How Does the Risk of Slashing Affect the Staking Yield Demanded by Validators?
The risk of slashing is a non-zero operational risk that validators face. To compensate for this risk, validators demand a higher staking yield (return on their staked capital).
This is a risk premium, similar to how investors demand a higher return for riskier financial assets. A higher risk of slashing translates to a higher required yield to make the staking operation economically attractive.
Glossar
Staking Yield
Return ⎊ Staking Yield is the annualized rate of return generated from an asset committed to securing a Proof-of-Stake network, paid out in the native token as a reward for validation service.
Slashing
Mechanism ⎊ Slashing is a punitive mechanism in Proof of Stake (PoS) blockchain networks designed to penalize validators who act maliciously or fail to perform their duties correctly.
Validators
Role ⎊ Validators are the network participants, typically in Proof-of-Stake systems, responsible for verifying the correctness of new transactions and proposing new blocks to be added to the blockchain ledger.
Operational Risk
Framework ⎊ Operational risk within cryptocurrency, options trading, and financial derivatives transcends traditional financial definitions, demanding a framework that explicitly incorporates technological, regulatory, and idiosyncratic elements.