Setheum uses NPoS (Nominated Proof-of-Stake) as its mechanism for selecting the validator set. It is designed with the roles of validators and nominators, to maximize chain security. Actors who are interested in maintaining the network can run a validator node. At genesis, Setheum will have a limited amount of slots available for these validators, but this number will grow over time to over one thousand.
The system encourages DNAR holders to participate as nominators. Nominators may back up to 16 validators as trusted validator candidates.
Validators assume the role of producing new blocks in BABE, validating blocks, and guaranteeing finality. Nominators can choose to back select validators with their stake.
The staking system pays out rewards equally to all validators regardless of stake. In other words, having more stake on a validator does not influence the block rewards they receive. However, there is a probabilistic component to reward calculation (discussed below), so rewards may not be exactly equal for all validators in a given era.
Distribution of the rewards are pro-rata to all stakers after the validator payment is deducted. In this way, the network incents the nomination of lower-staked validators to create an equally-staked validator set.
As a nominator, you can nominate one or more (up to 16) validator candidates that you trust to help you earn rewards in DNAR.
A validator node is required to be responsive 24/7, perform its expected duties in a timely manner, and avoid any slashable behavior.
Any potential validators can indicate their intention to be a validator candidate. Their candidacies are made public to all nominators, and a nominator in turn submits a list of any number of candidates that it supports. In the next epoch (lasting one hour), a certain number of validators having the most DNAR backing get elected and become active. There are no particular requirements for a DNAR holder to become a nominator, though we expect each nominator to carefully track the performance and reputation of validators.
Once the nomination period ends, the NPoS election mechanism takes the nominators and their associated votes as input, and outputs a set of validators of the required size, that maximizes the stake backing of any validator, and that makes the stakes backing validators as evenly distributed as possible. The objectives of this election mechanism are to maximize the security of the network, and achieve fair representation of the nominators. If you want to know more about how NPoS works (e.g. election, running time complexity, etc.), please read here.
To explain how rewards are paid to validators and nominators, we need to consider validator pools, where a validator pool consists of an elected validator together with the nominators backing it. (Note: if a nominator
n with stake
s backs several elected validators, say
k, the NPoS election mechanism will split its stakes into pieces
s_k, so that it backs validator
i with stake
s_i. In that case, nominator
n will be rewarded the same as if there were
k nominators in different pools, each backing a single validator
i with stake
s_i). For each validator pool, we keep a list of nominators with the associated stakes.
The general rule for rewards across validator pools is that two validator pools get paid the same amount of DNAR for equal work, i.e. they are NOT paid proportional to the stakes in each pool. Within a validator pool, a (configurable) part of the reward goes to pay the validator's commission fees and the remainder is paid pro-rata (i.e. proportional to stake) to the nominators and validator. Notice in particular that the validator is rewarded twice: once as commission fees for validating, and once for nominating itself with stake.
We highlight two features of this payment scheme. The first is that since validator pools are paid the same regardless of stake level, pools with less stake will generally pay more to nominators per-DNAR than pools with more stake. We thus give nominators an economic incentive to gradually shift their preferences to lower staked validators that gain a sufficient amount of reputation. The reason for this is that we want the stake across validator pools to be as evenly distributed as possible, to avoid a concentration of power among a few validators. In the long term, we expect all validator pools to have similar levels of stake, with the stake being higher for higher reputation validators (meaning that a nominator that is willing to risk more by backing a validator with a low reputation will get paid more).
The following example should clarify the above. For simplicity, we have the following assumptions:
These validators do not have a stake of their own.
They do NOT charge any commission fees.
Reward amount is 100 DNAR tokens.
The current minimum amount of DNAR to be a validator is 350.
A - Validator Pool
Fraction of the Total Stake
B - Validator Pool
Fraction of the Total Stake
Both validator pools A & B have 4 nominators with the total stake 600 and 400 respectively.
Based on the above rewards distribution, nominators in validator pool B get more rewards per DNAR than those in pool A because pool A has more overall stake. Sam has staked 50 DNAR in pool A, but he only gets 8.3 in return, whereas Kitty gets 12.5 with the same amount of stake in pool B.
Since validator slots will be limited, most of those who wish to stake their DNAR and contribute economic security to the network will be nominators. Validators do most of the heavy lifting: they produce new block candidates in BABE, vote and come to consensus in GRANDPA, validate the state transition function of parachains, and possibly some other responsibilities regarding data availability. Nominators, on the other hand, do not need to do anything once they have bonded their DNAR. The experience of the nominator is similar to "set it and forget it," while the validator will be doing active service for the network by performing the critical operations. For this reason, the validator has certain privileges regarding the payout of the staking mechanism and will be able to declare its own allocation before the share is divided to nominators.
Note: while the experience of a nominator is similar to "set it and forget it", in reality there are many reasons to keep an eye on one's validators and keep optimizing the nominations for best returns and reduced risk.
How Nominated Proof of Stake will work in Polkadot - Blog post by Web3 Foundation researcher Alfonso Cevallos covering NPoS in Polkadot.