchanges (DEXs), decentralized money markets, and the like, effectively allowing the user to earn revenue in two separate ways.
In this way, LSTs are fully redeemable for their underlying value and are generally not subject to a withdrawal waiting period (hence the name liquid staking, meaning they are always liquid and removable). This model dramatically increases the capital efficiency of staking for users when compared to traditional non-liquid staking options (such as through Keplr Wallet and a distinct Cosmos validator) where the user doesn't receive a LST for bonding their tokens within a validator to receive rewards
Nonetheless, one of the main weaknesses of liquid staking models is their potential susceptibility to security vulnerabilities. These mainly come in the form of smart contract risk, where the possibility exists that the smart contracts holding the initially deposited assets could be at risk of being hacked or exploited by a third-party.
When liquid staking, it is vitally important to consider the potential risks that your initially deposited assets could be susceptible to when they are held in the hands of a third party. This adds a level of counterparty risk and it's important to ensure that the protocol’s you have locked your assets within have their smart contracts audited regularly by several auditors that specialize in finding smart contract vulnerabilities and improving overall protocol security.
Autonity Network Staking Overview
Now that we are familiar with the various types of staking in blockchain systems, let’s go over how staking on the Autonity platform works. Like all Cosmos-enabled chains, Autonity makes use of the Proof-of-Stake Tendermint BFT consensus mechanism.
Distinctly however, Autonity makes use of both a liquid staking and Penalty-Absorbing Stake (PAS) model to enhance the functionality of the network.
The PoS consensus model secures the network via an economic incentivization mechanism that rewards honest validator behavior and punishes dishonest behavior through the initiation of a slashing (penalization) mechanism that potentially confiscates a portion of bonded stake or has an effect on the staking rewards normally given during consensus participation (i.e., it reduces the rewards the validator would normally receive in the event of penalization). This design is built to eliminate the potential for voting concentration within the validator set to ensure all network participants (validators) behave in an equitable manner.
In general, stake within an Autonity network (it is possible to host several Autonity networks simultaneously on-chain) is represented via the newton stake token (NTN). Like most Proof-of-Stake chains, all network participants that hold NTN automatically become a stakeholder contributing to the network’s security while earning a share of staking rewards in proportion to their stake.
By default, NTN exists in an unbonded and unlocked state and is transferable to other network stakeholders. However, when bonded, NTN is locked and no longer transferable, while liquid newton (LNTN) has the capability to be minted in exchange for delegated stake in equal proportion to the locked stake (i.e., the initially bonded/locked NTN).
Through this liquid staking model, LNTN receives staking reward entitlements equivalent to the bonded stake it represents (on a 1:1 ratio, meaning one NTN is always equal to one LNTN). As is clear from its nomenclature, liquid newton (LNTN) is transferable. In order to redeem stake, the converse (opposite) to bonding commences. Therefore, LNTN for delegated stake is burned (meaning it is no longer tradable) and after its unbonding period passes the NTN is redeemed.
To learn more about the relationship between Autonity’s three main token types (ANT, NTN, and LNTN) and the platform’s economic system, consider having a look at our Autonity economics and tokenomics blog post.
Autonity Liquid Staking
The Autonity network utilizes an incentivized liquid staking model concurrently with network validators as a means to redistribute value back to all users within the network. Validators achieve this goal through the participation of PoS consensus to ensure profitability from transaction fee distribution and the system’s stake inflation mechanism.
In general, the Autonity liquid staking model is designed to ensure:
- Capital efficiency allows staking rewards to be combined with the liquidy benefits of transferable bonded stake
- Composability liquid staked tokens can be transferred and used within additional protocols (e.g., as collateral for various DeFi purposes)
When delegated stake is bonded within a validator, liquid newton (LNTN) is minted in exchange for staked newton (NTN) and the staked newton is locked. The amount of liquid newton minted for the staked newton is proportional to the amount of delegated stake the validator possesses at the time bonding is initiated.
This conversion rate is maintained via the validator’s Liquid Newton Contract as the reference price for newton bonding and unbonding operations (determined via the rate of issued liquid tokens in proportion to the total amount of staked tokens bonded within the validator).
As a result, the minted liquid newton is subject to potential accountability and omissions (infractions that result in penalization) applied to the validator, meaning slashing takes place:
- If at the time of bonding, a validator’s delegated stake amount hasn’t been reduced via a stake slashing event, liquid newton is minted at a 1:1 ratio for the delegated newton staked.
- Conversely, if the validator’s existing delegated stake amount is less than the supply of issued newton, liquid newton is minted in proportion to the validator’s remaining delegated stake, resulting in a >1:1 issuance ratio of liquid newton for newton staked.
This tokenomic mechanism guarantees that a validator’s liquid newton (LNTN) tokens remain fungible (mutually interchangeable) during their continued issuance over time, meaning that the amount of liquid newton issued during the bonding process has a value proportional to the value of the newton (NTN) being bonded.
When stake is unbonded, it is subject to an unbonding period, allowing the holder’s liquid newton to be redeemed in proportion to its share of the liquid newton pool (i.e., the total amount of NTN held within the validator), less any applied slashing penalties.
To ensure network validator’s act honestly, the platform utilizes a Penalty-Absorbing Stake (PAS) model that determines slashing priorities via two main constructs, including:
- Self-bonded stake (NTN tokens deposited by the validator operator to its own validator to contribute to network consensus) is slashed as first priority until exhaustion. Self-bonded stake allows validators to earn staking rewards, however, unlike delegated stake, validators do not receive newly minted liquid newton (LNTN) in exchange for bonded newton (NTN). If a validator holds unbonded stake, the unbonding stake is slashed before the bonded stake.
- Delegated stake is slashed as second priority in the event the slashing amount exceeds the amount of self-bonded stake available. During the liquid staking process, stake delegators delegate the newton (NTN) governance token to validators in exchange for liquid newton (LNTN), which can then be redeemed for the underlying NTN via the unbonding process. If the delegator holds unbonding stake, the unbonding stake and bonded stake are slashed pro rata (proportionally) with equal priority.
In the Penalty-Absorbing Stake model, self-bonded stake has a unique risk profile compared to delegated stake because it furnishes loss absorbing capital should a slashing event take place. Consequently, liquid newton is only minted for delegated stake to ensure validator liquid newton has a balanced risk profile.
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The information provided by DAIC, including but not limited to research, analysis, data, or other content, is offered solely for informational purposes and does not constitute investment advice, financial advice, trading advice, or any other type of advice. DAIC does not recommend the purchase, sale, or holding of any cryptocurrency or other investment.
