New to Staking?

## Staking Proxies​

Walk-through video tutorial

In this section, we go through a couple of scenarios that show how the permissions to sign for staking-related actions by stash account, controller account, and staking proxy change according to their relationship. This video tutorial goes through those scenarios using the Polkadot-JS UI.

Kusama makes it possible to create accounts having special permissions also called proxy accounts. For mode details about proxy accounts visit the dedicated page on this wiki.

Proxy accounts are special accounts which can sign extrinsic calls made to specific pallets on behalf of the proxied account. There is thus the possibility to create staking proxy accounts that can be used to sign only extrinsic calls to staking, session and utility pallets.

Usually, with the stash-controller setup, the stash still needs to sign for actions that are performed less often, i.e. bonding more funds and changing the controller (see figure above). The controller is used to sign for those staking actions that are performed more often such as nominating. Remember, staking on polkadot is not a set-and-forget action, as a nominator you will need to monitor the performance of your validators and make changes if needed. Also, each time you sign with an account, you expose the private key of that account to the internet with consequent risk of attack. Ideally, accounts with high economic power like the stash must be and remain as isolated as possible. With a staking proxy, the stash account is even more isolated than when using a controller. This does not necessarily mean that the staking proxy can sign for all staking-related transactions. Below we show two main configurations that affect a staking proxy's permissions.

### Stash is also Controller​

It is not necessary to have a controller if you have a staking proxy: the stash can also be the controller, and the account security will not be compromised. In this case, the staking proxy will be used to sign all staking-relate transactions. Note that to change the staking proxy you will need to sign with the stash.

This situation is similar to having the controller as a staking proxy. For a practical perspective we need to use only one account and remember one password to sign for all staking-related transactions. From a security perspective who controls the staking proxy controls our staking actions.

It is important to remember that actions that can be performed by the proxy accounts are limited, and in the case of staking proxy, extrinsic calls to the balances pallet cannot be signed. This means it is not possible to do balance transfers on the proxied account through a staking proxy.

### Stash is not Controller​

If the stash and controller are different accounts, the staking proxy will just be used to bond more funds and change the controller. Thus the staking proxy will be used to sign for those transactions that are used less often and that are usually signed by the stash.

From a practical perspective, we now have two accounts and we need to remember two passwords. From a security perspective, the party who wants to fully control our staking actions must have access to two accounts.

## Bags List​

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On Polkadot and Kusama, the instance of the pallet Bags-List is named as 'voterList'

In Kusama's NPoS nomination intents are placed in a semi-sorted list called bags-list. The bags list example below uses DOT for explaining the concepts.The Bags-List substrate pallet is designed to be self-maintaining, with minimal effort from the blockchain, making it extremely scalable. The bags list has two primary components, bags and nodes (or nominators' accounts), with bags containing the nodes with bonded balance within a specific range. In the figure below the 1st empty bag will contain nominators whose bonded balance is in the range of 21 - 30 DOT, the 2nd bag 11 - 20 DOT, and the 3rd bag 0-10 DOT. The nomination intents are the nominators' accounts with bonded tokens (in the example shown below, there are eight nomination intents) that will be put inside each of those three bags depending on their stake.

The bags list is semi-sorted, meaning that sorting is only partially done. When the nomination intents are submitted to the network, they are automatically put into each bag based on the number of bonded tokens, but within each bag, those nodes are arranged based on the time they are inserted and not based on their stake (see figure below). When the nomination intent of 19 DOT is submitted, it gets placed at the last spot in the 2nd bag (shown in the yellow circle). The same scenario applies for the node with 8 DOT (green circle) in the 3rd bag. Placing the node above all nodes with a lesser stake requires an additional step (more on this later).

The mentioned two nodes (19 DOT and 8 DOT) have the option to move up in their respective bags, which can put them in front of the nodes with less stake than them (see figure below). This action must be done manually by submitting the putInFrontOf extrinsic within the voterList pallet instance. Moreover, if the node with 19 DOT bonds an additional 2 DOT, that node will be put automatically in the 1st bag (i.e. automatic rebag) because the total number of bonded tokens will now be within the range of the 1st bag. That node with now 21 DOT will be put at the tail end of the 1st bag with the possibility to manually put itself in front of "older" nodes with less than 21 DOT (if there are any).

If one decides to send staking rewards to the stash account and automatically bond them (i.e. compounding the staking rewards), the position within a bag does not change automatically. The same scenario applies to a slashing event, i.e., when a nominator gets slashed, their position within a bag does not change. This might result in a scenario where the node is in the wrong bag and needs to be placed in the right bag. To address this issue, any account on-chain can submit the permissionless extrinsic rebag within the voterList pallet instance to update the positions of the nodes that do not belong to their bag and place them in the correct one. To reiterate, actions like bonding/unbonding tokens automatically rebag the nominator node, but events like staking rewards/slashing do not. See the bags-list section for more information.

The bags-list is capable of including an unlimited number of nodes, subject to the chain's runtime storage. In the current staking system configuration, the bags list keeps nomination intents, of which, at most come out as the electing nominators. See Staking Election Stages section for more info.

This means that only a portion of the nomination intents is kept. Once the nomination period ends, the NPoS election system takes all nomination intents and their associated votes as input, and it outputs a set of validators. The bags are iterated from the most staked to the least staked. If the accounts are not appropriately sorted, this could leave the last touched bag to only be partially iterated. Thus, in some edge cases, the order of the members within a bag is important. Continuing with the example used in the previous figures, there are 8 nomination intents of which only 7 will be kept. If the bags list stays semi-sorted (i.e. no accounts call the putInFrontOf and rebag extrinsics), the nomination of the node with 8 DOT in the 3rd bag will not be considered while that of the preceding node with 5 DOT will be. Nomination of the node with 8 DOT will be kept only if it puts itself in front of the one with 5 DOT. Note how the nomination of the node with 19 DOT in the 2nd bag will be considered regardless of changing its position inside the bag. The sorting functionality of nomination intents using bags is extremely important for the long-term improvements of the staking/election system.

Minimum active nomination threshold to earn rewards is dynamic

Submitting a nomination intent does not guarantee staking rewards. The stake of the top nominators is applied to the validators in the active set. To avail of staking rewards, ensure that the number of tokens bonded is higher than the minimum active bond. For more information, see the nominator guide.

The "election solution" which is a connected graph between nominators and validators with the stake as edge weights, has to meet certain requirements, such as maximizing the amount of stake to nominate validators and distributing the stake backing validators as evenly 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.

## Rewards Distribution​

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The general rule for rewards across validators is that two validators get paid essentially the same amount of tokens for equal work, i.e. they are not paid proportional to their total stakes. There is a probabilistic component to staking rewards in the form of era points and tips but these should average out over time.

Validators are paid the same regardless of stake backing them. Validators with less stake will generally pay more to nominators per-token than the ones with more stake. This gives nominators an economic incentive to gradually shift their preferences to lower-staked validators that gain a sufficient amount of reputation. A consequence of this is that the stake across validators will be as evenly distributed as possible which avoids concentration of power among a few validators. In the long term, validators will have similar levels of stake, with the stake being higher for validators with higher reputation. A nominator who is willing to risk more by backing a validator with a lower reputation will get paid more, provided there are no slashing events.

Before distributing rewards to nominators, validators can create a cut of the reward (a commission) that is not shared with the nominators. This cut is a percentage of the block reward, not an absolute value. After the commission gets deducted, the remaining portion is distributed pro-rata based on their staked value and split between the validator and all of the nominators whose stake has backed this validator.

For example, assume the block reward for a validator is 10 DOT. A validator may specify validator_commission = 50%, in which case the validator would receive 5 DOT. The remaining 5 DOT would then be split between the validator and their nominators based on the proportion of stake each nominator had. Note that for this calculation, validator's self-stake acts just as if they were another nominator.

Thus, a percentage of the reward goes thus to pay the validator's commission fees and the remainder is paid pro-rata (i.e. proportional to stake) to the nominators and validator. If a validator's commission is set to 100%, no tokens will be paid out to any of the nominators. Notice in particular that the validator is rewarded twice: once in commission fees for validating (if their commission rate is above 0%), and once for nominating itself with own stake.

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 each receive the same number of era points.
• There are no tips for any transactions processed.
• They do NOT charge any commission fees.
• Total reward amount is 100 DOT tokens.
• The current minimum amount of DOT to be a validator is 350 (note that this is not the actual value, which fluctuates, but merely an assumption for purposes of this example; to understand how the actual minimal stake is calculated, see here).
Validator A
Nominator (4)Stake (600)Fraction of the Total StakeRewards
Jin1000.16716.7
Sam500.0838.3
Anson2500.41741.7
Bobby2000.33333.3
Validator B
Nominator (4)Stake (400)Fraction of the Total StakeRewards
Alice1000.2525
Peter1000.2525
John1500.37537.5
Kitty500.12512.5

Both validators A & B have 4 nominators with a total stake 600 and 400 respectively.

Based on the above rewards distribution, nominators of validator B get more rewards per DOT than those of validator A because A has more overall stake. Sam has staked 50 DOT with validator A, but he only gets 8.3 in return, whereas Kitty gets 12.5 with the same amount of stake.

To estimate how many tokens you can get each month as a nominator or validator, you can use this tool as a reference and play around with it by changing some parameters (e.g. how many days you would like to stake with your DOT, provider fees, compound rewards, etc.) to have a better estimate. Even though it may not be entirely accurate since staking participation is changing dynamically, it works well as an indicator.

#### Oversubscription, Commission Fees & Slashes​

There is an additional factor to consider in terms of rewards. While there is no limit to the number of nominators a validator may have, a validator does have a limit to how many nominators to which it can pay rewards. In Kusama this limit is currently , although this can be modified via runtime upgrade. A validator with more than nominators is oversubscribed. When payouts occur, only the top nominators as measured by the amount of stake allocated to that validator will receive rewards. All other nominators are essentially "wasting" their stake - they used their nomination to elect that validator to the active stake, but receive no rewards in exchange for doing so.

Note that the network slashes a validator for a misbehavior (e.g. validator offline, equivocation, etc.) the slashed amount is a fixed percentage (and not a fixed amount), which means that validators with more stake get slashed more DOT. Again, this is done to provide nominators with an economic incentive to shift their preferences and back less popular validators whom they consider to be trustworthy.

Also, note that each validator candidate is free to name their desired commission fee (as a percentage of rewards) to cover operational costs. Since validators are paid the same, validators with lower commission fees pay more to nominators than validators with higher fees. Thus, each validator can choose between increasing their fees to earn more, or decreasing their fees to attract more nominators and increase their chances of being elected. In the long term, we expect that all validators will need to be cost-efficient to remain competitive, and that validators with higher reputation will be able to charge slightly higher commission fees (which is fair).

## Slashing​

### Unresponsiveness​

For every session, validators will send an "I'm online" heartbeat to indicate they are live. If a validator produces no blocks during an epoch and fails to send the heartbeat, it will be reported as unresponsive. Slashing may occur depending on the repeated offenses and how many other validators were unresponsive or offline during the epoch.

Validators should have a well-architected network infrastructure to ensure the node runs to reduce the risk of slashing or chilling. A high availability setup is desirable, preferably with backup nodes that kick in only once the original node is verifiably offline (to avoid double-signing and being slashed for equivocation - see below). A comprehensive guide on validator setup is available here.

Here is the formula for calculating slashing due to unresponsiveness:

Let x = offenders, n = total no. validators in the active setmin((3 * (x - (n / 10 + 1))) / n, 1) * 0.07

The examples demonstrate how to calculate the slashing penalty for unresponsiveness.

note

In all of the examples, assume that there are 100 validators in the active set.

No slashing would enact if < 10% of all validators are unresponsive.

For example, if exactly 10 validators were unresponsive, the expression 3 (x - (n / 10 + 1))) / n would be 3 (10 - (100 / 10 + 1)) / 100 = 3 * (10 - (10 + 1)) / 100 = -0.03 which is rounded to 0.

note

The minimum value between 0 and 1 is 0. 0 multiplied by 0.07 is 0.

If 14 validators are unresponsive, then slashing would occur, as > 10% of validators are unresponsive.

The slashing penalty would be min((3 (14 - (100 / 10 + 1))) / 100, 1) 0.07 = min((3 (14 - 11))/100, 1) 0.07 = min(0.09, 1) * 0.07 = 0.6%

Similarly, if one-third of the validator set (around 33/100) are unresponsive, the slashing penalty would be about 5%.

The maximum slashing that can occur due to unresponsiveness is 7%. After around 45% of the validators go offline, the expression 3 (x - (n / 10 + 1))) / n will go beyond 1. Hence, min((3 (x - (n / 10 + 1))) / n, 1) * 0.07 will be ceiled to 7%.

### Equivocation​

GRANDPA Equivocation: A validator signs two or more votes in the same round on different chains.

BABE Equivocation: A validator produces two or more blocks on the Relay Chain in the same time slot.

Both GRANDPA and BABE equivocation use the same formula for calculating the slashing penalty:

Let x = offenders, n = total no. validators in the active setmin( (3 * x / n )^2, 1)

As an example, assume that there are 100 validators in the active set, and one of them equivocates in a slot (for our purposes, it does not matter whether it was a BABE or GRANDPA equivocation). This is unlikely to be an attack on the network, but much more likely to be a misconfiguration of a validator. The penalty would be min(3 * 1 / 100)^2, 1) = 0.0009, or a 0.09% slash for that validator (i.e., the stake held by the validator and its nominators).

Now assume that there is a group running several validators, and all of them have an issue in the same slot. The penalty would be min((3 * 5 / 100)^2, 1) = 0.0225, or a 2.25% slash. If 20 validators equivocate, this is a much more serious offense and possibly indicates a coordinated attack on the network, and so the slash will be much greater - min((3 * 20 / 100)^2, 1) = 0.36, or a 36% slash on all of these validators and their nominators. All slashed validators will also be chilled.

From the example above, the risk of nominating or running many validators in the active set are apparent. While rewards grow linearly (two validators will get you approximately twice as many staking rewards as one), slashing grows exponentially. A single validator equivocating causes a 0.09% slash, two validators equivocating does not cause a 0.09 * 2 = 0.18% slash, but rather a 0.36% slash - 4x as much as the single validator.

Validators may run their nodes on multiple machines to make sure they can still perform validation work in case one of their nodes goes down, but validator operators should be extremely careful in setting these up. If they do not have good coordination to manage signing machines, equivocation is possible, and equivocation offenses are slashed at much higher rates than equivalent offline offenses.

If a validator is reported for any one of the offenses they will be removed from the validator set (chilled) and they will not be paid while they are out. They will be considered inactive immediately and will lose their nominators. They need to re-issue intent to validate and again gather support from nominators.

### Slashing Across Eras​

There are 3 main difficulties to account for with slashing in NPoS:

• A nominator can nominate multiple validators and be slashed via any of them.
• Until slashed, the stake is reused from era to era. Nominating with N coins for E eras in a row does not mean you have N*E coins to be slashed - you've only ever had N.
• Slashable offenses can be found after the fact and out of order.

To balance this, we only slash for the maximum slash a participant can receive in some time period, rather than the sum. This ensures protection from overslashing. Likewise, the period over which maximum slashes are computed is finite and the validator is chilled with nominations withdrawn after a slashing event, as stated in the previous section. This prevents rage-quit attacks in which, once caught misbehaving, a participant deliberately misbehaves more because their slashing amount is already maxed out.

## Inflation​

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DOT went through redenomination in 2020 that saw the DOT token supply increase by 100 times. The current token supply on Polkadot is

(Over 1.2 Billion DOT).

KSM is inflationary; there is no maximum number of KSM. On Kusama network, inflation is set to be 10% annually, with validator rewards being a function of the amount staked and the remainder going to the treasury. The current token supply on Kusama is (Over 12 Million KSM).

There is an ideal staking rate that the network tries to maintain. The goal is to have the system staking rate meet the ideal staking rate. The system staking rate would be the total amount staked over the total token supply, where the total amount staked is the stake of all validators and nominators on the network. The ideal staking rate accounts for having sufficient backing of KSM to prevent the possible compromise of security while keeping the native token liquid. KSM is inflated according to the system staking rate of the entire network.

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According to the inflation model, this would suggest that if you do not use your KSM for staking, your tokens dilute over time.

The ideal staking rate on Polkadot also varies with the number of parachains (50% is the current estimation of all DOT that should be staked, per parachain slot).

The ideal staking rate varies based on the number of parachains

The current staking rate on Polkadot still assumes the absence of parachains, with the suggested ideal staking rate of 75%. You can track the progress on the issue to adjust it here. This has already been adjusted on Kusama, which has an ideal staking rate of approximately 50% with 50 parachains. When the number of slots reaches 60, the ideal staking rate is 45%. Here is the code for reference. This code assumes that the number of slots auctioned correspond to the number of parachains on the relaychain, which may not be true as new slots can be occupied by old parachains that are renewing their lease. You can also track the progress on resolving this specific issue here.

If the amount of tokens staked goes below the ideal rate, then staking rewards for nominators go up, incentivizing them to stake more tokens on the network. On the contrary, if it goes above the ideal rate, staking rewards drop. This is a result of the change in the percentage of staking rewards that go to the Treasury.

Source: Research - Web3 Foundation

• x-axis: Proportion of KSM staked
• y-axis: Inflation, annualized percentage
• Blue line: Annual inflation rate of NPoS, i.e. total amount of tokens minted to pay validators and nominators.
• Green line: Annual rewards rate for stakers. For instance, 0.2 corresponds to 20% of annual returns on the staked tokens.

You can determine the staking rewards by looking at the top bar of the staking overview on Polkadot-JS UI.

The above chart shows the inflation model of the network. Depending on the staking participation, the distribution of the inflation to validators/nominators versus the treasury will change dynamically to provide incentives to participate (or not participate) in staking.

For instance, assuming that the ideal staking rate is 50%, all of the inflation would go to the validators/nominators if 50% of all KSM / DOT are staked. Any deviation from the 50% - positive or negative - sends the proportional remainder to the treasury and effectively reduces staking rewards.

For those who are interested in knowing more about the design of the inflation model for the network, please see here.