Slashing in crypto happens when validators in a proof-of-stake blockchain are penalized by having part or all of their staked crypto removed for behaving negligently or maliciously. In this article, I will walk you through all you need to know about slashing in crypto.
What is slashing in crypto for dummies
Imagine you’re a validator in a proof-of-stake blockchain. Slashing is like the network’s way of giving you a stern slap on the wrist for bad behavior. It’s when you break the rules or make mistakes, and the blockchain takes some of your staked coins as punishment
“So, it’s like a digital time-out?”
Exactly! Let’s say you try to cheat or go offline when you’re not supposed to. The blockchain notices, and it says, ‘Bad validator! No cookies for you!’ It takes away some of your hard-earned staked coins to teach you a lesson and keep the network secure.
“But why do they call it ‘slashing’?”
“Well, it’s like a sharp blade coming down on your staked coins, slicing off a piece of them. It’s a way to deter malicious validators from misbehaving and protect the integrity of the blockchain. So, remember, when you stake, be a good validator and avoid the digital time-out!
An explanation for the more technically minded.
Slashing is primarily employed in proof-of-stake (PoS) blockchain networks, where participants lock up a certain amount of their cryptocurrency holdings as collateral to become validators. These individuals are typically responsible for verifying transactions, securing the network, and reaching consensus.
Validators who violate the predefined rules of the blockchain network can face slashing penalties. These penalties serve as a deterrent against activities that could undermine the security and functional aspects of the cryptocurrency ecosystem.
Slashing penalties can be triggered by various actions, such as
- Double signing, where a validator signs two conflicting blocks at the same height. This can lead to a fork in the blockchain and compromise its integrity.
- Censorship, where a validator intentionally excludes certain transactions from being included in the blockchain.
- Long-range or 51% attacks, where a validator attempts to rewrite the entire blockchain history.
- double-spending or attempting a
- Unavailability or downtime: Validators are also penalized for extended periods of inactivity or failure to contribute to achieving network consensus.
Why do Proof-of-Stake systems slash?
PoS systems use both a carrot and a stick mechanism to ensure incentives are aligned. This way they reward good behavior and penalize malicious behavior.
The carrot is in the form of block rewards that you receive for adding new blocks to the network. The validator who adds the new block is selected by chance in proportion to the amount of the native crypto coin that they have staked. Hence the more you stake the more likely you are to receive a reward.
On the other hand, the more you stake the more you have to lose. This is where the stick comes in. Slashing acts as a disincentive for participants to engage in actions that may compromise the network.
Ultimately, this helps to uphold the security, trustworthiness, and overall stability of the blockchain network as it discourages bad actors.
How Does Crypto Slashing Work?
Slashing mechanisms in cryptocurrency networks typically involve a series of predefined rules that node operators must follow.
These rules are coded into the blockchain protocol and are enforced by the network’s consensus algorithm.
When a validator or staker is found to have violated the rules, the penalty is automatically triggered. The severity of the slashing penalty depends on the severity of the offense committed.
The penalties can range from a percentage-based reduction in the staker’s holdings to the complete confiscation of their collateral and removal of the validator.
For example, now that Ethereum has moved to the proof of stake beacon chain the minimum staking requirement is 32 ETH. If you behave erroneously or maliciously you could lose anywhere between 1 or 2 ETH to complete liquidation depending on the severity of the infringement.
Why you should care
As a crypto investor, you need to be aware of the risk of slashing when you stake your crypto. As a crypto investor, if you plan to hold a crypto asset for the long term then you are better off staking it. This way you earn a yield on your holdings. The biggest risk with doing this is that you stake with a validator that gets slashed. To avoid this do the following
- Diversify your staking across validators
- If you hold ETH, join a liquid staking pool Lido, or Rocket Pool which allows liquid staking. You can find out more about how that will help you multiply your yield in my post on “What is Lido crypto“.
How Slashing Affects Validators and Stakers in Cryptocurrency Network
Best Practices for Validators to Avoid Slashing Penalties
To avoid incurring slashing penalties in PoS protocols, validators should follow these best practices:
- Stay updated on network rules and requirements to ensure compliance.
- Maintain reliable infrastructure to minimize the risk of downtime and promote network availability.
- Backup private keys to ensure security
- Regularly review network updates and patches to address any potential vulnerabilities and avoid penalties due to outdated software.
- Participate actively in network activities to avoid incurring penalties for inactivity or non-compliance.
Does slashing exist in proof of work?
No in a proof of work, blockchain validator nodes do not stake anything. For example, miners do not stake Bitcoin on the Bitcoin network. Instead, their input is the amount of energy they expend and the investment they make into powerful machines to solve cryptographic puzzles.
FAQs
What happens to slashed tokens?
It depends on the crypto protocol. For example Ethereum burns any slashed ETH and Polkadot sends slashed DOT it to its treasury.
Why is slashing bad?
Slashing in crypto means that a validator has acted maliciously or negligently which threatens the security and reputation of a Proof-of-Stake blockchain. It also means that if you staked your assets with that particular validator you lose all or part of your assets depending on the severity of the case.
What is the penalty for slashing ethereum?
It can range from 1 ETH all the way to complete liquidation and removal of the offending validator depending on the case.
Can I lose staked tokens?
Yes if stake directly with a validator you could lose you all or part of your staked assets if the validator gets slashed. You can avoid this by staking with Lido who diversify your staked assets across validators and have an insurance fund for such cases.
How common is ETH slashing?
Based on historical data about 1 in 10,000 blocks are associated with a slashing incident.
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