Author: Lorenzo Protocol Source: medium Translation: Shan Ouba, Golden Finance

In cryptocurrency networks based on proof of stake (PoS), those who are willing to pledge their assets and participate in block validation will receive a return on their investment. When everything runs smoothly, this can be a way for cryptocurrency users to easily earn predictable annual returns and passive income.

However, there is no free money in the world. As with all elements of the crypto industry, staking also brings various risks.

One ​​key area comes in the form of slashing. Slashing is a key safety mechanism in PoS systems that prevents stakers from abusing their power on these networks, but it can also plague those who simply don't fully know how to stake their tokens correctly.

This comprehensive guide will help you fully understand staking slashing and how to avoid staking slashing in the rapidly developing Bitcoin DeFi field. Let’s take a deeper look.

What is Slashing?

Slashing is a security mechanism used in PoS cryptocurrency networks to deter and punish bad behavior by validators on the network. Validators are nodes on the network responsible for creating new blocks, similar to Proof of Work (PoW) miners in Bitcoin.

These validators must post a certain amount of cryptocurrency as collateral for the right to participate in block creation, and this collateral can be seized in cases where the validator is not acting in the best interest of the network or is negligent. This seizure of collateral is called slashing.

Reasons Why Slashing May Occur

Each PoS cryptocurrency network has its own set of criteria when it comes to slashing. However, there are several common reasons why slashing may occur:

1. A validator signs multiple different blocks at the same block height, which can cause instability in the network as it is unclear which block to follow and when transactions will be finalized.

2. A validator is offline for a long period of time without participating in the consensus process.

3. A validator refuses to include specific, individual transactions or certain types of transactions, effectively implementing a form of censorship.

4. A validator regularly proposes blocks that contain invalid transactions or violate some other consensus rules.

It should be noted that different levels of penalties can be used to punish different types of malicious or bad behavior. For example, a validator who is offline for only a short period of time may have his stake reduced compared to a validator who is actively trying to attack the network through censorship or other means.

New slashing conditions can also be deployed to remove specific validators from the consensus process in emergency situations. For example, the rest of the network might band together to slash the stake of a hacker, government, or other unwanted entity that was able to gain too much control over the staking process.

How does Bitcoin slashing work?

It should be noted that Bitcoin slashing works differently than other cryptocurrency networks due to Bitcoin's use of PoW and a relatively limited scripting language at the base blockchain layer. While other networks can implement fairly simple smart contracts directly on the blockchain to handle the staking process, Bitcoin slashing requires the use of a separate protocol such as Babylon. Additionally, there is no direct staking for Bitcoin, and Babylon is used to enable cross-chain slashing for alternative PoS chains that wish to secure their networks with Bitcoin-based liquidity.

While PoS chains with expressive smart contract capabilities can implement their slashing mechanisms directly on their chains, Babylon uses simpler Bitcoin Scripts and an off-chain cryptographic proof system to handle Bitcoin slashing for securing other PoS chains.

Specifically, Babylon uses extractable one-time signatures (EOTS) to ensure that stakers’ Bitcoin private keys can be made public in the event that they are used to sign conflicting messages related to validation on a secondary PoS chain. The disclosed private keys can then be used to slash the Bitcoin staked by Babylon stakers by sending the funds to an unusable Bitcoin address.

While the outcome is the same (stakers lose money), the way slashing is implemented in the Babylon cross-chain Bitcoin staking protocol is very different from the traditional PoS model.

How to Avoid Bitcoin Staking

As mentioned earlier, the main reason slashing exists is to punish validators who want to engage in malicious behavior; however, even well-intentioned validators can be punished if they do not manage their nodes properly.

In order to avoid being slashed when staking Bitcoin or any other cryptocurrency, here are some key points to keep in mind:

• A validating node should always remain online and available to the cryptocurrency network being staked. Missed block signing opportunities or attestations can result in an inactive node being slashed.

• Practice proper private key management. While the validating node itself should remain online, the private keys associated with the Bitcoin staked on the node should be kept in a separate hardware device to prevent hackers from exploiting the stake for their own potentially nefarious purposes.

• Keep your node software up to date. PoS chains tend to move faster than Bitcoin and receive updates more frequently, and sometimes the updates pushed to these networks involve fixes for emergency-level bugs.

• Know what PoS chains you are validating and stay up to date with the latest news related to these systems. While slashing conditions tend to be fairly similar between chains, from time to time unique sets of rules are implemented. It can be difficult to comply with rules related to slashing if the rules are unknown.

• Before staking any Bitcoin on a PoS chain, research its reliability and reputation. Relatively new chains that don’t have a diverse user base may offer attractive returns; however, higher returns also come with additional implied risks. After all, it doesn’t take too many resources for a bad actor to take control of a chain that hasn’t had much stake added.

• Choose a validator service provider, such as Lorenzo, that can streamline the entire validation process and implement additional safeguards to avoid potential slashing situations.