Staking Token Selection

The Proof of Stake algorithm covered in the previous section is available for your own L1 if you decide to build a permissionless blockchain. One of the key design decisions you'll need to make is choosing which token will serve as your staking token.

Separating Staking and Native Tokens

In many networks, such as Ethereum, the same token is used for both staking and paying for gas. However, Avalanche L1s offer the flexibility to separate staking tokens from native (gas) tokens, as they fulfill fundamentally different purposes:

• Native Token (Gas Token): Used to pay for transaction fees and execute smart contracts on your L1
• Staking Token: Used to secure the network through the Proof of Stake mechanism

Why Use the Same Token?

Using your native token as the staking token creates a unified economic model where:

• Validators have a direct stake in the L1's success
• Token utility is maximized (both for transactions and security)
• The economic security is directly tied to your L1's value

Why Use a Different Token?

Alternatively, you might choose to use a separate staking token (such as AVAX or another established token) when:

• You want to bootstrap security from an existing liquid token
• Your native token is designed for specific use cases that don't align with staking economics
• You want to leverage an established validator set from another network

Critical Design Consideration: Token Liquidity

If you decide to use an alternative token (rather than your native token) as your staking token, you must choose a token with substantial liquidity and market depth. This is a critical security consideration.

The Liquidity Attack Vector

Using a low-liquidity token as your staking token exposes your L1 to a potentially devastating attack:

1. Attack Scenario: A malicious actor could take out a large loan or use existing capital to purchase a majority of the staking token
2. Network Takeover: With >51% of the staking token, they gain control of your network's consensus
3. Exploitation: They could halt the network, double-spend, censor transactions, or otherwise disrupt operations
4. Exit: After causing damage or extracting value, they could sell back the staking tokens (potentially at a profit if they shorted your native token)

Liquidity Requirements

When selecting an alternative staking token, evaluate:

• Market Capitalization: Is it large enough that acquiring 51% would be prohibitively expensive?
• Daily Trading Volume: Can large amounts be bought without significantly moving the price?
• Market Depth: Are there sufficient orders on both sides of the order book?
• Distribution: Is the token widely distributed, or controlled by a few large holders?