How Does Solana Staking Work? A Beginner's Guide

Staking crypto assets is often advertised as a way to earn a passive income but is it all to it there is? In this article, we hope to provide a more in-depth look into one of the most popular Proof-of-Stake networks at the time, Solana. Let’s unpack how Solana staking works and bust some myths along the way.

Key Takeaways

• Staking is a part of the process necessary to maintain consensus on the state of Solana’s decentralized network. Due to computational complexity of contributing to the network, validation is rewarded with SOL tokens.
• Without running a validator yourself, there are two main methods to stake Solana: delegate from a non-custodial wallet or use a staking option on a centralized exchange.
• Despite the popularity of staking as a passive income method and seeming safety, it is not without its own risks. Poor performance of a validator is penalized, and if you use DeFi products to stake, the risk of smart contract vulnerabilities is present there.

What is Solana and Why Stake It?

Most likely, you are coming into this guide with some basic knowledge about Solana and Proof-of-Stake. If not, catch up with our guides! Diving into Solana staking specifically, let’s unpack the basics before we delve into the details and practical advice.

What is Staking?

Staking is associated with the consensus mechanism called Proof-of-Stake (PoS). The term is closely connected with the ‘prize/interest/share’ meaning of the word. When you stake, you commit a portion of an account balance to secure the network. This usually also entails running a full node or validator node, which can require significant computing resources.

In other words, you commit crypto assets and/or computing power to the network. To reward users who go for these lengths to support a platform, crypto protocols introduce staking rewards. In return for the pledge, validators receive rewards, which can come from transaction fees, inflation and other sources.

Solana’s Unique Approach to Consensus

The Solana cryptocurrency uses an original specification of Delegated Proof-of-Stake (DPoS). In its case, validators’ software votes on block inclusion and their votes have more sway if the stake is high. SOL holders can choose to delegate a portion of their tokens to validators of their choice. In this relationship, validators gain more voting power, and delegates receive a share of validator’s rewards.

DPoS is not really obscure and is actually applied in many popular cryptocurrencies (BNB, TRX). What makes Solana truly unique is its integration of Proof of History (PoH), which acts as a cryptographic clock. PoH creates a verifiable sequence of events and timestamps, allowing the network to process transactions at exceptional speeds—often cited at over 65,000 transactions per second—while maintaining low fees. By providing a historical record and efficient time-keeping, PoH streamlines the consensus process, making Solana a high-throughput blockchain.

Benefits and Risks of Staking Solana

Staking Solana allows you to earn rewards and contribute to the network’s security. By delegating your SOL, you help strengthen the Solana blockchain, making it more resilient and efficient. In the long-term, this can be considered a network effect: the more reliable and efficient the infrastructure, the more valuable it is.

However, contrary to popular opinion, staking is not risk-free. To discourage harmful behavior, staking protocols employ slashing. If a validator fails to meet their requirements or intentionally undermines the network processes, their stake gets slashed. In addition to getting basically fined, their stake is diminished which leads to further loss in rewards.

When you stake your SOL, unlike some PoS networks, you do not send them to an address or lose self-custody. Users are still encouraged to perform due diligence when choosing delegates, because in the event of slashing, their stake and rewards get slashed, too.

Choosing a Staking Method: Centralized Exchanges vs. Non-Custodial Wallets

There are plenty of ways to earn staking rewards: delegate SOL in your wallet, exchange, go to decentralized finance, or just use the CLI to do it yourself. Choosing the right method depends on your comfort level with technology and your priorities regarding control and convenience.

Staking with Centralized Exchanges (CEX)

Staking with an exchange is a popular way of earning rewards on staking SOL. After all, if they have your deposits, you might make the most out of it instead of letting your funds just be a dead weight in someone else’s hands. Some exchanges, such as Coinbase, Kraken, and Binance, run their own validator staking pools with their own infrastructure.

Pros of CEX Staking:

• Ease of Use: Exchanges offer a simple, user-friendly interface. Staking is often automated, requiring minimal technical knowledge.
• Convenience: If your SOL is already on the exchange’s balance, staking is basically seamless.

Cons of CEX Staking:

• Custodial Risk: The exchange holds the addresses’ private keys, meaning you do not have full control over your assets. If the exchange is hacked or goes bankrupt, which is rare but happens, your funds are at risk.
• KYC Requirements: Before you even start, you must comply with Know Your Customer (KYC) and Anti-Money Laundering (AML) checks.
• Lower Rewards: Staking yields on CEXs may be lower compared to non-custodial options due to commissions.

Staking with Non-Custodial Wallets

A more accessible option for users who want to retain control over their assets is to stake through a non-custodial wallet service. Wallets like Phantom and Solflare let you delegate your stake while retaining full control over your private keys.

Pros of Non-Custodial Staking:

• Full Control (Self-Custody): You maintain ownership of your private keys and your funds.
• Greater Privacy: You are not subject to the same regulatory oversight as CEXs.
• Censorship Resistance: Your access to funds cannot be restricted by a centralized entity.

Cons of Non-Custodial Staking:

• User Responsibility: If you lose your private keys or seed phrase, there is no customer support to recover your funds.
• Technical Burden: While generally straightforward, it requires managing security and backups yourself.
• Unstaking Delays: To prevent the threat to the consensus mechanism in an event of mass stake withdrawal, staking and undoing a stake does not occur immediately. There is typically a warm-up and cool-down or unbonding period (usually 2-3 days) before unstaked SOL is available.

Staking Solana Through a Centralized Exchange Step-by-Step

Are you comfortable with trusting an exchange with your keys and funds? Then staking through a centralized exchange is arguably the easiest method. A typical process for staking Solana on an exchange looks like this:

1. Log in and Top Up the SOL Balance: Ensure you have SOL in your exchange account. If not, deposit it from an external wallet or purchase it directly on the exchange.
2. Navigate to the Staking Section: Look for the "Earn," "Staking," or "Simple Earn" section on the exchange platform. Locate Solana in the list of available staking assets.
3. Choose a Staking Option: Exchanges often offer "Flexible" (can unstake anytime, lower APY) or "Locked" (fixed term, higher APY) options.
4. Enter Amount and Confirm: Input the amount of SOL you wish to stake, review the terms, and confirm the subscription.
5. Unstaking: For Flexible staking, you can typically redeem at any time. For Locked staking, you must wait for the term to end, or choose early redemption, which may result in reduced or forfeited interest.

Centralized exchanges these days are also large liquid staking providers. If you want to know how this DeFi feature, available for Solana as well, works and how to use their tokens, read our guide to liquid staking!

Staking Solana Through a Non-Custodial Wallet Step-by-Step

Staking via a non-custodial wallet provides the benefit of self-custody. With Solflare and Phantom, you can expect the delegation process to look like this.

1. Set Up and Fund Your Wallet: Create a new wallet (if you haven’t already). Ensure you securely store your seed phrase. Deposit SOL into the wallet address. Remember to leave a small amount of SOL (e.g., 0.05 SOL) in your main account to cover future transaction fees.
2. Access the Staking Section: In your wallet interface, look for the "Staking" tab or an option to "Start earning SOL."
3. Choose a Validator: The wallet will display a list of validators. This is a crucial step, as you will delegate your stake to one of these nodes.
4. Enter Staking Amount and Confirm: Select the validator, input the amount of SOL you want to stake, and click "Stake" or "Approve."
5. Activating the Stake: Solana manages staking operations through epochs (~2-3 days). Your staked SOL will activate at the start of the next epoch and begin earning rewards.

Unstaking Solana:

1. Initiate Unstake: Go to your staked balance in the wallet and select the stake account you wish to unstake.
2. Deactivation Period: When you unstake, your SOL enters a deactivation period, which begins at the start of the next epoch. You will not earn rewards during this time.
3. Withdraw Funds: Once the stake is fully deactivated at the end of the epoch, the SOL will become available for withdrawal back to your main wallet account.

Understanding Validators and Choosing the Right One

In Solana's DPoS model, validators are the backbone of the network. They are responsible for processing transactions and maintaining the integrity of the blockchain. When you delegate your SOL, you empower a validator, and they share a portion of the rewards they earn with you.

In other words, choosing the right validator is essential because your rewards depend on their performance. Which key factors should you consider when choosing one?

• A validator’s uptime indicates how consistently they are validating blocks. Higher uptime (closer to 100%) means more reliable rewards.
• Validators charge a commission fee on the rewards they earn before distributing them to delegators. Lower commissions (e.g., 0% to 10%) mean a higher return for you.
• Delegating to smaller, independent validators rather than large pools (especially those run by centralized exchanges) contributes to the network's overall health and decentralization.

You can find information about different Solana validators and their metrics (uptime, commission, total stake) using monitoring tools such as Solana Beach or Validators.app.

Fair Warning: Risks of Staking Solana

While staking is generally considered a low-risk way to earn passive income, it is not without potential issues to keep in mind.

As noted earlier, if a validator acts maliciously or fails to perform their duties correctly, their stake—and a portion of your delegated stake—can be "slashed" or penalized. More often than not, this will be outside of your control when you delegate.

If your chosen validator experiences downtime, they cannot validate transactions and will not earn rewards during that period, impacting your returns.

While native staking (directly via a wallet) avoids smart contracts, liquid staking solutions (like Marinade.Finance) rely on smart contracts. If a vulnerability exists in the liquid staking protocol, funds could be at risk.

You can mitigate risks by performing thorough due diligence on validators and diversifying your stake among several reputable validators.

Maximizing Your Staking Rewards

Solana rewards for stakers are distributed every epoch, roughly every two days. With the current distribution rate, it roughly translates to a 7.2–7.6% annual percentage yield on average. Liquid staking and restaking solutions deliver roughly the same results but with the added benefit of holding liquid staked tokens (LST) on top. Whatever offers you higher rates certainly should attract scrutiny for being too good.

You can maximize your returns by:

• Compounding Rewards: Staking rewards are automatically added to the total stake, so a stake essentially accrues compound interest. If you stake natively, Solana compounds it automatically but some alternatives might require your attention or action.
• Choosing Low-Commission Validators: By selecting validators with a lower commission rate (e.g., 0% or 5%), you ensure a larger share of the rewards is distributed to you.
• Monitoring Validator Performance: Regularly check your chosen validator’s uptime using monitoring tools to ensure they are performing reliably and maximizing your rewards.

Conclusion

Staking in general is a solid and safe way to increase your holdings, though not entirely risk-free. It’s not worth committing to it expecting parabolic growth and immediate results, at least if we are talking about legitimate projects such as the Solana blockchain.

Let us know if you found this guide to staking helpful! We offer more educational and informative content in our blog but with your input it can be even better. Same goes for ChangeHero in social media—X, Facebook, and Telegram—subscribe and connect with us!