Polkadot is giving smaller investors the opportunity to participate in native staking with the launch of a new feature called “Nomination Pools”, which allows anyone to help secure the network and validate transactions with as little as 1 DOT.
Staking is a mechanism found in proof-of-stake blockchains that enables the community to support the network. It’s an alternative to proof-of-work blockchains like Bitcoin, which require users to buy expensive computer hardware to “mine” new blocks. Polkadot utilizes a novel nominated proof-of-stake mechanism that makes it even more decentralized, as it provides a way for users to nominate validators, instead of running a node by themselves.
With the launch of nomination pools, users now have three options to stake directly on the Polkadot Relay Chain.
First, they can become a validator. This is the most demanding option, both from a financial and a technical perspective. It requires a massive investment of DOT and validators must also set up and run a node. Once the node is up and running, they stake tokens to participate in a kind of lottery, competing with other nodes to be able to propose each new block. The more tokens staked, the higher the chances of being selected. Those validators that are chosen to mine the next block earn rewards in DOT tokens as compensation for supporting the network.
The second option is to nominate a validator. This makes it possible for those who aren’t running validator nodes the chance to participate. Nominators simply stake their DOT through validators, using their combined resources to increase the chance of the validator being chosen to mint a new block. In return, they receive a share of the rewards earned by the validator. However, there is a sophisticated mechanism in place that results in the number of nominators being capped at 22,500. Moreover, only the top 256 nominators of each validator are allowed to participate in the rewards distribution. This limitation means that users are generally required to stake at least 171 DOT (around $1,000) to have any chance of earning rewards.
To make staking more inclusive, Polkadot has created a third option – nomination pools, which make staking with as little as 1 DOT a viable option. Each nomination pool acts as a single nominator, where all of the user’s stakes are combined. The creator of the nomination pool then decides which validator to back, increasing that node’s stake, and when it is chosen to create a new block, the rewards will be distributed to each account within the pool proportionally to the amount of DOT they have contributed.
So inclusivity is really the name of the game, but note there are some things to consider. While anyone can create a nomination pool, it’s important to understand there are certain roles within it that must be performed. The creator of the pool is assigned the role of Nominator by default and has responsibility for choosing which validator to back. The Nominator must also select a second account to act as the State-Toggler, who is responsible for changing the “state” of the pool – deciding if it should be open, blocked (meaning no new accounts can join) or “destroying” (which means the pool is in the process of being dissolved). Finally, the nominator must choose a third account to act as the Root, who has the ability to select a new nominator or state-toggler or even change their own role.
The Polkadot council is considering whether or not to enable a DOT-based rewards mechanism for nomination pool creators, as a way of incentivizing users to create pools that reliably assist the network.
Staking through nomination pools is likely to pay out rewards at a rate of around 15%, based on the historical rewards rate over the past year. However, it should be noted that staking isn’t entirely risk free. Polkadot employs a feature known as “slashing” that acts to discourage bad actors. Validators who attempt to harm the network in any way can be punished by losing between 5% and 20% of their total stake – in the event a nomination pool backs a validator who is slashed, every member of that pool will also be punished in the same fashion. So always do your research before choosing a pool!
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