What Is Nominated Proof of Stake and How Does It Work?

What Is Nominated Proof of Stake?

Nominated Proof of Stake, usually shortened to NPoS, is a Proof of Stake variation where token holders nominate validator candidates, and the protocol picks an active validator set from them. These active validators then handle the technical work needed to secure the blockchain.

With Proof of Stake, participants lock up tokens as an economic commitment. That commitment is called stake. NPoS adds a clear split in roles: validators run the technical infrastructure, while nominators decide which validator candidates they want to support with their stake.

So a nominator doesn’t need to run their own validator node. A node is a computer that connects to the network and enforces the blockchain’s rules. The nominator bonds tokens and indicates which validator candidates seem trustworthy. The protocol uses these preferences during an election.

NPoS is best known from Polkadot and Kusama. On Polkadot, NPoS isn’t the entire consensus mechanism. It selects and economically secures the validator set. After that, validators produce blocks with BABE and handle finality with GRANDPA. Finality means a block is permanently confirmed and won’t be replaced by a different version of the blockchain.

Key Takeaways

• Nominated Proof of Stake is a Proof-of-Stake variation for choosing validators.
• Nominators bond tokens and nominate validator candidates without running a validator node themselves.
• Validators handle the network’s technical consensus and security tasks.
• The protocol decides which candidates become active and how the backing is spread out.
• On Polkadot, NPoS selects validators, while BABE produces blocks and GRANDPA provides finality.

How Does Nominated Proof of Stake Work?

NPoS works by using nominators’ preferences and their bonded tokens to elect a limited group of active validators. On Polkadot, the process looks roughly like this.

1. A candidate signs up as a validator

   A validator candidate registers that they want to participate. The candidate must run a node and be able to reliably perform the duties of an active validator.

2. Nominators pick candidates

   A nominator bonds tokens and puts together a limited list of validator candidates. This tells the network which candidates the nominator thinks are a good choice.

3. The protocol runs an election

   The protocol picks a limited number of active validators. It’s not just about how much backing a candidate has. The election also tries to spread backing more evenly across the chosen validator set and include nominators’ preferences in a proportional way.

4. The stake gets assigned

   A nomination isn’t a fixed instruction where all tokens automatically go to one chosen candidate. The election outcome decides which active validators a nominator’s stake gets assigned to for that period. So some of a nominator’s chosen candidates may become active, while others might not get selected.

5. The active set performs the network roles

   On Polkadot, the active validator set is refreshed each era. An era there lasts about 24 hours. This means the lineup of active validators can change from era to era.

The election uses methods from voting theory that are related to Phragmén. The goal isn’t simply to pick the candidates with the most raw backing. The protocol tries to use as much stake as possible, give chosen validators enough backing, and reduce big differences between those backing amounts.

This more complex distribution is calculated off-chain and then submitted to and verified on-chain. That way, the blockchain doesn’t have to do all the heavy computation itself every time an era changes.

Example: Say a nominator nominates three validator candidates. If two of those candidates are chosen, the protocol can assign this nominator’s bonded tokens to those two active validators. The nominator doesn’t have to decide that split manually.

What Roles Do Nominators and Validators Play?

Nominators choose validator candidates with their stake, while validators handle the technical tasks needed to keep the blockchain running. Both roles matter, but the responsibilities are clearly different.

A validator runs a node and participates in consensus. Consensus is the process where blockchain participants agree on which blocks and transactions are valid. On Polkadot, validators, among other things, produce blocks, validate parachain blocks, and participate in finality.

A nominator usually doesn’t run a validator node. Instead, the nominator bonds tokens and selects candidates they consider trustworthy. This choice affects the chances that candidates get enough backing to become active.

Nominating isn’t a totally passive form of staking. A nominator needs to keep evaluating validator candidates. Important factors include:

• the validator’s performance;
• the commission rate;
• the validator’s own stake;
• past slashes;
• the chance the validator becomes active;
• possible technical or economic connections between validators.

A slash is a penalty where a protocol can take away part of the stake after a qualifying violation. Validators face operational risks, like downtime, a bad configuration, or double-signing. The validator manages the node infrastructure and keys. The nominator mainly faces selection and allocation risk: a bad choice or an inactive nomination can mean no rewards.

A nominator only receives staking rewards when their stake is actually assigned to an active, reward-earning validator. So just bonding tokens or listing candidates isn’t enough.

How Are Rewards Distributed in Nominated Proof of Stake?

On Polkadot, rewards are first determined per active validator and then split between the validator and the active nominators behind that validator. The reward doesn’t depend only on how much backing a validator has.

Active validators generally receive a similar gross reward within the validator set. The exact amount can vary per era because of era points. Era points are points validators earn for completed tasks, like producing relay chain blocks and submitting validity statements for parachain blocks.

Then the distribution happens in two steps:

1. Commission goes to the validator first

   The validator sets a commission percentage. This percentage is taken out of the gross reward first. So a higher commission leaves less reward for the other participants behind that validator.

2. The remaining amount is split proportionally

   What’s left after commission is split pro rata. That means each participant gets a share that matches their share of the stake behind that validator. The validator also shares in it based on their own active stake.

The validator doesn’t have custody over nominators’ rewards. Custody means control over someone’s crypto. The blockchain mints and distributes rewards directly to the rightful recipients when a payout is executed.

Transaction tips are separate from these staking rewards. On Polkadot, those tips go entirely to the validator who receives them.

Example: An active validator receives a gross reward. First, the set commission for the validator is taken out. The remaining portion is split between the validator and the active nominators, based on each person’s share of the stake behind that validator.

What Are the Benefits of Nominated Proof of Stake?

NPoS makes it possible for token holders to contribute to a blockchain’s economic security without having to run a validator node themselves. That lowers the technical barrier to staking.

The main benefits are:

• More accessible participation: Nominators can bond tokens and select candidates without managing a validator node’s hardware, connection, and keys.
• Diversifying preferences: A nominator can nominate multiple candidates. This way, the nominator isn’t fully dependent on one candidate who might not become active.
• More balanced backing: The election methods are designed to spread backing more evenly across the chosen validator set. This can help prevent all backing from naturally flowing to a small group of popular validators.
• Proportional representation: The election tries to reflect nominators’ preferences proportionally when choosing multiple validators.
• Shared economic incentives: Validators and nominators both have a reason to make sure the chosen validator set operates correctly. Good performance can earn rewards, while qualifying misconduct can have consequences.

On Polkadot, the reward structure also means a validator doesn’t automatically get a higher gross validator reward just because they have a lot more backing. This design makes it less appealing to concentrate all stake into a small number of validators.

These benefits are design goals, not guarantees. In practice, an NPoS network can still have concentration risk, for example if different validators are run by the same party or the same infrastructure service provider.

What Risks and Limitations Does Nominated Proof of Stake Have?

NPoS lowers the technical barrier to staking, but it doesn’t remove risk. Nominators are still responsible for their choices and for following the network’s rules.

One key risk is that a nominator might not receive rewards. That can happen if none of the chosen candidates become active, or if the nominator’s stake isn’t assigned to an active validator. On Polkadot, nominators are prioritized for election input based on bonded stake. The minimum active bond is dynamic. Because of that, tokens can be bonded without a smaller nominator being active or earning rewards.

Also, the system is technically complex. The election has to process a large set of nominators and validator candidates. So not all nominators are necessarily included in the election input. The calculation happens off-chain and then has to be verifiable within the blockchain’s rules.

Validator risk also still matters. A validator can go down, be misconfigured, or break consensus rules. Examples of serious misconduct include equivocation, where a validator signs contradictory messages, and invalid votes. The protocol can then disable a validator or apply a slash.

Commission rates and performance can also change. A low commission isn’t a guarantee of reliable operation, and a well-known validator identity doesn’t guarantee a good outcome either. So nominators need to re-evaluate their choices regularly.

Multiple nominations also don’t fully protect you from connected risks. For example, if several chosen validators are technically operated by the same operator, an outage could take them all down at once. The same applies if multiple validators are economically or organizationally linked to the same party.

Finally, NPoS doesn’t protect against all crypto-related risks. The market price of the staked token can drop. Also, losing access to private keys, issues with a Wallet, and vulnerabilities in smart contracts outside the staking protocol aren’t covered by NPoS.

What Is the Difference Between Nominated Proof of Stake and Proof of Stake?

The main difference is how validators are selected. In a classic Proof-of-Stake model like Ethereum, validators lock up crypto themselves as stake and are selected from the active validator pool to perform tasks. In Nominated Proof of Stake, nominators help decide which validator candidates become active by placing stake behind their preferred candidates.

On Ethereum, there is no separate group of nominators that first chooses an active validator group. Validators lock up ETH and are then selected according to the protocol's rules. In each slot, for example, one validator is chosen to propose a block, while other validators in committees check and vote on blocks.

With NPoS, as on Polkadot, it works differently. Validator candidates make themselves available, while nominators lock up DOT and indicate which candidates they want to support. The network then uses an election system to assemble an active validator group and spread the stake across those validators as evenly as possible.

Nominated Proof of Stake is therefore a specific variant of Proof of Stake. Proof of Stake is the broad term for consensus models where participants lock up economic value as stake and are encouraged through rewards and possible penalties to follow the network's rules.

So there is not just one standard version of Proof of Stake. Networks can use different rules for things like validator selection, required stake, reward distribution, and how blocks become final.

The similarity is that both Ethereum and Polkadot use staking and economic incentives to secure the network. The main difference is that Polkadot uses NPoS with a separate nominator layer and election to determine which validators become active, while Ethereum selects validators directly from its validator pool.

What Is the Difference Between Nominated Proof of Stake and Delegated Proof of Stake?

NPoS and Delegated Proof of Stake, or DPoS, both give token holders influence over which validators or block producers become active. The main difference is how those participants are chosen and what happens to the stake behind them afterward.

With NPoS, as on Polkadot, nominators choose multiple validator candidates they want to support. The network then uses an election system to assemble an active validator group. It does not only look at how much support each candidate gets, but also tries to spread the stake across the chosen validators as evenly as possible.

With DPoS, the focus is usually more on directly voting for a limited group of representatives who produce blocks on behalf of token holders. A well-known example is TRON. Users who stake TRX get voting rights and can use them to vote for candidates for the role of Super Representative. The 27 candidates with the most votes become active and then produce blocks for the network.

So the difference is mainly in the election. With DPoS like on TRON, the vote ranking determines which candidates become active. With NPoS, Polkadot uses a more extensive election system that also tries to spread the stake across the chosen validators as evenly as possible.

In short: in both systems, token holders use their stake to influence who secures the network, but NPoS pays more attention to how stake is distributed across the final validator group.

Conclusion

Nominated Proof of Stake is a variant of Proof of Stake where nominators choose validator candidates and let their bonded tokens count as backing. Within Polkadot, NPoS determines which validators become active and how the stake is distributed across this validator group.

The system does not simply try to choose the candidates with the most stake, but also to spread backing across active validators as evenly as possible. That allows token holders to help secure the network without running a validator node themselves.

Nominating is not fully passive, though, and it is not risk-free. You do not automatically receive rewards, and the final distribution of your stake depends on the election outcome. In addition, slashing can have financial consequences under certain circumstances.

In short, NPoS combines staking with an election system in which nominators help decide which validators become active and how much economic backing they receive.