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’s the Difference Between Nominated Proof of Stake and Other Consensus Mechanisms?

NPoS differs from other consensus mechanisms because it’s mainly a system for validator selection and economic security, not a full description of every consensus step. To compare it correctly, it’s important to separate two layers.

The first layer determines who is allowed to be a validator and how much stake is behind that validator. NPoS operates on this layer. The second layer determines how blocks are produced, which chain is followed when multiple blocks exist, and when blocks are final. That includes block production, fork choice, and finality.

A protocol can combine NPoS with other algorithms for that second layer. On Polkadot, NPoS chooses the validator set, BABE produces blocks, and GRANDPA handles finality. Because of that, NPoS isn’t a one-to-one match with a full consensus stack that includes all tasks by itself.

What’s the Difference From Proof of Stake?

NPoS is a specific form of Proof of Stake, while Proof of Stake is a broad category. Within PoS, economic stake helps with validator selection or participation. The exact implementation varies a lot by blockchain.

In a simple, direct PoS setup, stake can directly affect which validators participate. NPoS adds an explicit nominator role. Nominators build a list of trusted candidates, and then an election algorithm determines both the active validators and how backing is distributed.

So the goal isn’t only to pick the candidates with the most raw backing. NPoS also tries to balance backing across the chosen set and represent nominators’ preferences proportionally.

On Polkadot, stake mainly matters before the technical consensus roles, during the NPoS election. After validators are selected, they’re treated with equal weight in the BABE and GRANDPA authority set. So a larger stake doesn’t permanently give a chosen validator more voting weight there.

What’s the Difference From Delegated Proof of Stake?

NPoS and Delegated Proof of Stake, or DPoS, both let token holders influence block producers or validators, but they’re different designs. The terms aren’t interchangeable.

In classic DPoS systems, token holders usually vote for a relatively small group of delegates or witnesses who produce blocks. This is a representative, stake-weighted election of block producers.

With NPoS on Polkadot, users nominate multiple validator candidates. Then the protocol runs a proportional multi-winner election. It also calculates how nominators’ backing is spread across the chosen validators.

The biggest difference is NPoS’s explicit goal of proportionally representing nominators’ preferences and balancing backing within the active validator set. DPoS designs mainly focus on electing delegates or witnesses. The exact voting, selection, and reward rules vary by DPoS blockchain.

A nominator in NPoS doesn’t automatically hand control of their tokens to a validator. The nominator states preferences for candidates, and then the protocol decides what active allocation follows from the election.

Final thoughts

Nominated Proof of Stake is a Proof-of-Stake variation that lets token holders participate in the selection and economic security of validators through nominations. Nominators don’t need to run a node, but they do need to carefully evaluate which validator candidates they nominate.

The core of NPoS is the election: the protocol chooses an active validator set and spreads nominators’ backing across that set. This design tries to make participation more accessible and distribute backing more evenly than if only the biggest candidates dominated.

That comes with clear responsibilities and risks. A nominator only earns rewards with an active assignment, commissions and performance can change, and linked validators can create shared risks. So NPoS isn’t a passive way to lock up crypto, but a model where smart validator selection and regular check-ins still matter.