# Staking¶

Polkadot uses NPoS (Nominated Proof-of-Stake) as its mechanism for selecting the validator set. It is designed with the roles of validators and nominators, to maximize chain security. Actors who are interested in maintaining the network can run a validator node. At genesis, Polkadot will have a limited amount of slots available for these validators, but this number will grow over time to over one thousand. The system also encourages an unlimited number of DOT holders to participate as nominators, where a nominator backs the election of one or more trusted validator candidates, to ensure the network will not be heavily centralized on only a few validators. Validators take the role of both validating blocks and guaranteeing the finality of the chain, while nominators will have the power to choose the set of validators by indicating their support weighted by DOTs. Both validators and nominators will earn rewards proportional to the amount that they stake, with validators having the ability to set some payment preferences.

## How does staking work in Polkadot?¶

### 1. Identifying which role you are¶

In staking, you can be either a nominator or a validator. As a nominator, you can nominate multiple validator candidates that you trust to help you earn rewards in DOTs. You can take a look at the nominator guide to understand what you are required to do when the mainnet launches. Meanwhile, a validator node is required to be responsive 24/7, perform its expected duties in a timely manner, and avoid any slashable behavior. You can follow our validator guide if you want to run a validator in the current testnet.

### 2. Nomination period¶

Any potential validators can indicate their intention to be a validator candidate. Their candidacies are made public to all nominators, and a nominator in turn submits a list of any number of candidates that it supports. In the next epoch (lasting several hours), a certain number of validators having the most DOT backing get elected and become active. There are no particular requirements for a DOT holder to become a nominator, though we expect each nominator to carefully track the performance and reputation of validators.

Once the nomination period ends, the NPoS election mechanism takes the nominators and their associated votes as input, and outputs a set of validators of the required size, that maximizes the stake backing of any validator, and that makes the stakes backing validators as evenly distributed as possible. The objectives of this election mechanism are to maximize the security of the network, and achieve fair representation of the nominators. If you want to know more about how NPoS works (e.g. election, running time complexity, etc.), please read here.

### 3. Staking Rewards Distribution¶

To explain how rewards are paid to validators and nominators, we need to consider validator pools, where a validator pool consists of an elected validator together with the nominators backing it. (Note: if a nominator n with stake s backs several elected validators, say k, the NPoS election mechanism will split its stakes into pieces s_1, s_2, …, s_k, so that it backs validator i with stake s_i. In that case, nominator n will be rewarded the same as if there were k nominators in different pools, each backing a single validator i with stake s_i). For each validator pool, we keep a list of nominators with the associated stakes.

The general rule for rewards across validator pools is that two validator pools get paid the same amount of DOTs for equal work, i.e. they are NOT paid proportional the stakes in each pool. Within a validator pool, a part of the reward goes to pay the validator’s commission fees, and the remainder is paid pro-rata (i.e. proportional to stake) to the nominators and validator. Notice in particular that the validator is rewarded twice: once as commission fees for validating, and once for nominating itself with stake.

To estimate the inflation rate and how many DOTs you can get each month as a nominator or validator, you can use this Excel sheet as a reference and play around with it by changing some parameters (e.g. validator pools, total supply, commission fees, etc.) to have a better estimate. Even though it may not be entirely accurate since staking participation is changing dynamically, it works well as an indicator.

### 4. Rewards Mechanism¶

We highlight two features of this payment scheme. The first is that since validator pools are paid the same, pools with less stake will pay more to nominators per-DOT than pools with more stake. We thus give nominators an economic incentive to gradually shift their preferences to lower staked validators that gain a sufficient amount of reputation. The reason for this is that we want the stake across validator pools to be as evenly distributed as possible, to avoid a concentration of power among a few validators. In the long term, we expect all validator pools to have similar levels of stake, with the stake being higher for higher reputation validators (meaning that a nominator that is willing to risk more by backing a validator with a low reputation will get paid more, which is reasonable).

Let's take a look at the following example.

For simplicity, we have the following assumptions.

• These validators do not have a stake of their own.
• They do NOT charge any commission fees (although they can)
• Rewards amount is 100 DOT tokens
• The least amount of DOTs to be a validator is 350
A - Validator Pool
Nominator (4) Stake (600) Fraction of the Total Stake Rewards
Jin 100 0.167 16.7
Sam 50 0.083 8.3
Anson 250 0.417 41.7
Bobby 200 0.333 33.3
B - Validator Pool
Nominator (4) Stake (400) Fraction of the Total Stake Rewards
Alice 100 0.25 25
Peter 100 0.25 25
John 150 0.375 37.5
Kitty 50 0.125 12.5

Both validator pools A & B have 4 nominators with the total stake 600 and 400 respectively.

Based on the above rewards distribution, nominators in validator pool B get more rewards per DOT than those in pool A because pool A has more overall stake. Sam has staked 50 DOTs in pool A, but he only gets 8.3 in return, whereas Kitty gets 12.5 with the same amount of stake.

We also remark that when the network slashes a validator slot for a misbehavior (e.g. validator offline, validating an invalid block, etc.) the slashed amount is a fixed percentage (and NOT a fixed amount of DOTs), which means that validator pools with more stake get slashed more DOTs. Again, this is done to provide nominators with an economic incentive to shift their preferences and back less popular validators whom they consider to be trustworthy.

The second point we want to highlight is that each validator candidate is free to name their desired commission fee (as a percentage of the reward) to cover operational costs. Since validator pools are paid the same, pools with lower commission fees pay more to nominators than pools with higher fees. Thus, each validator can choose between increasing their fees to earn more DOTs, or decreasing their fees to attract more nominators and increase their chances of being elected. We will let the market regulate itself in this regard. In the long term, we expect that all validators will need to be cost efficient to remain competitive, and that validators with higher reputation will be able to charge slightly higher commission fees (which is fair).

## Accounts¶

There are three different accounts for managing your funds: Stash, Controller and Session accounts.

• Stash: This is the primary account that holds the funds and has a portion bonded for participation; The funds can be kept in a cold wallet; All bonded DOTs are locked. After unbonding, users must wait a certain amount of time in order to access the locked funds (600 blocks at the time of writing).
• Controller This is used to control the operation of the validator or nominator, switching between validating, nominating and idle; (It only needs enough funds to send transactions when actions are taken).
• Session The seed of this account should be passed to the node using the --key parameter. You may pass in either a mnemonic (recommended) or a legacy raw seed for the key parameter. The session account does not need to have funds as it does not need to send any transaction. The best practice is to create a dedicated account to be used as session account. Although a single account can theoretically be used as both session and controller, it is not recommended to do so. Having a dedicated session account would prevent the theft of funds should the validator node be compromised and the --key leaked. Note that Session keys should always be of crypto type Edwards (Ed25519), not the default Schnorrkel (sr25519).

For more on how keys are used in Polkadot and the cryptography behind it see here.

## Validators and nominators¶

Since validator slots will be limited, most of those who wish to stake their DOTs and contribute economic security to the network will be nominators. Validators do most of the heavy lifting, they produce new block candidates in BABE, vote and come to consensus in GRANDPA, validate STF of parachains, and possibly some other responsibilities in regard to data availability. Nominators, on the other hand do not need to do anything once they have bonded their DOTs. The experience of the nominator is similar to "set it and forget it" while the validator will be doing an actual service for the network by performing the critical operations. For this reason, the validator has certain privileges in regard to the payout of the staking mechanism and will be able to declare its own allocation before the share is divided to nominators.

## Slashing¶

Slashing will be applied if a validator has been reported to be offline for a number of times. Essentially, there are two parameters that will be taken into account whether the slashing will happen or not, these are Offline Slash Grace & Unstake Threshold. Offline Slash Grace is configured by the network, and the current testnet configuration is set to 4, whereas Unstake Threshold is decided by the validator. However,the maximum number of Unstake threshold is NOT allowed to be set greater than 10 in the current setting.

In short, validators will be slashed if they have been reported offline more than Offline Slash Grace + Unstake Threshold times.

At the same time, once slashing is determined, a value will be deducted from the balance of the validator and all the nominators that have voted for this validator.

Info

Example:

Offline Slash Grace = 4 (Network define)

Unstake Threshold = 5 (Validator define)

In this case, slashing will only occur if a validator has been reported offline more than 9 times.

## Reward Distribution¶

Based on the the current configuration in the Alexander testnet, rewards are recorded per session that is roughly 5 minutes and paid per era. It takes 1 hour to finish an era; that means rewards will be distributed to the validators and nominators per hour.

Info

Example:

PER_ERA * BLOCK_TIME = Reward Distribution Time

600 * 6 = 3600 = 1 Hour

These parameters can be changed by proposing a referendum

Validator can create a cut of the reward that is not shared with the nominators. After value gets deducted, the remaining portion is based on their staked value and split between the validator and all of the nominators who have voted for this validator.

For example, assume reward is 100 DOTs. A validator may specify validator_payment = 50 DOTs and the remaining 50 DOTs would split between the validator and their nominators based on the portion of stakes they had.

Rewards can be used by the same account (controller) to keep accumulating the rewards or by the stash account (increasing the staked value/not increasing the staked value). Also, it is possible to top-up/withdraw partial bonded DOTs without having to complete un-stake everything.

## Inflation¶

It will be closed to 10% in the first year. Each validator will get 1,000 - 2,000 DOTs per month to share with their nominators.

Source: Research - Web3 Foundation

x-axis: amount of DOTs staked

y-axis: the annualized percentage

Green line: return rate based on the staking participation

Blue line: inflation rate

The above chart shows the inflation model of the network. Depending on the staking participation, the inflation rate will be dynamically changed to incentivize / disincentivize token holders to participate in staking. For instance, inflation would be 10% if there is 50% of DOTs being staked to the network.

Determining the ideal staking rate is not an easy task as the network requires enough DOTs to be staked to provide the security guarantees we want and to avoid illiquidity on the market.

For those who are interested in knowing more about the design of inflation model for the network, please see here.

## Why stake?¶

• 10% inflation/year when the network launches
• 50% targeted active staking
• ~20% annual return

## Why not stake?¶

• Tokens will be locked for about 12 weeks
• Punishment in case of validator found to be misbehaving

## How many validators will Polkadot have?¶

The plan is to start with somewhere between 50 to 100 open validator positions and open more gradually. The top bound on the number of validators has not been determined yet, but should only be limited by the bandwidth strain of the network due to frequent and voluminous peer-to-peer message passing. The practical estimation of the number of validators that Polkadot will have at maturity is around 1000.