All news is rigorously fact-checked and reviewed by leading blockchain experts and seasoned industry insiders.
Although it’s hard to believe, it wasn’t so long ago that purchasing items online from unknown companies was extremely risky, that getting a ride from a stranger was unheard of, and that asking a stranger to rent their house for a few days would have gotten some very strange looks. Today, you might purchase via Amazon from a company you’ve never heard of, while taking an Uber to the AirBnb you booked. In 2011, Forbes predicted how these elements would change with the evolving internet, and that reliable ratings systems would take over our decisions on who to do business with. At the time, companies like Uber and AirBnb were starting to expand, but none of it would have been possible without these rating systems, part of the reputation economy. The internet, and especially social media, have essentially made it harder and harder for companies or people to be terrible without the word getting out. Enough bad reviews can ruin an Amazon-based business, and a 3 star rating of an AirBnb gives pause for concern. Even individuals rely on their reputation to stay intact on social media, knowing that rude posts or real world incidents can make their way to the court of public opinion.
While not a perfect system, the reputation economy has unlocked the decentralized business model, essentially creating trustless and P2P interactions that are protected because both parties are heavily incentivized to do the right thing. For Web3, smart contracts can already create this trustless and secure system. However, there are times when relying on individuals still makes sense in Web3. And this is where the reputation economy allows the best of both worlds, in the form of third-party delegated staking.
Delegated Staking: The Basics
Delegated staking came about as a way to fix the flaws in Proof of Stake consensus. While Proof of Work has a number of key flaws, including tremendous computing and energy needs, much longer times between blocks, and a lack of scalability, Proof of Stake was meant to fix these issues. In some ways PoS has created a much better alternative to PoW, speeding up the process considerably which helps to keep gas fees reasonable, creating a scalable solution. However, PoS isn’t perfect either, as it heavily rewards those who have the resources to stake large amounts, rewarding those who already have the most. This also opens up the method to bad actors, who can potentially hijack the chain simply by outstaking other participants, and the community as a whole does not have much recourse to prevent heavy consequences.
This is where delegated staking can tweak the PoS model, fixing three key elements while giving up relatively little if the method is executed correctly. Delegated staking allows individuals within the protocol to delegate their staked tokens to a third party, giving them the ability to act as a validator. Why would anyone choose to delegate their tokens? Because when that individual is chosen to validate, the rewards earned are then passed back proportionately to those who contributed their staked tokens. Essentially, members are voting for an individual with their tokens, hoping that the combined contribution will help the validator to get “elected” and earn rewards for those who voted.
This is a simple tweak to PoS, and yet it creates a very different model. With this method, the speed of validation (and therefore the network) is much faster since there is a much smaller number of validators, each with a subcommunity of staking supporters. Second, the “winner take all” element of PoS is eliminated, with the rewards being distributed to a much broader proportion of the community. The last difference is somewhat counterintuitive. Because there are far fewer validators, the initial reaction is that this is a riskier method and prone to attacks. This could happen, but it is here that the reputation economy effect greatly buffers the risk. Unlike PoS, delegated PoS requires that validators are not anonymous. Given that the only way they can be selected to validate is to have a large amount of staked tokens, they are very highly motivated to cultivate and keep a positive reputation. If there is any hint of foul play—and not just in terms of validation, but even in their personal lives—that reputation hit could prove devastating. For the delegators, only an individual with a good track record and trustworthy reputation is worth staking for. If there is foul play, all those who supported the individual are at risk of losing their stake. This creates heavy incentives by all to act in a way that benefits the platform’s health and longevity. When done properly, the method’s potential weakness effectively becomes its greatest strength.
Who Uses Delegated Staking?
The delegated staking method, despite having a number of advantages, is still used by a smaller number of platforms. Cosmos, Cardano, and Aptos have adopted the method and have seen success with it. For the Chainlink ecosystem, only stake.link utilizes delegated staking. However, the platform has taken the method even further by adding one more modification. Instead of straightforward delegated staking, stake.link offers liquid delegated staking. This means that users now have a larger chance of their validator being selected and earning rewards, but at the same time they are able to work their tokens to create even more gains. The platform has run very smoothly since going live in December of 2022, largely because it is supported by 15 of the highest-performing node operators in the protocol. The result has been democratizing access to staking in the Chainlink Ecosystem, and creating composability through the use of the liquid staking receipt token, stLINK. stake.link and the protocol token SDL enables users to provide LINK collateral. This benefits them as they receive a share of rewards from the most high-performing Chainlink node operators, gain priority access to staking LINK, and are able to participate in the governance of the platform.
Final Thoughts
There are many different consensus methods used across the larger blockchain ecosystem. Each is designed to accomplish a specific goal, and each carries with it pros and cons. Choosing a consensus method as a platform can be a stressful process, hoping the chosen method will strike the right balance for the platform’s security, speed, scalability, and more. Delegated staking, while not perfect, provides plenty to like and has fewer downsides than many other methods. So long as the validators are selected well, structured within a transparent reputation economy, a platform can have a long life with a community of well-rewarded members.
