How Polkadot Staking Works

 

Polkadot (DOT) is a third generation blockchain which focuses on interoperability and scalability. Polkadot is pioneering interoperability through building a network which supports a constellation of independent blockchains. These self-sovereign blockchains are referred to as parachains. While the Ethereum blockchain introduced the use of custom smart contracts in blockchain logic, Polkadot is enabling developers to launch application specific blockchains tailored to their specific needs. These custom blockchains are designed to be interoperable with one another, allowing for seamless cross-chain communication and transfers of value. Communication is enabled by the Cross-Chain Messaging Protocol (XCMP), while transactions take place across bridge parachains in the network. Polkadot operates a sharded blockchain model in which transactions are processed in parallel rather than sequentially, vastly improving the number of transactions per second. 

 

The Relay Chain acts as the central backbone of the Polkadot network. Parachains create blocks of transactions which are sent to validators operating on the Relay Chain. These validators confirm that the blocks can be added as a permanent addition to the ledger. The result is that all parachains enjoy the same level of rigorous security guarantees. 

Polkadot’s Nominated Proof of Stake

 

Polkadot operates a Nominated Proof of Stake (NPoS) consensus mechanism. Proof of Stake has risen to prominence within the blockchain industry due to its inclusiveness, environmental sustainability and scalability. The NPoS system relies on nominators with stake in the system (DOT token holders) to nominate people to be responsible for minting blocks, known as validators. These validators play a vital role in the continuation of the Polkadot ecosystem, as they process transactions for all parachains. They are responsible for building reputations with good performance and also commit their own stake to the system as a pledge that they will behave well. The reward for participating in consensus is the native DOT token as the block reward, which can be traded and exchanged for other currencies, bought and sold, and traded for other forms of value. 

 

Nominators are responsible for publishing a list of validators they trust, and then putting up the amount of stake they would like to allocate to these validators. If a validator they have selected is chosen to produce a block, they share in the block rewards. Rewards are paid out equally to validators regardless of stake. Having more stake does not change the amount of block reward a validator receives. As the block reward remains the same, validators with fewer nominators will therefore be able to distribute higher rewards to each of their small group of nominators, encouraging the spread of nomination to be higher among smaller validators. In each era, an election takes place in which validators are selected to participate in the “active set”. This is the selection of those validators who get to mint blocks in the blockchain. The goal of every validator is to be in the active set. 

 

Polkadot’s Election Process

 

(Source: Web3 Foundation)

 

It is possible to nominate a validator via Polkadot-JS UI. A nominator can nominate up to 16 validators. Once validators are selected, nominations will be active in the next era (~24h), which will be the period when validators are elected for block production. Only the elected validator and its pool will receive rewards

 

Polkadot’s Nominators and Validators

(Source: Web3 Foundation)

 

How to Get Started in Polkadot Staking – Key Management 

“Controller” and “stash” keys are essential to participate in nominating on the Polkadot network. Both act as different types of account keys with different uses. 

Controller Key

The controller key has the power to start or stop participating in the staking process. The controller key always remains in control of the user, while being semi-online. Controller keys require some DOT to cover transaction fees, yet should not be vested with large amounts of funds due to their semi-exposure to the wider internet on a regular basis. Controller keys grant control over participating in Polkadot’s consensus mechanism on behalf of the user’s stash account

Staking Proxy Account

 

With the controller account’s permission, a staking proxy account can sign for the controller account in staking and governance votes but not transfer funds. At any time the controller account can replace its staking proxy account. 

Stash Key 

The stash key is a cold wallet which should never be exposed to the internet. It represents a large amount of users’ funds as it is security protected in this way. Anyone willing to participate in staking must bond their staking key to their controller. This means that the controller key will represent the full stake of the users’ stash when it comes to performing actions on the blockchain, such as nominating, staking and voting. This separation is designed to protect users’ funds as they participate in on-chain activities. However, an attacker gaining access to the control key may still be able to slash, meaning this key should be changed regularly. 

 

Polkadot Staking Rewards

As mentioned, validators on Polkadot’s network receive rewards for participating in consensus. DOT rewards are distributed to validators each era (~24h). Total network block rewards are paid the same amount to validator pools regardless of total amount staked in the individual validator pool, meaning pools with less stake will generally pay more to the nominators than pools with more stake. Rewards can be claimed via Polkadot-JS UI. Rewards have the potential to be compounded, or withdrawn from staking. 

Slashing Risks

Polkadot slashing is the removal of a percentage of an account’s DOT as a penalty for a validator’s poor behaviour. This poor behaviour might be acting maliciously against the best interests of the network, or incompetence. An example of slashable behaviour would be remaining offline for a long period of time, removing the chance for them to produce a block. Slashing exists to incentivize good behaviour while discouraging bad behaviour by validators. Slashable offences carry different penalties depending on the severity of the behaviour or lack thereof. A full account of the levels of slashing can be found here

 

Nominators in Polkadot should be aware that if their validators are slashed, their bonded stake is at risk of slashing also. Validators with larger amounts of stake will be punished more in proportion to their total funds. This incentivizes nominators to nominate smaller validators, contributing to the decentralization of the network. 

 

Validator Requirements 

Becoming a validator requires upfront skills and knowledge. Both reputation and finances are at risk when becoming a validator, as a poor performing validator can suffer slashing and no nominators. Blockdaemon’s staking services guarantee strong performance on a consistent basis. Furthermore, all funds are insured against slashing, meaning finances are never at risk. This means peace of mind and return on investment for participating in Polkadot’s decentralization. 

 

A full list of the requirements to becoming a validator can be read here