Learn How Staking And Liquid Staking Works On Solana
Staking Solana is the process of delegating your SOL tokens to a Solana validator or group of validators so they can use your SOL as collateral when they process Solana network transactions. Validators earn SOL rewards by using your SOL, and they give you a percentage of their earnings as a reward for lending them your SOL tokens.
The Solana network validates transactions using a Proof-of-Stake mechanism. Proof-of-Stake means that validators are required to deposit SOL with the network (their "stake") when they help maintain the network. The deposit acts as collateral to make sure the validators stay honest and do not try to cheat the system. If a validator tries to cheat the network, then the SOL deposited with the network can be "slashed", or taken away from the validator (see network slashing rules here). This is one example of how blockchain protocols are designed to reward and punish behavior in a way to incentivize all participants to act in the best interest of the entire network.
Staking Solana SOL is similar to keeping idle fiat currency in a savings account. You may not have a need for your SOL at the moment, so you can earn a passive income yield on your SOL until you need to use it (passive income can also called interest APY, interest APR and interest).
Earning SOL yield helps offset the overall effect of inflation. Each year the network issues a number of new SOL tokens determined by computer code - these tokens are given to validators as a reward to process transactions.
As of May 2022, there are about 1,800 Solana validators located across the world. The number of validators has risen gradually since Solana mainnet started - this number will likely continue to grow into the future. A large number of independent validators helps ensure that the Solana blockchain stays healthy and decentralized.
Source: Solana Beach
When you delegate your SOL tokens to a validator, you are trusting that they will not try to cheat the system. You could lose your SOL tokens if a validator tries to manipulate the system. The chances of this occurring are fairly low, and there are not any prime examples to date of this occurring on the Solana network. The risk is not zero either, so it's important to be be aware of the remote possibility. It is always important to do your own research and trust the validator before delegating your SOL tokens to them. Validators.app and SolanaBeach.io are good resources to read about individual validators.
Delegating your tokens to a validator does not give the validator ownership or control over your tokens. The validator cannot steal your tokens or send them to someone else. You maintain full control over your staked tokens at all times. The validator is only able to use your SOL tokens to help validate the network.
You should be aware that validators can change the fee they charge without notice. You should always check the latest statistics for your validator to make sure you are earning the yield you expected. The Solana network allows validators to charge a fee between 0% and 100%, which means that validators could take all of the staking rewards in some cases.
Validators are incentivized to be honest and keep fees low in order to attract more Solana SOL deposits. Many validators charge 0% fee to build their reputation among the community and gather assets. Validators that charge high fees may lose their assets over the long-term as depositors seek higher staking reward yields from lower fee validators.
When you look at the public validator fee schedules, you may see some validators that charge 100% fee. This is not a mistake - it typically represents a privately run validator. You should not stake your SOL with validators that charge 100% fees because you will not generate any staking reward yield for yourself.
Source: Solana Beach
“Liquid Staking solutions like Marinade help increase decentralization while creating new opportunities for users through staking derivatives.”
- Anatoly Yakovenko, CEO of Solana Labs
Liquid staking is an innovative staking method that enables users to earn staking yield on their SOL while maintaining liquidity, or the ability to spend and send the token. With traditional staking, your tokens become "locked" and you cannot send or spend your tokens until you unstake them. This presents an issue if you want to use your SOL as collateral with a DeFi app. With liquid staking, you can still use your staked SOL while it continues to earn interest.
The most common way to use liquid staking on Solana is with Marinade and Lido. Smart contracts automate Marinade and Lido staking programs. Avana Wallet has integrated Marinade liquid staking in the app. Avana Wallet enables you to liquid stake and unstake your SOL with just a few clicks in our app.
When you liquid stake your SOL with Marinade, the Solana smart contract allocates your funds to a diversified pool of more than 400 medium-size validators. Marinade's liquid staking program spreads out your SOL so you can benefit from portfolio diversification, which is a finance term that means you are spreading your bets to reduce overall risk. If one validator goes rogue, you will not lose all of your funds because that one validator likely represents less than one percent of your total funds.
Marinade's liquid staking program helps improve the health of the Solana network because it allocates funds to medium-size validators. The overall network health is better when the number of validators increases and the overall voting power is not controlled by a small concentrated group of validators. As of May 2022, the top 20 validators had about 33% of the voting power. Marinade's liquid staking program should help this number move down over time.
The long-term goal of Marinade is to make MSOL the unit of account across Solana instead of SOL tokens.
In the two charts below you can see actual price data for Solana SOL and Marinade MSOL over time. The price of Marinade MSOL tracks Solana SOL very closely. The second chart shows the relative price of Marinade MSOL divided by Solana SOL. Over time Marinade MSOL rises in value compared to Solana SOL. The rise in value is the effective interest rate, or interest APR. Currently the effective interest APR on Marinade MSOL is about 6%. This rate has been fairly stable since the liquid staking smart contract was launched in 2021. The staking rewards interest rate changes over time, so always check the interest rate before staking your SOL.
As you can see, it makes more sense to hold a liquid staking option like Marinade MSOL in your portfolio rather than Solana SOL. Keep in mind you should always keep some Solana SOL in your portfolio to pay transaction fees. Not all DeFi and other decentralized apps accept Marinade MSOL.
When you are ready to unstake your Marinade MSOL back to Solana SOL, you can either swap your Marinade MSOL for another token using the swap feature in Avana Wallet, or you can unstake directly with the Marinade smart contract using Avana Wallet. Unstaking your Marinade MSOL typically involves a small fee of ~0.3%. This fee changes depending on market conditions. Avana Wallet calculates the unstaking fee automatically for you when you use the app.
The amount you can earn from staking Solana SOL depends on the network staking rewards paid and the fee that the validator takes. The network rewards paid are pre-determined, and can be seen in the chart below from Solana. Staking rewards start high in early years, and gradually drop to a stable rate of about 2% after year 10.
The staking rewards you receive can be calculated by taking the current staking reward (about 8% as of May 2022) minus the fee that the validator takes (varies by validator).
The staking rewards paid by the network directly affect the inflation rate, which is the quantity of new Solana SOL tokens issued each year. This rate is pre-determined by network protocols.
Solana's network operates in a system of epochs, each of which typically lasts 2-3 days. The system rewards validators at the end of each epoch. The system rewards are similar to a paycheck that you receive every two weeks from working.
When you stake your Solana SOL with a validator directly, you must wait until the beginning of the next epoch to start earning yield on your SOL. Also, when you want to unstake your Solana SOL, you must wait until the end of an epoch to unstake your SOL. The time it takes to unstake your Solana SOL depends on the epoch - it could take between a few minutes and two days.
Liquid staking programs do not require the waiting period - you can stake and unstake between epochs with liquid staking programs. Avana Wallet believes that liquid staking programs provide a better risk-adjusted return and experience for users - that is why we integrated liquid staking into our app. Liquid staking removes the waiting time and also provides portfolio diversification.
The tax treatment of crypto staking varies by country. You should always consult a tax professional for advice before you make any financial decisions. Currently in the United States the tax treatment for staking is unclear.
Some cryptocurrency groups are pushing for favorable crypto staking tax treatment that would not tax crypto when it is swapped to a staking derivative. The industry state is changing rapidly, so be sure to check the latest status. You can read more about staking and crypto taxes here.
Staking your Solana SOL is easy with Avana Wallet. It requires just a few steps:
This post is not meant to be financial advice, and it is for educational purposes only. You should always consult a financial advisor before making financial decisions.
Staking and liquid staking is a great way to earn low-risk passive income on your Solana SOL. Avana Wallet makes it super simple for you to use liquid staking in our app - the entire process is integrated and requires just a few clicks.
Upgrade your Solana wallet today