What is Nominated Proof of Stake?
A complex consensus method used in blockchain networks, Nominated Proof of Stake (NPoS) expands on the ideas of Proof of Stake (PoS) by include the essential component of nomination. This approach penalizes dishonest behaviour while promoting honest and effective network node functioning.
Basis in Proof of Stake (PoS): NPoS is founded on the broad ideas of PoS, which states that the quantity of tokens held determines the creation of new blocks and the verification of transactions, as opposed to the energy consumption of Proof of Work (PoW). A node has a better chance of being chosen to produce a new block if it has more tokens.
A More Democratic Approach: In contrast to conventional PoS systems, NPoS seeks to establish a blockchain ecosystem that is more democratic and equitable. By enabling token owners to designate particular validators to act on their behalf during the block validation procedure, it does this.
Important Players: Participants in NPoS networks are assigned to two primary roles:
- Validators: In delicate protocols like block production and finality, these entities are essential. Their work is hard; they have to manage expensive operations, maintain excellent communication response, and establish a solid reputation for dependability. To ensure compliance, validators must stake native tokens like Polkadot DOTs. Disobeying or lying gets them chopped, while conforming gets them rewarded. Although any Polkadot node can nominate itself, only hundreds or thousands can validate.
- Nominators: These token owners nominate trustworthy validators using their financial backing rather than actively participating in consensus. Nominators specify the validator candidates they endorse along with the number of tokens they are willing to stake. They are encouraged to closely monitor the candidates and make sure that only qualified and reliable individuals are elected. As nominators, any number of parties may take part.
How the Nomination and Election Process Works
- Nomination: By wagering on their capacity to conduct themselves honourably and efficiently, token holders (nominators) choose particular nodes they believe to be reliable and efficient. To make well-informed decisions, nominees might consider a number of criteria, such as a validator’s history, on-chain ID, and further supporting information.
- Election: The system chooses a set of validators to make up the active validator set roughly once every day or “era” (a predetermined period of time, such as four to twenty-four hours). To choose validators, Polkadot, a pioneer of NPoS, employs a particular election method known as the sequential Phragmen election.
- Fair Representation: By distributing the nominators’ stake among the elected validators as fairly as feasible while honouring their preferences, the election process strives for fair representation. This characteristic guarantees that, proportionate to their stake, the elected validators do not over- or under-represent any pool of nodes. It was influenced by Lars Edvard Phragmén’s technique. It essentially corresponds to the rule that at least one of the nominator’s trusted validators will be elected if they own at least one k-th of the total stake (where k is the number of elected validators).
- Security Maximization: Security, which is the bare minimum of support for any chosen validator, is another area of emphasis in the election process. In order to make the backings of elected validators as balanced as possible, the nominators’ stake is divided among them, making it challenging for antagonistic pools to elect validators. Efficient approximate heuristics are employed to solve this difficult optimization problem.
- Stake Distribution: In order to ensure fairness, the network automatically divides the staked tokens among all selected validators after the active set is finalized. In order to balance the support of validators overall, a nominator’s stake is divided among any validators who are elected.
Incentives and Penalties
- Rewards for Good Behaviour: Stakers assist nodes that are honest, active, and help the network run smoothly, which increases their chances of generating new blocks and receiving rewards. Staking benefits are given pro rata to both validators and nominators. A more varied selection of validators can be promoted by offering nominators greater rewards for proposing less seasoned validators with lower stakes.
- Penalties for Bad Behaviour (Slashing): Validators risk losing some of their staked tokens if they commit dishonesty or produce blocks in an improper manner. Importantly, nominators in NPoS lose all or a portion of their staked collateral if they select dishonest or careless validators. By lowering the possibility of collaboration, this dual punishment approach encourages higher network security and incentivises both sides to act honourably.
Advantages of NPoS
- Enhanced Security: By requiring enormous amounts of aggregate stake to elect validators, NPoS greatly improves security by making it extremely difficult and expensive for hostile actors to assault the system. Collusion is less likely when validators and nominators share accountability for appropriate behaviour.
- Decentralisation: NPoS encourages decentralisation and increases the network’s resistance to attacks by promoting token distribution and community participation in the nomination process.
- Efficiency and Sustainability: NPoS is intended to be faster than conventional PoS and more effective than PoW. The network’s stability and equilibrium are preserved by the rewards and penalties scheme.
- Fair Representation and Democracy: By enabling token holders to choose validators they trust, it guarantees a more equitable environment. The election procedures strive for even stake distribution and proportional representation.
Disadvantages of NPoS
- Nominator Risk: Because they risk losing their staked tokens if they support malevolent validators, nominators take on a greater risk than in conventional PoS systems. Additionally, their compensation is closely linked to how well the validators they assist perform.
- Limited Active Validator Set: Although nominators have the option to select more than one validator, not all of them may be included in the active set. The validators that are elected from their nominations will then split the nominator’s share.
- NPoS vs. DPoS: Although nominators/delegators and validators are two separate user roles in both NPoS and DPoS, the punishment mechanism has historically been a significant distinction. While only validators are penalized in many DPoS systems, both nominators and validators can be slashed for bad behaviour in NPoS. Nevertheless, some contemporary DPoS methods have begun to muddy the boundaries by incorporating means of penalizing delegators as well.
- Implementations: In order to further its primary goals of decentralization and interoperability, Polkadot was the first blockchain to adopt and employ the Nominated Proof of Stake method. NPoS is also used or influenced by other networks, including as Cardano, EOS, Tezos, Cosmos, Kusama, and Edgeware.