Slashing in cryptocurrency: how and why validators are penalized

Validators*, which confirm transactions and produce new blocks, form the foundation of blockchain network security. However, some validators may be found guilty of negligence or other violations that undermine the stability of a decentralized network.

* Validator — a participant in a blockchain network that, in accordance with the consensus algorithm, verifies transactions and blocks, proposes new blocks, confirms blocks proposed by other participants, and participates in selecting the current version of the blockchain. To become a validator, participants usually must stake their own or delegated cryptoassets. Validators receive rewards for performing their duties correctly but may be penalized, temporarily suspended, or excluded from the network for violating protocol rules.

To address these cases, blockchain ecosystem developers have introduced a mechanism known as slashing, which encourages validators to keep the network operational and discourages malicious behavior.

At the same time, slashing should be distinguished from an ordinary reduction in rewards. A validator may lose income for missing a vote or a block, but slashing usually involves a more serious penalty: the forced deduction of part of the stake, suspension, or removal from the active validator set.

What is slashing in cryptocurrency?

Slashing is a mechanism for penalizing network operators responsible for confirming transactions and producing new blocks when they violate the rules of a blockchain protocol.

Slashing in cryptocurrency is one of the main mechanisms used to maintain the proper operation and reliability of blockchain networks based on the Proof-of-Stake consensus algorithm and similar models.

The economic rationale behind slashing is that validators put their own funds at risk. To carry out a successful attack, obtaining technical control over a node is not enough: the validator must also put locked assets at risk, which the protocol can partially or completely confiscate.

Such well-known blockchains use the slashing mechanism as:

• Ethereum;
• Polkadot;
• Cosmos;
• Harmony;
• Tezos.

Not every Proof-of-Stake blockchain uses slashing. Some networks use other methods to penalize offenders. Therefore, the mere presence of staking does not necessarily mean that the protocol provides for slashing.

How does slashing work in crypto?

The slashing mechanism is embedded in the code of a decentralized protocol: the algorithm automatically monitors the network for violations committed by node operators and, when such violations are detected, determines the penalty, which varies between blockchains.

Slashing generally does not result from a subjective decision by a blockchain's administrators or developers. Instead, it is based on cryptographically verifiable evidence.

Penalties imposed through slashing may take different forms, for example:

• Withholding a certain amount of rewards from assets held in staking*. The amount of withheld rewards may range from 0.01% to 100%, depending on the parameters of the particular protocol and the severity of the violation;
• Validator suspension. The operator of a node found to have committed a violation may be removed from the active validator set for a certain period specified by the protocol rules. In this case, validators also lose their staking income. For example, in the event of slashing on Ethereum, node operators may be excluded from the network for up to 36 days;
• Asset confiscation. This slashing penalty is often applied on the Ethereum blockchain. The amount of assets confiscated depends on the number of validators found to have engaged in malicious activity and the severity of their violations.

* Staking — participation in maintaining the operation and security of a Proof-of-Stake blockchain by locking, depositing, or delegating cryptoassets. These assets serve as an economic guarantee of a validator's honest behavior: validators receive rewards for performing their duties, while part of the funds may be withheld through slashing if they violate protocol rules.

In some networks, such as Cosmos, slashing may still apply even after a node operator has submitted a request to withdraw funds from staking. Once the request has been submitted, a so-called unbonding period begins, during which the validator no longer receives rewards but cannot yet access or use the funds.

Some blockchains use correlation-based slashing: the more validators commit the same violation at approximately the same time, the higher the penalty imposed on each of them may be. This approach allows the protocol to distinguish an isolated technical error from a coordinated attack on the blockchain.

This mechanism protects the network from attacks, including those involving the mass withdrawal and sale of validators' assets, while also encouraging an increase in the number of long-term cryptocurrency holders.

In some protocols, such as Cosmos, another role exists alongside validators: the delegator. Delegators are ordinary network users who delegate their assets to validators and receive income in return. The greater the amount of delegated assets, the greater the validator's influence on the blockchain network.

However, in the event of slashing, not only validators themselves but also their delegators may lose staking rewards. As a result, dishonest validators may lose some delegators, reducing their influence on the network.

Why are validators penalized through slashing?

The main violations for which slashing in crypto may be applied include:

• Double-signing on a blockchain — a situation in which a validator signs two different blocks at the same height. This action may lead to the double-spending* of coins or even a blockchain fork*;
• Manipulation of the blockchain network, including attempts to sign invalid blocks and transactions, as well as contradictory voting;
• Downtime*. One of the key performance indicators for validators is uptime, meaning the period of continuous operation. When the minimum downtime threshold is reached, slashing may be applied to the node operator because validator downtime reduces the network's efficiency and negatively affects its security. Downtime may be measured either as the period during which the validator is not operating or as the number of consecutive blocks it has missed. The downtime threshold varies depending on the particular network. For example, in the Harmony blockchain protocol, a validator automatically becomes inactive if its uptime falls below the 66.66% threshold.

* Double-spending — an attempt to spend the same units of cryptocurrency more than once by creating conflicting transactions. For example, an owner may attempt to send the same coins to two different recipients simultaneously. The consensus mechanism must identify one valid transaction and reject the conflicting one.

* Fork — the division of a blockchain into two or more branches, each containing its own sequence of blocks. A fork may occur because of changes to protocol rules or disagreements among network participants about which version of the chain is correct.

* Downtime — a period during which a validator is unavailable or fails to perform the duties required by the protocol. A node shutdown may cause it, loss of internet connectivity, technical failure, software errors, or incorrect infrastructure configuration. Different networks measure downtime by either the time spent offline or the number of missed attestations, votes, or block proposals.

What benefits does slashing provide in cryptocurrencies?

Slashing encourages node operators to act honestly and maintain network stability while making attacks on a decentralized network economically unprofitable.

Therefore, slashing in crypto increases trust in networks based on the PoS consensus mechanism.

Slashing also strengthens network security. Validators can carry out attacks involving invalid blocks and double-signing only through collusion. The slashing mechanism protects decentralized networks against such coordinated attacks.

Slashing also protects blockchain finality. Finality means that an alternative branch should not later replace a transaction history the network has confirmed.

In addition, slashing contributes to network decentralization. The more numerous and serious the violations a validator commits, the less influence that validator will have within the network, not to mention the risk of being completely removed from the list of node operators. Delegators will prefer more reliable validators with strong reputations, increasing their influence on the ecosystem and improving the overall resilience of the network.