54. What Is Slashing in Cryptocurrencies?
The proof-of-stake consensus is used to validate transactions and generate new blocks. The entire process requires that validators receive rewards and appropriate compensation for their work.
However, it can happen that validators may intentionally or completely inadvertently engage in activities that harm the proper functioning of the entire blockchain. And this is where crypto slashing appears.
What is this action? What are its causes? Let’s dig deeper into this topic!
Crypto Slashing – Definition
The term is used to refer to validators who violate the principle of proper staking of cryptocurrencies. The main purpose of slashing is to promote appropriate behavior, adherence to the rules in the protocol and responsibility for one’s actions. This punishment encourages participants in a given network to act honestly and eliminate inappropriate behavior.
Simply put, slashing is part of the proof-of-stake consensus, which bans validators with bad intentions.
How Does Slashing Work?
As mentioned earlier, slashing serves as a punishment for inappropriate behavior by validators. It entails reducing a portion of their rewards due to violations of specific network rules.
Remember that validators are key participants in a given protocol or ecosystem. They earn money by verifying transactions and creating new blocks on the chain. For a validator to gain this responsible function, they must first pledge a certain amount of a given cryptocurrency to the network. This is a kind of security and motivates validators to act honestly. Thus, if a validator intentionally engages in something that harms the network, he may lose some of his funds through slashing.
Of course, the severity of the penalty varies from protocol to protocol. But the principle is common – slashing involves some specific percentage that is deducted from the validator’s rate, for each negligence. You probably want to ask at this point – can there be a situation where a validator has been so negligent in his duties that his entire account has been subject to slashing? Yes. This results in the removal of the validator from the community.
Reasons for Slashing
There are three main causes of crypto slashing. The first is the so-called downtime. Each network expects validators to be on standby at all times and to participate in the ecosystem. So if a given validator’s node is offline for an extended period of time, it causes delays in block production. The effect? The overall security of the entire network is reduced. For such behavior, the validator is subject to slashing.
The second reason is double signing. This offense is definitely more serious than downtime. It also involves a much greater penalty. What is involved? Double signing occurs when a validator signs two blocks at the same time – it doesn’t matter whether this procedure is accidental or intentional. This behavior triggers a backup node, which, as you probably know, results in nothing good for the primary chain.
The third is to manipulate the network and, more specifically, the consensus process. Beyond simply participating in the network, validators must completely avoid ill-intentioned behavior that potentially compromises the protocol. Understanding these principles is essential for anyone who wants to act as a network validator.
How to Minimize the Risk of Slashing?
We know – losing capital really hurts. Especially since when you invest in digital assets, you’re setting yourself up for profit, not loss. The good news, however, is that there are many ways to minimize the risk of slashing while still making money through staking.
For example, you can choose projects that do not use slashing. This group includes, for example: VeChain, Neo, Tron, Algorand or Band.
All right, but what about when you are nevertheless interested in a project that uses slashing? You can minimize the risk. Before you start staking, take a look at the rules of the protocol. Some of them are really tolerant, and in order to lose some of your funds, you have to really make an effort.
Trustworthy validators are invaluable to a particular network. The revenue of a given protocol depends on them. No wonder, that the developers of a network choose them so carefully and pay special attention to their behavior. In the case of downtime, part of the reward will be lost not only for the validator, but for the entire network!
If you have aspirations to be a validator, you need to understand what slashing is and the consequences that come with it. Understanding this is not difficult, and it will help you avoid behaviors that are subject to penalties in the ecosystem.