Preface
Polkadot has a staking architecture that encourages its token holders to take significant active participation in the security of the network; a strategy game that requires frequent monitoring and re-configuring of nominators’ validator set which is incentivised through financial rewards and penalties. The aim of Polkadot is to obtain a continuously revised optimal selection of validators securing their Network. However, the P2P Polkadot team received feedback from the community regarding nominators not receiving consistent daily rewards, which led us to investigate whether the anticipated behaviour of frequently curating validator sets was being achieved. The following research paper is devoted to the analysis of nominators behaviour in the active participation of managing their validator set in the Polkadot network. We hope that this will not only inform nominators on how to best manage their stake, but to provide the Polkadot community with a better understanding of the current state of nominator participation, and how to best manage the expectations moving forwards.
All data used for analysis in the research was obtained from publicly available sources such as MBELT and Subscan.
How does Polkadot Staking work?
Polkadot uses a nominated proof of stake consensus algorithm to achieve consensus in the network.
Token holders can nominate their DOT holdings to validators (node operators) who will earn staking rewards on their behalf which will then be redistributed daily to their nominators by the Polkadot protocol. Validators will keep a predefined fee off the rewards for running their service.
Validators go through an election phase at the end of each era (24h) where the top 297 validators (ranked by volume of stake) qualify to be part of the elected set responsible for staking in the subsequent era.
Nominators are given the option to nominate up to 16 validator addresses they trust. At the start of each era, through the use of Sequential Phragmén Method, each nominator’s stake is allocated to elected validators in their selected set. The aim is to evenly distribute the stake amongst validators.
Why should nominators care about updating their validator list?
Regularly updating your validator list has two key benefits: maximising rewards and ensuring the security of funds.
The Polkadot protocol seeks to provide an even rewards distribution among properly configured validators, regardless of their stake. Therefore, a nominator that has their stake allocated to an active validator with a lower amount of stake will receive higher rewards had their stake been allocated to a validator with a greater amount of stake. This is because the same amount of rewards will be distributed to less DOT.
Additionally, only the top 256 nominators (ranked by the volume of their stake) will receive rewards per active validator. Which means nominators, especially ones with lower stakes, should avoid oversubscribed validators. On the other hand, only the top 297 validators (ranked by volume of stake) qualify to be part of the elected set responsible for staking in the subsequent era. It is therefore important for nominators to verify whether their validator set contains some validators that will likely be elected in the next era.
If any of their validators stop behaving accordingly, it is important for nominators to remove them from their list to avoid being slashed. Validators, including their nominators, can be punished financially for compromising the security of the network. This incentivises nominators to only nominate trustworthy validators, which in turn creates a strong set of validators to secure the network.
Lastly, validators can also reconfigure their fee settings each Era. It is important for nominators to review whether their validators are keeping their fees low. In some extreme cases, validators can even increase their fees up to 100% as a way to deter nominators.
While it is clear that nominators curating their validator set increases the network performance by ensuring a continuously renewed optimal validator set, it is important to note that the staking architecture should be developed in a way where the cost of researching and updating the validator set is not greater than the rewards earned. The lower the stake of a nominator, the lower the rewards earned for a similar amount of research required. It can therefore be estimated that nominators with lower stake are more likely to inadequately re-configure their validator set.
Investigation into the missed rewards
The aim of this research was to see how often nominators were missing out on rewards. We collected data from all 22500 active nominators on June 20 2022 and summed the number of days that nominators did not receive rewards in the last 30 days. We only included nominators that did not receive rewards for 10 or more days during the month.
There are several reasons why nominators may not receive their rewards:
1. The nominators do not meet the minimum stake requirement of ~120 DOT. The minimum is dynamic and is set based on the top 256 nominators of a validator receiving rewards.
2. Their nominated validator set is being mismanaged by selecting oversubscribed validators in their list or by only having validators that are not elected.
3. Validators did not pay out the rewards by increasing commissions to 100%.
The below graph charts our findings.
A total of 2 166 nominators holding 1 928 751 DOT stake did not receive rewards for 10 or more days. Out of the nominators that we retrieved, 89 had a stake greater than 500 DOT, 2 050 with a stake between 120 (the minimum stake) and 500 DOT, and only 27 with less than 120 DOT.
A total of 2 139 out of 22 500 (~10%) nominators with stakes over the minimum requirement (120 DOT) did not receive rewards for 10 or more days of rewards and are currently being left out of at least 1/3 of potential rewards.
Our data points to the fact that there is a clear lack of participation in the management of the selection of validators from retail token holders.
Further research needs to be made to specify whether this lack of participation comes from the insufficient knowledge from individual token holders, or whether the labour required to research and reconfigure validator sets is too large versus the earnings they make from staking. In either case, it is clear that the process needs to be made simpler to retail clients.
Solutions
Better education and tools for nominators
While there are significant amounts of educational material out there to guide users on how to manage their stake, the extensiveness of the guides available can be daunting for beginners. Polkadot.js is arguably the most popular analytical tool provided by the community to help curate a nominator’s validator set, however it is complex. There needs to be more made available tools (such as yieldscan) that incorporate ease of use and choice given to the nominator.
Nomination Pools
Polkadot are currently working on Nomination Pools where nominators can group their stake together and be considered as one nominator. This would allow nominators with smaller stake to increase their ranking in a validator’s nominator set and improve their likelihood of receiving daily rewards. Furthermore, by joining nominators into a Pool, this will likely increase the amount of available nominator slots. This initiative is a significant step for Polkadot to include all token holders regardless of their stake.
Liquid Staking
Alternatively, there is now the option to liquid stake DOT. For example, Lido for Polkadot is backed by industry leading validators and provides nominators with a liquid staking solution. Instead of nominating your DOT in the traditional way and having to monitor your validator set, you can swap your DOT with stDOT tokens that represent a share of the total pool, and the Lido program nominates DOT to Lido-controlled validators on the Polkadot network. When these nominations accrue rewards on the allotted stake, the total DOT under management grows and this increases the value of stDOT tokens. By staking this way, nominators will not have their DOT locked and can use their stDOT tokens to participate in other DeFi protocols.
Conclusion
The security of the Polkadot network relies on the active participation of nominators. Our investigation has highlighted that, while Polkadot’s idea to gain an edge is a great concept, the execution hasn’t seen the uptake they were hoping for. There is a high % of individual token holders that are currently not receiving daily rewards due to the lack of participation in the relatively complex staking architecture. There are a lot of compelling reasons for nominators to be participating in Polkadot’s architecture but the complexity of the system and the time investment for those with less stake can be off-putting.
As the number of nominators are on the uptrend, it is important for the development of more user-friendly tools to simplify the inclusion and participation of all nominators while still giving them freedom of choice. If Polkadot can find a way to simplify its architecture and invest in more user friendly tools, not only will it attract more retail nominators but also highly likely the uptake of retail nominators consistently updating their validators becomes significantly higher, leading to the selection of a more optimal validator set to secure the network.
Currently, there are more available slots for nominators in the current active validator set than nominators that are not receiving daily rewards. In other words, there is enough capacity in the validator set to include all DOT nominators. To help nominators select validators that will generate daily rewards for them, we reviewed the Polkadot validator set and put together a list of active validators that had available slots. You can find it here.
About P2P
P2P Staking is a world-leading staking provider with the best industry security practices and proven expertise. We provide comprehensive due-diligence of digital assets and offer only top-notch staking opportunities. At the time of the latest update, more than 1.5 billion of USD value is staked with P2P Validator by over 25,000 delegators across 25+ networks. We are early DOT investors and the largest validator by staking volume. We are committed to provide long term support for the network.
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