• Wed. Jun 19th, 2024
Polkadot Staking: How Does It Work?

Staking has come up as a great method for investors to earn profits in the crypto market. Polkadot staking seems to have gained popularity among investors.

Unlike restricted proof-of-work (PoW) blockchains such as Bitcoin, the Polkadot blockchain lets cross-blockchain transfers of any data or asset support more transactions every second and requires minimal infrastructure.

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Polkadot mainly utilizes a nominated proof-of-stake (NPoS) blockchain focusing heavily on the interoperability of parachains that link to and are secured by the Relay Chain. Notably, validators can validate the parachains and Relay Chain, helping in the creation of a scalable and flexible blockchain solution.

Polkadot staking

DOT is the native token that powers the Polkadot blockchain. It is used for staking, paying transaction fees, trading, bonding, and voting in network governance.

Related: Is Polkadot a Good Investment?

What Is Polkadot Staking?

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Launched in 2016 as a layer-0 protocol and multichain network, Polkadot is a blockchain project that was created by Gavin Wood, the Ethereum co-founder.

This project is designed to set up a decentralized, secure, and fair internet called Web 3.0 (Web3), by supporting communication across blockchain networks that were previously independent and incompatible.

Polkadot staking consists of using the DOT tokens to nominate validators and in turn, earn rewards. Since Polakdot is an NPoS blockchain, it heavily relies on nodes to validate transactions and secure its entire network.

The NPoS mechanism is a complex process where the nominators choose the validators who are authorized to participate in its consensus protocol. In general, a high number of participants and more distributed nodes mean that the network is highly decentralized, minimizing the possibility of successful attacks on the blockchain by hackers.

Subject to their availability, budget, and level of expertise, DOT holders can readily engage with the Polkadot staking network natively in four different ways. In that context, the stakers who cannot produce the minimum needed amount to nominate alone (it is a fluctuating amount) can enter a nomination pool and share all the penalties and benefits proportionally.

On the other hand, stakers can nominate the validators. Stakers mostly select a validator subject to their reliability in authenticating the legitimacy of network transactions. Also, stakers can open and operate a nomination pool, in case they are confident in their ability to identify trustworthy and competent validators and request a commission. Other operators can join and stake their crypto.

Related: Polkadot Facts And Features: Is The Network Ready To Dethrone Ethereum Blockchain?

On the top are the validators, perfectly suited to people with lots of time commitment and technical expertise. These individuals operate the nodes that are servers operating specialized software. The software might submit a block of transactions and disapprove or validate it.

Notably, there is a strict set of staking needs before Polkadot lets anybody become a validator because validators require specialized expertise and validators will be in charge of a master node.

All the stakers who stake with a validator receive more DOT tokens as a reward when the validator correctly validates a transaction. When the validators approve a fictitious transaction or attempt to defraud the system, they get slashed by losing some of their staked DOT. Any of the slashed DOT is sent into the Polkadot Treasury.

Moreover, there are different specialized positions that need the indulgence of increased technical expertise than a nominator but less commitment than a validator. They include collators responsible for tracking valid parachain transactions and later submitting them to validators on the Relay Chain, and Polkadot Alliance members.

DOT Staking Requirements

Users require a fluctuating minimum amount of DOT to directly stake and nominate. That rule is not applicable when joining a nomination pool, using an exchange, or utilizing a liquid staking method because users delegate their power to the validators that meet the least requirements.

An exchange platform can impose extra necessities, including minimum staking amounts, Know Your Customer/Anti-Money Laundering, and minimum lockup periods or fees.

Why Invest In Polkadot Staking?

Polkadot staking is a strategy of offering security and decentralization to the network and receiving staking rewards. DOT stakers help in the maintenance of network stability, development, and security in exchange for the Polkadot tokens.

Notably, these stakers are allowed to utilize the staked tokens to generate passive revenue streams with the possibility of growth in the network. The Polkadot stakers can participate in the network’s governance while profiting from the token’s appreciation.

Polkadot staking methods

Staking Rewards

Stakers and delegators receive Polkadot staking rewards once per 24 hours subject to the number of blocks their stake contributed to creating. Polkadot could offer higher returns than other proof-of-stake blockchains and exchange staking.

Based on data from crypto-staking data aggregator Staking Rewards, the yearly reward rate Polkadot holders might get changes depending on the crypto-trading platform, the wallet, and the validators. Holders can earn a maximum annual reward rate of 14.34%. The platform’s staking dashboard offers on-chain data to specify current rewards.

Equally, Polkadot staking can offer various rewards according to the kind of staking strategy. Nominators who do not operate the nodes directly but instead assign their stakes to validators can get a maximum yearly reward rate of 14.1%. Since there is an extra responsibility of maintaining the network, the validator node operators might earn up to 14.8%.

Risks Of Staking Polkadot

Staking in Polkadot comes with various risks like any other investment. Although it currently provides a great annual reward rate, it can easily change subject to the current market conditions. A majority of staking platforms review their interest rewards occasionally.

The Polkadot staking network design is mainly secure. But, several risks are linked with nominating validators. For example, whenever validators breach the set terms and conditions, Polkadot may slash their stake. It means that stakers may ultimately lose some of their staked DOT tokens.

Due to slashing, nominators have to be highly vigilant in their choice of validators. They need to just settle on validators that have a proven reliability track record. Furthermore, DOT is designed with an unbonding period of 28 days, meaning that stakers have to wait for over 28 days before they get their tokens. That can be detrimental in a highly volatile market.

In case a selected validator is unresponsive in the whole session, the validator’s bond is subjected to involuntary chilling and might not be chosen in the next session. Additionally, the validator does not earn any rewards when the chilling session is active.

When investors stake DOT on a software wallet, it is worth noting that its safety is just as good as the wallet provider’s safety protocols. Sadly, that is beyond the Safety reach of Polkadot and could be hacked beyond its control.

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Kevin Moore - E-Crypto News Editor

Kevin Moore - E-Crypto News Editor

Kevin Moore is the main author and editor for E-Crypto News.