On Proof of Stake blockchains like Umee, users can lock up their crypto as collateral to help keep the blockchain operational and secure in a process called “staking.” By staking tokens a user is helping secure a network by increasing the total amount staked and therefore increasing the difficulty for an attacker to take over the network.
Users who do not stake their tokens are penalized by having their market share diluted over time.
Liquid Staking
When users stake their tokens, the tokens usually become locked up for a predetermined amount of time. During this period the staked tokens are illiquid and users are unable to transfer or exchange them.
Liquid staking allows users to access the underlying tokens while they're being staked. With liquid staking, users that stake tokens are issued another token that can be thought of as a certificate of deposit. These tokens can be redeemed for the underlying tokens plus staking rewards accrued, transferred between wallets, instantly exchanged for the underlying unstaked token or other tokens on a decentralized exchange, or used across various DeFi applications like Umee's lending facility to generate additional yield.
Validators
When tokens are staked on PoS networks like Umee, a token holder is “delegating” their tokens to a validator. These tokens are locked up and added to a validator's “stake,” or total collateral, and are no longer usable or transferable while staked.
Validators can be thought of as elected officials in a representative democracy, and delegators can be thought of as the community that elected them. While anyone who stakes tokens can vote on governance proposals to help shape the future of a network, it is a validator’s duty to stay informed and actively participate in governance in order to advance the interests of their delegators and add value to the network.
Users maintain full custody of staked assets; validators are unable to confiscate staked tokens if they wanted to.
It is recommended that users assess various criteria including voting power, voting participation, and general governance stances whenselecting a validator.
The more tokens a validator stakes, the greater their “voting power,” or ability to influence governance decisions becomes.
Slashing
Staked tokens are a form of collateral used to ensure validators do their job. If a validator misbehaves, a portion of their total stake is removed or “slashed.” This means that everyone who has delegated tokens to this validator will have their tokens slashed proportionately.
Slashing is very rare because validators are financially incentivized to do their job.
The most severe offense a validator can commit on the Umee blockchain results in 5% of their total stake being slashed, meaning that delegators would lose 5% of the tokens they delegated to this validator if the validator misbehaves.
Slashing helps ensure validators are responsible and actively working to keep the network operational and secure since there is a financial penalty if they don't.