Understanding Slashing: Impact on Stakers, Institutions, and Preventive Measures

Following the integration of the PoS system and the consequent emergence of staking, it has notably become a commendable means to authenticate transactions, fortify networks, and reap rewards.  But, hidden in the mix of rewards and yields, there’s this thing called slashing. 

Since 2020, there’ve been 226 of these slashing incidents on Ethereum alone costing around $14.3 million. 75 validators were slashed in February 2021 due to a single incident. Sounds like a lot, right? But when you think about it, that’s just 0.04% of all the staked ETH. Even though it’s not too common, it’s still a big deal, especially for institutions and individuals with substantial investments, given the potential financial ramifications.

What is slashing on Ethereum? 

Slashing serves as a stringent protocol within networks, akin to an enforcement mechanism. It kicks out troublemaking validators from the network while draining their funds. Think of it as a way to keep everyone in line.

Validators, who are like the guardians of the network, really don’t want to lose their investment. Slashing makes sure they play by the rules and don’t mess things up. It’s a punishment that takes away a chunk of a bad validator’s stake, and it keeps taking until they get booted out and tagged as “slashed.”

The whole point of slashing is to commend diligent validators who do their jobs well, while penalizing those who neglect their validation duties. It’s a way to stop sneaky moves that could mess with the network, like trying to create conflicting versions of past checkpoints.

It’s really important to remember that getting penalties doesn’t always happen because someone meant to do something wrong. Sometimes, it’s just from accidental mistakes or settings that mess up the system’s reliability.

How To Get Slashed?

Here are some of the most common ways people get slashed that you should avoid if you don’t want to get slashed:

1. Double signing: 

This is the most serious offense and can result in a validator losing all of their staked tokens. Double signing occurs when a validator proposes two blocks for the same slot. This can disrupt the network and lead to inconsistencies in the blockchain history.

2. Attestation violations: 

This occurs when a validator votes for two different versions of the blockchain history. This can happen if a validator is offline or if they are not properly synchronized with the network.

3. Downtime: 

This is the most common reason for slashing. Validators are expected to be online and available at all times. If a validator is offline for an extended period, they may be slashed.

4. Double voting: 

This is a less common offense, but it can still result in slashing. Double voting occurs when a validator votes for the same transaction twice. This can inflate the supply of the cryptocurrency and disrupt the network.

5. Incorrect block proposals: 

This occurs when a validator proposes a block that is invalid or contains malicious content. If a validator proposes a block that is not accepted by the network, they may be slashed.

How does slashing work?

First, when someone monitoring the network spots one of the above offenses, they blow the whistle. They create a message detailing what went wrong and spread the word. Then, that message gets added into a block by someone else. As a little thank-you, they get a small slice of what the wrongdoer put in. Finally, the network checks if the proof is legit, and if it is, the offender (the slashed validator) will receive the following slashing penalties:

1. They’ll be set to leave the network permanently in about 36 days.

2. Receive a minimal penalty at the point a proposer transmits a block containing the whistleblowing message.

3. At the beginning of each assigned period, they’ll receive a penalty for not fulfilling their duties leading up to their exit from the network.

4. Somewhere between the time a block includes the whistle-blowing message and when the offender can leave, they’ll receive a penalty that takes into account how many other validators broke the rules during that time. This penalty can be as high as the total balance the offender has. It’s meant to really punish validators who team up for bad behavior.

If a pool operator fails and incurs slashing penalties affecting multiple validators, the ETH depositor risks relying on the operator for reimbursement. This scenario, exemplified by Staked in February 2021, can result in the maximum penalty wiping out the offender’s entire balance.

Once validators are slashed, they cannot rejoin the validator set. Users slashed must create new validator keys and deposit fresh stakes if they wish to continue validating.

Slashing results in a gradual loss of staked ETH, peaking midway. After 36 days, the offending validator can exit the beacon chain, withdrawing any remaining stake.

Institutions, Exercise Caution!

Institutions, due to their substantial funds and consequently greater engagement in staking activities, encounter escalated repercussions when slashing incidents occur, thereby presenting substantial risks to their operations:

Money Troubles: Slashing means hefty fines. If a bunch of validators linked to an institution get slashed together, it could mean a major hit financially, possibly losing a lot of money.

Bad Rep and Trust Issues: If an institution’s validators get slashed, it can wreck their reputation and trust with users or clients. People might question their ability to handle staking properly or manage assets well.

Messy Operations: Slashing messes up an institution’s work by kicking validators out of the network for good. This disruption could mess with ongoing staking activities, and the institution might need to cough up new validator keys and stake fresh assets to keep going.

Relying on Others: Institutions relying on pool operators for staking face trouble if these operators mess up and cause slashing. This puts the institution’s stakeholders at risk, depending on these operators for fixes or refunds, which adds more uncertainty.

Regulatory Heat: Depending on where they operate, getting slashed might attract unwanted attention from regulators. Institutions might have to show they’ve been following the rules and doing their homework in managing staking. This could lead to more audits and oversight.

Clean Liquid Staking, a viable Strategy for Institutions!

Liquid staking essentially allows users to earn staking rewards while retaining access to their staked assets by leveraging liquid staking tokens (LST).

Among the various advantages, slashing protection stands prominent in liquid staking. Here’s a closer look at how liquid staking effectively addresses or mitigates the impact of slashing:

  • Token Liquidity: Staked assets are tokenized, offering tradable versions that provide liquidity and usability within the ecosystem.
  • Risk Diversification: Tokenizing assets allows spreading risks across multiple validators or platforms, reducing the impact of slashing.
  • Insurance Mechanisms: Some solutions include DeFi products or insurance-like features that buffer against slashing risks, minimizing direct impact.
  • Faster Recovery: Tokenized assets facilitate quicker rebound from slashing penalties, allowing users to swiftly re-stake or move assets to other validators.
  • Improved Participation: By offering liquidity to staked assets, liquid staking encourages greater engagement in staking activities, alleviating fears of fund loss in case of slashing events.

Final Thoughts

Slashing poses a significant challenge in the world of staking, impacting both individual validators and institutions alike. Its potential financial and reputational repercussions underscore the need for preventive measures.

As institutions navigate the staking landscape, the introduction of Clean Liquid Staking emerges as a strategic solution. Offering slashing protection through token liquidity, risk diversification, insurance mechanisms, faster recovery, and increased participation, Clean Liquid Staking stands as a reliable avenue for institutions to engage in staking without the looming threat of slashing.

Dexponent, with its commitment to offering staking opportunities for institutions sans slashing risks, presents a secure and innovative platform. Explore Dexponent today to seize the benefits of staking without the worry of slashing, ensuring a smooth and rewarding staking experience.

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