For those who may be taking their first tentative steps into staking it’s important to understand exactly why the system exists in the first place.
PoS or Proof of Stake is a consensus mechanism. Consensus mechanisms are systems used in blockchain networks to achieve agreement (or consensus) on single data values or parts of the network among the decentralised or distributed system. In other words, it’s a way of checking that nobody is tampering with the blockchain ledger by making sure we all agree on those transactions that are correct and those that are not. This is really important for a self-regulating decentralised community, as we don’t have (or want) a single authority to decree what does and doesn’t go in the ledger. A robust consensus mechanism ensures that we have a secure blockchain ecosystem that is fair and accurate.
There a number of different possible consensus mechanisms used by various blockchains such as Proof of Stake (PoS), Proof of Work (PoW), Delegated Proof-of-Stake (DPoS), Proof-of-Authority (PoA), and Proof-of-Importance (PoI) to name a few. By far the most popular are PoW and PoS.
Proof of Work is used by Bitcoin and was the first consensus method to enable a functioning blockchain. Since then Proof of Stake has been developed as a low-cost, low-energy consuming alternative to the POW algorithm.
Staking is the process of holding funds in a specific cryptocurrency wallet in order to act as collateral for network security. Most staking systems require all their node operators (and often other token holders) to hold or stake their tokens in a wallet. They do this to add validity to their ‘promise’ to perform their validating responsibilities correctly. If they perform their duties correctly, and all the other node operators can verify this, then the stake is returned and a reward is given. However, if the node operator fails to perform their duties, their stake will be slashed — a portion taken away. This way all node operators are incentivised to do the right thing for the blockchain.
The more CENNZ tokens staked in the system, the more people are invested in correctly following the blockchain protocols, so making the whole ecosystem more secure.
Now let’s have a look at the specifics of staking on CENNZnet. We will explain the token economy, the role of Validators and Nominators, rewards and the benefits of staking.
CENNZnet works on a dual-token economy:
CENNZ is our staking token and works separately to block rewards. This means it can increase in value without impacting the cost of using the network. This is important to ensure developers can predict the costs of running their application and make it easier to plan ahead.
CPAY is the gas in the network and is used to pay transaction fees and as block reward payment in staking. It’s designed to be algorithmically stable, so it will retain a steady value. This means developers creating DApps on the network can easily predict the cost of their application, and stakers can easily predict the value of their stake. CPAY will also be tradable on the CENNZX exchange initially or can be transferred directly between wallets.
On CENNZnet we have two roles within staking: Validators and Nominators.
Validators are node operators who each store a copy of the blockchain and must perform certain functions to keep the system secure. CENNZnet will have 12 validator slots at launch — but this number will increase as the network matures and governance decisions are made.
Aside: What is a node? Full nodes act like a server for a decentralised network. They each store a copy of the whole blockchain which they use to validate transactions. Their main tasks are maintaining the consensus between other nodes and verification of transactions.
Full nodes are also involved in voting on proposals to decide upon actions for the future of the network. If more than 51% of them don’t agree with the proposition, it will not happen.
Run a node.
Stake a portion of their own tokens. The validator stake must be above the minimum threshold of 10,000 CENNZ.
Produce blocks. This requires them to be online 24/7 so they can create a block as soon as they are called upon.
Check the work of other Validators so that a group consensus can be reached as to whether the transactions are correct.
If the above duties are not performed correctly then the Validator’s stake will be slashed.
Validators are elected and hold their position for 24 hours. After 24 hours re-election will occur to select the next set of validators. Elections are run by an algorithm. Those who fulfil the requirements are put forward and out of this pool, those with the highest stake are chosen to fill the available roles. This means that Validators are never guaranteed their position and must accrue a competitive stake in order to be elected. It also means node operators can take downtime for maintenance without being penalised.
Validators need to be online and have their software running for the whole 24 hours of their era. This does not require you personally to physically be performing tasks for 24 hours, however your computer will and so you will need to have good monitoring and redundancy plans to keep nodes online all the time or risk slash.
Nominators are CENNZ token holders who choose to stake a portion of their CENNZ behind a Validator. If the chosen Validator is elected and performs their duties correctly, Nominators receive a portion of the resulting CPAY reward.
The Nominators CPAY reward is proportional to their contribution to the stake. So if you contributed 30% of the total stake behind a Validator you will receive 30% of the CPAY reward. Bear in mind, however, that Validators can choose to also take a commission, so this will be removed from the total reward available to Nominators.
Note that there’s diminishing returns on everybody voting for the same Validator, as the more Nominators a Validator has the less the portion of the CPAY reward. There’s a risk reward incentive to try nominate a Validator no one else has and get a larger share of the reward.
Nominators can stake with several Validators. If only some of your chosen Validators are elected then your token stake will automatically move to pool behind just Validators who have been elected. The nominator’s original preferences will remain intact in subsequent elections.
If a Nominator’s chosen Validator is found to not be performing their duties correctly, a portion of the stake is slashed. This includes the Nominator’s contribution.
Nominators staked CENNZ are locked in during the staking period. There will also be a slight time delay on return to ensure the Validators duties were performed correctly. This is a security measure. There has to be ample time to be sure a Validator/Nominator has not done something wrong before their funds are free to withdraw.
To take part in staking you must:
Agree to lock in and stake a minimum threshold amount of CENNZ (minimum stake will be 10,000 CENNZ for both nominating or validating).
To be elected as a Validator you must also:
Agree to lock in and stake a Validator minimum threshold of CENNZ.
Indicate interest in being a Validator. This is done by signing and submitting a transaction stating they want to be considered as a validator candidate. It will be available via cennznet.io but you can also build your own tools using our APIs.
You can stake CENNZ through cennz.net portal here: https://cennznet.io/#/staking
Keeping a blockchain network safe and supported is an essential part of the ecosystem. To ensure everyone is working together to support CENNZnet and to prevent malicious attacks, CENNZnet uses a reward and punishment system.
The incentive for staking CENNZ behind a well-behaved Validator is the distribution of CPAY rewards.
What is CPAY?: As mentioned in the CENNZnet token section above, CPAY is our stable gas token. It is separate from CENNZ and is used to pay staking rewards and transaction fees. CPAY is a deliberately inflationary token in order to create a stable fiat value. This protects our network users and developers from complications in pricing and unpredictable pricing fluctuations.
CPAY rewards are distributed every era (every 24 hours in line with the Validator election cycle) to successful Validators and their associated Nominators.
The exact CPAY reward is calculated according to transaction volumes on CENNZnet. Validators and subsequently Nominators are paid proportionality to the number of transactions that have taken place on the network during the relevant era.
All transactions on the CENNZnet require the user to pay a transaction fee. The transaction fee can be paid in any currency supported by CENNZnet (initially this will be CENNZ and CPAY but it will expand to include DApp tokens used on the network) and will be automatically converted into CPAY at the current spot value. Transaction fees are important for the security of the network as they prevent malicious parties from trying to inundate the system with transaction requests, in what’s known as a Denial of Service attack. Someone trying to overload the service with transaction requests would have to pay A LOT of money to be successful.
The more transactions that have taken place on CENNZnet the more transaction fees are acquired. At the end of the era, the pool of CPAY made from transaction fees is split up and divided equally and proportionally between Validators. The Validators then distribute the reward proportionally amongst their associated Nominators. In word equation form it will look something like this:
Era reward = Total transaction fees / # validators
Nominator era reward = per validator reward * my nominator stake / all nominator + validator stake
This means the busier the CENNZnet ecosystem is the higher the rewards for staking will be. It also theoretically means the inverse. Very low or no activity on the network could result in negligible or no rewards for an era.
The Validator limit
There is one further factor to consider in terms of CPAY rewards. While there is no limit to the number of Nominators a Validator may have, there is a limit to how many Nominators a Validator can distribute rewards to. This limit is currently 128, although it can be modified via runtime upgrade. A Validator with more than 128 Nominators is considered oversubscribed. If a Validator is oversubscribed when reward payments occur, only the top 128 Nominators as measured by amount of stake allocated by a Nominator to that specific Validator will receive rewards. All other Nominators are essentially “wasting” their stake — they used their nomination to elect that Validator to the active stake, but receive no rewards in exchange for doing so.
The punishment for Validator misbehaviour is slashing (removing of tokens). When Validators deliberately or accidentally fail to perform their duties correctly (e.g. go offline, attack the network, or run modified software) in the network, they and their Nominators will get slashed by losing a percentage of their staked CENNZ.
The percentage of the stake slashed varies according to the severity of the offence. The following levels of offence are defined:
Level 1: isolated unresponsiveness, i.e. being offline for an entire epoch. No slashing, only chilling (removed from active duty that era and also removed as a candidate in new eras. the validator must actively sign up to validate again).
Level 2: concurrent unresponsiveness or isolated equivocation. Slashes a very small amount of the stake and chills.
Level 3: misconducts unlikely to be accidental, but which do not harm the network’s security to any large extent. Examples include concurrent equivocation or isolated cases of unjustified voting in GRANDPA. Slashes a moderately small amount of the stake and chills.
Level 4: misconduct that poses a serious security or monetary risk to the system, or mass collusion. Slashes all or most of the stake behind the validator and chills.
Any slashed CENNZ will be added to the Treasury rather than burning or distributing them as rewards. This is so that slashes can be quickly reverted by the Council by simply paying out from the Treasury. This is useful in situations where validators have committed an offence through no fault of their own e.g power outage forcing Validators offline. In the case of legitimate slashing, it moves tokens away from malicious validators to those building the ecosystem through the normal Treasury process.
There are some further key points to know about slashing:
Slashed Validators will be automatically chilled. This means they are unelected and removed from active duty during the staking era. They will also be removed as a candidate from elections in new eras. To regain their status as a Validator they must actively sign up again and regain support from nominators.
After a slash has been determined there will be a window of time where the offending Validator can plead their case to the governing council. The council can then decide to proceed with the slash or undo it if it’s deemed not malicious or accidental.
Nominators can view a Validators slash history when choosing who to entrust with their stake. Once a Nominator has signed a contract with a Validator, they are obliged to see it through to the end of the era. You cannot uncommit mid- era if you realise a slashable offence has taken place. This means it is very important to choose a validator with a history of good behaviour and reliability.
There are some key benefits to taking part in staking, both as a Nominator or a Validator.
Staking benefits for Nominators:
Earn CPAY rewards: You are essentially investing your CENNZ to earn a return from them.
Help to secure the network: The more CENNZ are staked in the system the more secure the network is for everyone.
Staking benefits for Validators:
Earn CPAY rewards: Validators earn CPAY from their portion of the stake and can also take a commission % from the total CPAY reward.
Take part in governance: Validators can shape the future of the network by voting in proposals and having their say.
Securing the network: Validators are the front line of the consensus mechanism. By successfully verifying transactions and making accurate blocks you keep the ecosystem safe, fair and accurate.