Staking series: #1 Polkadot staking — Why should you care?
This is the first article of our new series on Polkadot’s staking. Every explanation should start with some theory and a bit of tech behind it, so here you have it in some very easy-to-read and simple way. There are tons of materials in Polkadot Wiki, so if you want to dig really deep, you can. But take this just as an entry point into the whole series about staking — how to secure a network and be rewarded at the same time.
In the first parts, we will get into staking itself and then we will move on to more advanced concepts like liquid staking with various Polkadot protocols or staking on parachains that support it.
Polkadot staking: the theory
Polkadot is a new generation blockchain protocol that greatly simplifies cross-chain communication thanks to XCMP protocol (Cross-Chain Message Passing) and interoperability by binding multiple blockchains AKA parachains with various usecases into one network.
Projects using Proof-of-Stake and its modifications such as NPoS employ staking for securing their network. Users delegate their tokens to individual nodes, which then include transactions into blocks and these blocks form the blockchain itself.
The Polkadot consensus algorithm is a modified version of the PoS called the Nominated Proof-of-Stake (NPoS). where nominators (users) back validators with their own stake as a leap of faith in the good behavior of the validator. By using this algorithm, validators secure the network and verify blocks produced by collators in parachains.
For bonding DOT tokens into staking, nominators receive regular rewards in the form of DOTs. Validators then secure the network by using their own stake and the stake of the nominators. More DOTs are locked in the staking, the more the network is secured and it's harder and more expensive to attack.
There will always be a limited number of active validators, now we are about 300 and the number will grow up to 1000 (we already have this number on Kusama).
Any validator can become a candidate and participate in the election process because there is no minimum amount of DOT to be bonded. Validators are elected once in the era (every 24 hours). The network will always elect validators with the largest amount of stake behind them, which makes sense because more stake means more reputation and trust which people put into such a validator. A nominator can nominate up to 16 validators, however, he cannot choose how his stake is going to be distributed among them. This is done by the Phragmén algorithm.
Where to stake your DOTs
Since Polkadot runs on the Nominated Proof-of-Stake algorithm, you are able to stake your coins to secure the network and earn rewards for it. There are several possibilities to do so.
The first and foremost option is staking using the Polkadot JS wallet, where you are the true owner of your keys and tokens.
The second option is to use some 3rd party and its dApp. Acala, Parallel Network, or Bifrost are the most known options, but we will definitely go through them within the next few chapters of the staking series.
The third option is to use nomination pools that were recently launched on Kusama and we will see them coming to Polkadot quite soon. It’s a solution for staking scalability that will finally remove staking limits that exist on the Polkadot network for quite some time.
Option no. 666 is to stake your beloved DOTs with a centralized exchange such as…..well, we don't even name them to give them promotion :-). In our decentralized eyes, using centralized exchange has only one advantage — simplicity. But you trade it for higher rewards, real coin ownership (yes, your coins can be stolen or impossible to release when you need them most), the right to vote in governance with your coins, and the idea of decentralization in particular.
Important staking facts
- there are ~300 active validators in the Polkadot network
- validators are elected once in the era, so every 24 hours
- the minimum nominator bond is 10 DOT
- the bonding period in Polkadot is 28 days
- approx. 52% of the DOT supply is locked in staking
- the reward for staking DOT is ~14,5%
Staking in Proof-of-stake blockchains is a crucial thing. At the same time, you are securing the network by your stake and receiving rewards for that. That makes staking an important and valuable bot for stakeholders and network security.
What's next? We are preparing chapter #2, which will focus on the practical part and examples of how to stake your DOT. So stay focused!