Author: Lorenzo Protocol, Source: medium, Translator: Shan Aoba, Golden Finance

In proof-of-stake (PoS) cryptocurrency networks, those willing to stake their assets and participate in block validation will be rewarded with investment returns. When everything runs smoothly, this can be an easy way for cryptocurrency users to earn predictable annual returns and passive income.

However, there is no free money in this world. Like all aspects of the crypto industry, staking also comes with various risks.

One key area is what's known as slashing. Slashing is a key security mechanism in PoS systems that prevents stakers from abusing power on these networks, but it can also plague those who don't fully understand how to properly stake their tokens.

This comprehensive guide will help you fully understand staking slashing and how to avoid it in the fast-moving Bitcoin DeFi space. Let's dive in.

What is Slashing?

Slashing is a security mechanism used in PoS cryptocurrency networks to prevent and punish the misbehavior of validators on the network. Validators are the nodes on the network responsible for creating new blocks, similar to the proof-of-work (PoW) miners in Bitcoin.

These validators must provide a certain amount of cryptocurrency as collateral to gain the right to participate in block creation, and in the event that a validator does not act in the best interest of the network or is negligent, this collateral can be seized. This seizure of collateral is referred to as slashing.

Common Reasons for Slashing

Each PoS cryptocurrency network has its own set of standards when it comes to slashing. However, some common reasons for slashing include:

1. A validator signing multiple different blocks at the same height, which can lead to network instability as it's unclear which block to follow and when transactions are complete.

2. A validator being offline for an extended period of time and not participating in the consensus process.

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

4. A validator regularly proposing blocks containing invalid transactions or violating other consensus rules.

It's worth noting that different degrees of punishment can be used to penalize different types of malicious or negligent behavior. For example, validators that are only offline for a short period may experience less of a stake reduction compared to those actively attempting to attack the network through censorship or other means.

In emergency situations, new slashing conditions can also be deployed to remove specific validators from the consensus process. For example, the rest of the network could potentially come together to slash the stake of hackers, governments, or other unwanted entities that have gained too much control over the staking process.

How Does Bitcoin Staking Slashing Work?

It's worth noting that due to Bitcoin's use of PoW and the relatively limited scripting language of the base blockchain layer, Bitcoin slashing works differently than in other cryptocurrency networks. While other networks can directly implement fairly simple smart contracts on the blockchain to handle the staking process, Bitcoin staking requires the use of a separate protocol, such as Babylon. Additionally, Bitcoin does not have direct staking, and Babylon is used to enable cross-chain staking of Bitcoin to protect alternative PoS chains.

While PoS chains with more expressive smart contract capabilities can directly implement their slashing mechanisms on their own chains, Babylon uses simpler Bitcoin scripts and off-chain cryptographic proof systems to handle the slashing of Bitcoin used to protect other PoS chains.

Specifically, Babylon uses Extractable One-Time Signatures (EOTS) to ensure that the Bitcoin private keys of stake holders can be publicly revealed in the case of signing conflicting messages related to validation on the auxiliary PoS chain. The staked Bitcoin can then be slashed by sending funds to an unspendable Bitcoin address using the now publicly revealed private keys.

While the end result is the same (the staker loses money), the way slashing is implemented in the Babylon cross-chain Bitcoin staking protocol is quite different from the traditional PoS model.

How to Avoid Bitcoin Staking Slashing

As mentioned earlier, slashing exists primarily to punish validators who seek to engage in malicious behavior; however, even well-intentioned validators can be subject to penalties if they don't properly manage their nodes.

To avoid being slashed when staking Bitcoin or any other cryptocurrency, remember the following key points:

• Validation nodes should always remain online and available for the cryptocurrency network being staked. Missing block signing opportunities or proving could lead to an inactive node being slashed.

• Practice proper private key management. While the validation node itself should remain online, the private keys associated with the Bitcoin staked on the node should be stored on a separate hardware device to prevent hackers from exploiting the staking to achieve their potential malicious goals.

• Keep node software up-to-date. PoS chains tend to move faster and receive updates more frequently than Bitcoin, with some updates that are pushed to these networks addressing critical-level bug fixes.

• Understand the PoS chain being validated and stay on top of the latest news related to these systems. While the slashing conditions are often quite similar across chains, unique rule sets are occasionally implemented. If the rules are unknown, it becomes difficult to comply with slashing-related requirements.

• Research the reliability and reputation of a PoS chain before staking any Bitcoin to it. Relatively new chains with less diversified user bases may offer attractive yields; however, higher reward rates also come with additional implicit risks. After all, it doesn't take much for a bad actor to take control of a chain that hasn't accumulated too much stake.

• Consider using a validator service provider, such as Lorenzo, that can simplify the entire validation process and implement additional safeguards to avoid potential slashing scenarios.