With the launch of a new feature called “Nomination Pools,” Polkadot is making it possible for smaller investors to take part in native staking. Anyone can help secure the network and verify transactions with as little as 1 DOT.
Staking is a way for the community to help support the network in proof-of-stake blockchains. It’s an alternative to proof-of-work blockchains like Bitcoin, which require users to “mine” new blocks by buying expensive computer hardware. Polkadot uses a new nominated proof-of-stake system that makes it even more decentralized by letting users choose validators instead of running their own nodes.
Users now have three ways to bet directly on the Polkadot Relay Chain with the release of nomination pools.
They can start by becoming a validator. From both a financial and a technical point of view, this is the hardest choice. It takes a huge amount of DOT, and validators have to set up and run a node as well. Once the node is up and running, they stake tokens to take part in a kind of lottery, competing with other nodes to propose each new block.
The more tokens that were bet, the more likely it was that someone would be chosen. Those validators who are chosen to mine the next block are paid for their support of the network with DOT tokens.
The other choice is to choose a validator. This means that people who aren’t running validator nodes can still take part. Nominators simply stake their DOT through validators and use their combined resources to increase the chance that the validator will be chosen to mint a new block. In exchange, they get a share of the rewards the validator earns.
But there is a complex system in place that limits the number of people who can make nominations to 22,500. Also, only the top 256 people who nominated each validator can take part in the rewards distribution. Because of this limit, most users have to bet at least 171 DOT, or about $1,000, to have any chance of getting rewards.
Polkadot has made staking more open to everyone by adding nomination pools, which make it possible to stake with as little as 1 DOT. Each nomination pool acts as a single nominator, where all of the user’s stakes are added together. The person who made the nomination pool then chooses which validator to support, which raises that node’s stake. When that node is chosen to make a new block, the rewards will be split among the accounts in the nomination pool based on how many dots they have contributed.
So, being open to everyone is really the goal, but there are some things to think about. Even though anyone can make a nomination pool, it’s important to know that certain roles must be filled within it. By default, the person who made the pool is the Nominator, and it’s up to them to decide which validator to support.
The Nominator must also choose a second account to be the State-Toggler. This account is in charge of changing the “state” of the pool, which means deciding if it should be open, blocked (so no new accounts can join), or “destroyed” (which means the pool is in the process of being dissolved). Lastly, the nominator has to choose a third account to be the Root. The Root can choose a new nominator or state-toggles, or they can switch their own role.
The Polkadot council is thinking about whether or not to allow a DOT-based rewards system for nomination pool creators. This would give users an incentive to make nomination pools that help the network in a reliable way.
Based on how often rewards have been given out in the past year, nomination pools are likely to give out rewards at a rate of about 15%. But it’s important to remember that staking doesn’t have any risks at all. Polkadot has a feature called “slashing” that keeps bad people from doing bad things.
Validators who try to hurt the network in any way can be punished by losing between 5% and 20% of their total stake. If a nomination pool backs a validator who is then slashed, every member of that nomination pool will also be punished in the same way. So always do your homework before choosing a pool!
