NPoS: Staking & nominating on Polkadot & Kusama

NPoS is a new way to stake

The Polkadot universe is designed to distribute stake backing as evenly as possible over the validator set. How? With a staking scheme called ‘nominated proof of stake,’ abbreviated as NPoS. NPoS is a bit different than existing staking designs, but luckily for Kusama (KSM) and Polkadot (DOT) token holders, most of its complexities are hidden.

Caveat: nearly anything about Kusama and Polkadot can be changed via governance. I’ll update this article when changes occur.

These are the things you’ll want to pay attention to

  1. Staking process
  2. Nominating process
  3. Governance process

Staking Process

First, you’ll bond (ie. lock) the number of tokens that you’ll put at stake. More staked tokens earn more rewards while being exposed to risk of being slashed. More on this later.

Bonded tokens are locked. To unbond, it takes 7 days on Kusama and 28 days on Polkadot before you can transfer them to another account.

What is nominating?

When you nominate, two things happen: 1) you help validator candidates get elected as active validators and 2) you back one or more of your nominees with your stake.

You can nominate between one and 16 validators. If one or more of your nominees becomes an active validator, you will begin earning rewards.

Who should you nominate?

Only validators that you trust. When you nominate, you give the protocol permission to distribute your stake-backing to any of the validator candidates on your list. You will share the rewards earned by the validators you back, but you will also share any punishments, in the case that one of your validators breaks protocol rules while you are backing them.

How can I minimize risk?

You can lose funds due to slashing, so select validator services that have a good reputation across all of the networks that they validate on. Be wary of validator services that use cloud services to run their staking node–that means their private key (used for signing) is at risk of being exposed to hackers. Be wary of validators that use complex “active-active” or highly active setups, since setups with backup nodes increase the probability of committing equivocation (double-signing) violations.

When transfers are enabled, use a separate controller account

Your validator(s) are not the only ones that should practice secure key management–you can also lose funds to hackers. For added security, Polkadot and Kusama enable token holders to use a stash and controller account. Keep the bulk of your tokens secured with a hardware wallet or offline–that should be your stash account. Then designate your controller account, which can then be controlled via software wallet. Read more about that here.

How can I maximize rewards?

The protocol will rebalance and move your stake-backing between the validators you have nominated. Each of your favourite validator services will likely run multiple nodes, so it will be important to ensure that each of their nodes is on your nomination list (and not just their largest validator).

The rewards rate depends on the rate of staking participation, so your rewards will change based on how much of the total token supply is staked. Rewards are paid each era, which is approximately 24 hours.

What else should I know?

Lastly, nominating is different than governance, in that Kusama and Polkadot’s governance is separate from validators and NPoS. It’s a complex governance system that I will explain in an upcoming article, but for now, this is what you should know:

  1. Governance has the potential to change everything I mentioned above and more
  2. You can vote on all active referenda
  3. You can vote for council members (stewards of the governance process)

The above can be done without moving any tokens out of your stash account, and your validator(s) are not enabled to make those decisions on your behalf.