As regulation becomes hot topic in enterprise staking industry, Web3 organizations recognize the need for observability and monitoring to maintain a reliable business. In this article, we'll discuss the most important principles for getting your staking observability right.
The Internet Finance Bond
The financial ecosystem might be intimidating at time. Fact is that It has been difficult for entities or individuals to participate in or gain financial exposure to the internet's base layer before the invention of public blockchain networks.
Thanks to Web3, this has changed.
Internet Bonds, a new generation of digital work agreements, enables participants anywhere in the world to get exposure to the open-source web economy.
Understanding the fundamental properties of this new type of agreement is the first step to creating better models, products, and operations around it.
In this blog, I will focus on the accounting, financial, and operational aspects of staking rather than its technical aspects which we usually read about.
Staking Terminology 101
Self-Stake are tokens that are owned by the operator of a validator node which is then delegated to their node.
Move the accumulated rewards from the vault into the staker’s wallet
The staker's actual rewards are calculated by subtracting the claimed rewards from the difference between the daily generated rewards between two specific points in time
Earnings stored outside of the staker’s wallet (in a vault). These rewards are not transferable. The staker should "claim" the rewards in order to transfer them
A cut of the rewards that the validator keeps to themselves as a means of payment for their services
Self Stake / delegate
Rewards generated by staking the tokens
A Node in charge of processing, confirming, and writing transactions into a new block
Delegators are token holders who cannot, or do not want to run a validator themselves. Token holders can delegate tokens to a validator, who will at turn take a commission and from the rewards generated.Besides sharing rewards with the validators, delegators also share the risk
Activity performed by the Delegator, assigning tokens to a Validator of choice
Staking as a Service Provider
Staking-as-a-Service serves as a bridge between a blockchain's consensus mechanism and cryptocurrency holders who want to participate in the network. Through this platform, users can conveniently stake their crypto and receive rewards from network fees, with a small portion deducted by the staking service.
Custodial Staking-as-a-Service Large exchanges typically practice Custodial Staking-as-a-Service, which involves handling the entire staking process. Notably, the staking provider receives the rewards before they are distributed to the individual who staked a portion of their crypto holdings. Often this is called “Pooled Staking” since the service controls the users address required to stake and pools address together to manage the process more efficiently.
Non-custodial Staking-as-a-Service Non-custodial Staking-as-a-Service utilizes the delegation process that is integrated into several protocols. In this scenario, a validator like Allnodes.com, manages the node infrastructure, while the user retains control over their keys. When using a PoS network that supports native delegation, your share of rewards is directly transferred to you, without a middleman
Liquid Staking Liquid staking is an alternative to traditional staking that provides increased flexibility and efficiency. It enables stakers to access their assets while simultaneously enjoying the advantages of staking their tokens. This overcomes the challenge of illiquidity. A liquid staking provider accepts token deposits, stakes the tokens, and gives the depositor a receipt (such as stETH) that can be redeemed for the staked tokens.
The Staking Lifecycle
It's crucial to note that each blockchain's staking mechanism operates differently. Factors such as consensus mechanism, governance structure, and security model can impact how staking is implemented and incentivized. Therefore, it's vital to research and understand the unique nuances of each blockchain's staking system. Doing so can help investors and stakeholders make informed decisions and optimize the benefits of staking.
We will demonstrate two of the most common crypto native staking lifecycles:
Non-custodial Atom Staking
Delegating your ATOM means you retain control of your assets, unlike centralized exchanges which hold them in a custodial wallet. Your stake represents a weighted vote of confidence and the validator cannot access your assets.
The risk of a validator behaving incorrectly or maliciously is minimal, as this would expose them and you to protocol penalties (slashing).
When you delegate your ATOM, it becomes locked and cannot be used for anything else. Un-delegating your stake requires a three-week time commitment before regaining access to your delegated stake.
Rewards are “accrued” / "pending" and must be claimed before they become yours. Claiming rewards incur transaction fees, so it is advisable to wait until they exceed the fees before claiming.
Non-Custodial Validators services like Allnodes.com have additional features baked in for end-users, such as the ability to auto-compound your ATOM staking rewards, or recover your tokens if your wallet holding ATOM has been hacked.
Ethereum2 Liquid Staking with Lido
Users can stake any amount of ETH they wish to on the Lido Platform. Lido receives the staked ETH.
In exchange for the ETH stakes, users can avail of the derivate token of Lido DAO known as stETH (liquid asset).
As opposed to conventional staking which requires ETH in the multiples of 32, Lido DAO allows staking of any quantity of ETH the user wishes to stake.
Staking Monitoring Principles
Single Source of Truth - A Single Source of Truth (SSOT) is a system that allows all members of an organization to make business decisions based on the same telemetry data. It serves as a centralized repository of information. Web3 organizations can facilitate this by providing finance teams with a single source that stores the necessary data points - transactions, assets, and positions. This resource can then be utilized by all teams to conduct analysis, collaborate, and identify performance issues. Additionally, teams can retrieve specific data without being inundated by excessive information.
Structured Data - Data curation and reshaping helps translate and transform data from multiple blockchains to be usable. This means organizations should have their information curated and designed in the easiest usable format. A good observability platform should cut down the raw data to the relevant size and format. This lets teams both find the problem and easily generate insights. Teams should also be able to add custom telemetry data sources to their observability system like comments, tags, and files.
Continuous Reconciliation - The biggest challenge in reporting for crypto financing is often missing transactional data and/or interpreting data from DeFi transactions. For example, missing claimed staking rewards transactions can cause missing cost basis errors, which drive up your capital gains. You need to make sure your transactions are reconciled against your assets at any point in time.
Automation - Documenting transactions and assets are two manual activities that can take a lot of time and effort, have human errors, and slow down your operations. By automating data gathering, reconciliation, and reporting it is possible to focus on your core business instead of wasting time on manual operations.