March 22, 2022
Table of Contents
- How to Choose a Validator
- Risk Factors
- Detailed Staking Guide
- Why Should You Stake Your ATOM?
- Conclusion
Cosmos was created in 2014 by developers Jae Kwon and Ethan Buckman with the goal to create the “Internet of blockchains”, which is a universe of blockchains that are interoperable with one another. The ecosystem is built based on a Hub and Zone model, with application-specific blockchains such as Osmosis, Terra, and Sentinel. To learn more about Cosmos, check out our latest article here!
Those of you who have explored the Cosmos ecosystem may already be familiar with Keplr Wallet, the browser extension wallet for the Cosmos (ATOM) ecosystem. The Keplr wallet is the go-to wallet for transfers and staking for many blockchains in the Cosmos ecosystem, including the Cosmos Hub, as well as Osmosis (OSMO), Secret Network (SCRT), Crypto.org (CRO), and more.
The Cosmos Hub is powered by a Proof-of-Stake consensus method that uses validators rather than miners to validate transactions. This means that transaction validators across the network validate based on how much “stake” they pledge to the operation of the network. The more cryptocurrency a validator “stakes”, the more often it’ll be chosen to propose new blocks, thereby increasing the amount of staking rewards over time. The process of committing your assets to the validator of the blockchain is commonly referred to as “staking”. In the Cosmos ecosystem, participants can stake their ATOM to generate yield, participate in governance, and secure the network which we will elaborate more in the article later.
How to Choose a Validator?
Before you start staking, it makes sense to first choose a validator. As of 13 March 2022, Cosmos Hub has 150 validators in the active set, and picking a validator from this broad list can be difficult. While I can’t tell you which validator is “better,” I can provide you with some considerations to take note of while you make your decision.
1. Uptime
Perhaps one of the more important factors to look out for is the validator’s consistent uptime. Validators with inconsistent uptime have a higher probability of getting slashed (described more below) as a result of not following protocol rules. For ATOM, slashing parameters are set to 5% for double-signs, and 0.01% if a validator misses 95% of blocks in a rolling 10,000 block window. For example, assuming that your delegator double signs, 5% of your delegated ATOMs will be slashed and you will be automatically unbonded from the validator. Since slashing also affects delegators, it is critical to select your validators based on their credibility and the security of their infrastructure.
Below shows DokiaCapital, a good example of a validator with consistent uptime.
2. “Skin in the game”
“Skin in the game” refers to how much of the validator stake belongs to the validator’s address. Validators that have their “skin in the game” are typically trusted more since having their own stake in its validator demonstrates both the validator’s dedication and their confidence in the network.
However, validators with a low self-bonded rate do not necessarily mean they don’t have “skin in the game”. Most of the time, these validators have several accounts from which they nominate themselves, so they still risk losing their assets if they get slashed.
To check validators’ self-bonded rate click here. Below is an example of stake.fish, the current №1 validator on Cosmos Hub.
3. Quoted commission
While it is enticing to select a validator with the lowest commission, running a validator entails extensive workload and cost to operate. The commission rate is a contribution to the validator that is used to cover the expenses of actually running a validator node. Choosing a validator with 0% commission might bring the most personal profit, but it does not facilitate a sustainable network in the same way that supporting validators through commission does. The typical commission rate for a Cosmos validator now is around 5%.
Be careful not to nominate a validator with 100% commission, you will receive zero rewards! To calculate your ATOM reward after commission, click here!
4. Decentralization and Governance Participation
Decentralization should factor into your decision as well because it allows delegators to be in control of their funds. If you are tempted to choose a centralized exchange (CEX) as your validator because of familiarity, you should consider their role in the overall ecosystem. In terms of decentralization and network security, CEX operated validators are not the most favorable option because they frequently ignore votes and do not participate in governance. Other than that, any airdrops that occur due to staking ATOM are usually not re-distributed to delegators of a CEX operated validator. If you wish to receive airdrops and contribute to the network, perhaps avoid delegating your ATOM to a CEX validator.
The image below shows centralized exchanges validators: Binance, Coinbase, and Kraken. Although the three exchanges have a combined voting power of 15%, none of the exchanges has participated in any governance on the Cosmos Hub.
Risk Factors
Before we start the guide, do take note that every investment comes with a risk. While staking ATOM can earn you generous interest in your investment, it is not completely risk-free. Perhaps the most common risk is validator misbehavior. This usually occurs if a validator becomes offline for too long. or when the validator signs two different blocks at the same height (double-signing). If this happens, a percentage of ATOM delegated to the validator can be slashed. But what exactly is Slashing? Slashing means the delegated ATOM (not just rewards) will be burned or lost forever without the possibility of recovering it. Upon staking your ATOM on Keplr, risk mitigation becomes an important factor to lower your odds for the worst-case scenario. Holders are recommended to delegate their ATOM to multiple validators with a good reputation to spread out their risk.
Because of ATOM’s 21-day unbonding period, “price risk” can occur. Price risk is a loss incurred when the dollar value of your token at the time of your withdrawal becomes less than its amount at the time of deposit. For example, suppose you staked 10 ATOM at $20 and earned an additional 1 ATOM over the term, but at the same time, the price of ATOM falls to $17. Due to the 21-day time delay for withdrawal, the price of ATOM falls even further after unbonding, from $17 to $10. Without the time delay, you might have sold your 11 ATOMs at $17 for $187, but now your assets are worth $110. Although you earned an additional ATOM, the total investment value of ATOM has decreased. As the saying goes, “Time is money.”
Detailed Staking Guide
Now that you are aware of how to select a validator as well as the risks involved, let’s now have a look at the process of setting up your wallet to stake your ATOM!
Step 1: Install Keplr Wallet
Step 2: Create A New Wallet
After you have downloaded the Keplr Wallet, you will be welcomed to a webpage. On the webpage, select “Create new account” to start setting up your account. If you already have a Keplr Wallet, select “Import existing account.”
Step 3: Store Recovery Phrase
Once you have selected “Create your account,” you will be given an option to choose a 12 or 24-word Mnemonic Seed/Seed Phrase. However, in this guide, we will be choosing a 12-word Mnemonic Seed for the sake of simplicity. It is very important to store your seed phrase offline to mitigate the risk of data breaches, the best and simplest way would be to write it down on a piece of paper, put it into a ziplock bag, and store it somewhere safe. The seed phrase will be used to recover your funds in case you lose your wallet’s password or the device your wallet is installed on, hence it is very important to keep it safe.
After you’ve copied your seed phrase, you will be asked to fill out your account name and password. Once confirmed click “Next”.
Step 4: Mnemonic Seed Confirmation
Next, you will next be prompted to enter your seed phrase in the correct order in order to register. After you are done selecting your seed phrase in the correct order, click register. You have now created your Keplr Wallet!
Step 5: Dashboard
Now that you are done with the hard part, go to Dashboard to continue. On top of the dashboard, you will see the current staking rewards for Cosmos.
Step 6: Deposit Cosmos (ATOM) into Keplr
Before you stake, you need to deposit some ATOM into your wallet. Make you that you are on the correct network (Cosmos Hub) and copy your account address to send ATOM from any exchange or wallet. In this example, we will be sending our ATOMs from KuCoin.
Once you confirm the transaction, it should take under a minute for you to receive it! Do note that sending your ATOMs from a centralized exchange (CEX) typically do not require a MEMO! However, MEMO will likely be required when sending your ATOM from one CEX to another.
Step 7: Delegate
To delegate your ATOM, select “Stake” on the dashboard’s left drop-down menu, this will take you to the overview of the top validators on Cosmos.
Once you have found a validator, click “manage” and “delegate”.
Next, insert the amount of ATOM you want to stake and click “Delegate”. To prevent validators from attacking the network and then promptly removing their stake, the Cosmos Hub has imposed a 21-day unbonding period when you decide to unstake. During this period, staked Atoms are will not be rewarded, but slashing is still possible. This means that your ATOMs will be illiquid for the next 21 days after you opt to stop staking!
Once you have delegated your ATOMs, the amount staked will appear at the top of your Dashboard. The fun part is that rewards will start generating almost immediately after delegation! If you aren’t satisfied with the services your current validator provides, you can always use the re-delegation function to change your validator without delays and at almost zero cost. Please note that your tokens will remain locked for 21 days after the re-delegation process.
Why Should You Stake Your ATOM?
Inflation
Cosmos (ATOM) is an inflationary token with an infinite supply. The rate of inflation increases when there are fewer stakers and decreases when there is a sufficient amount of stakers to secure the network. To compensate stakers, the supply of ATOM is inflated, which means that non-stakers’ ATOM holdings will suffer from inflation if they do not stake their tokens. If you have ATOM in your wallet, be sure to stake them if you plan to HODL!
The current inflation rate is available here, and ATOM’s adjusted coin supply with year inflation can be found here.
Secure the network
The Cosmos Hub is built on Tendermint, which secures the network by using a set of validators. The validators are responsible for running a full node and participating in consensus by broadcasting votes that contain cryptographic signatures signed by the validator’s private key. By staking your ATOM with a validator, you are playing an important role in keeping the Cosmos ecosystem safe and secure.
Governance
Staking ATOM grants stakers the right to vote on proposals and make decisions on the future of the network. The number of tokens you have staked will be used to determine how much influence your vote will have on the outcome of a proposal. During the voting stage, participants will be able to vote Yes, No, NoWithVeto) or Abstain to the proposal. If a proposal receives quorum or the minimum threshold set by the voting process, it advances to the next stage for tallying. The image below is an example of governance on Cosmos Hub:
Airdrops
The biggest incentive for staking ATOM is all the juicy free Airdrops that are distributed to stakers when a new project launches on the ecosystem. Usually, Airdrops are distributed based on the number of tokens you have, but in some cases, you would need a minimum number of tokens to be eligible for the Airdrop. To increase your chances of receiving an Airdrop, having 10 to 20 ATOM staked is usually a good number to start with. Also, avoid delegating to a validator with 0% commission (as mentioned above), as many Airdrops tend to exclude validators based on that alone. P.S CEX validators also do not receive and distribute airdrops. To view the current and potential upcoming Airdrops for ATOM, click here.
Conclusion
Some believe that ATOM’s lack of utility and inflated supply makes the project uninvestable, but with its new services, ATOM could perhaps become more valuable.
What upcoming services should you expect from Cosmos? During its latest Delta Upgrade, Cosmos introduced “Gravity DEX” to provide seamless trading across multiple blockchains, and all transactions made on the DEX will be fueled by the ATOM token. The DEX also includes liquidity pools for users to provide liquidity using their ATOM tokens. Moreover, there is Gravity Bridge, an interoperable Ethereum-Cosmos bridge designed to be the most secure, efficient, and decentralized cross-chain bridge to Ethereum. The bridge could play an important role to bring additional users and liquidity to the Cosmos ecosystem.
Lastly, Cosmos Hub’s Interchain Security is one of the most exciting developments in the ecosystem that will allow hub chains, such as Cosmos to be in charge of producing blocks for another chain, like Osmosis. With Interchain Security, validators will be able to run two nodes. For example, validators can run a node for Cosmos and another one for Osmosis, allowing them to earn staking rewards for both Cosmos and Osmosis at the same time. This also means stakers can earn staking rewards for multiple tokens if they stake just their ATOMs with their preferred validator of choice.
The Cosmos ecosystem is quickly expanding, with over 260 apps deployed and $139 billion+ in assets managed. With Cosmos’ significant role in providing interoperability between blockchains, it will serve as an important catalyst for the future development of the blockchain sector with powerful new products and services that leverages the benefits of multiple blockchain networks simultaneously. If you truly believe Cosmos Hub’s long-term mission, the best bet is to accumulate, stake, and hodl now.