Staking on Polkadot, explained
What makes Polkadot different from other Proof-of-Stake networks?
This is a platform that focuses on inter-blockchain communication — ensuring that different networks can talk to one another.
Polkadot was established by Gavin Wood — and if that name sounds familiar, there's a good reason why. He co-founded Ethereum and created the Solidity smart contract language.
A key difference with Polkadot lies in how highly customizable Layer 1 blockchains can be established using this infrastructure… and they won't be siloed from the ecosystem.
At the beating heart of this network are validators responsible for governance and security, as well as ensuring that "parachains" remain in constant communication.
When Polkadot was formed, key decision choices were made that have helped make the ecosystem what it is today. A crucial difference concerns the wide variation of pooling options that are available to users — eliminating the high barriers to entry that often stop validator nodes from receiving staking rewards.
And what's the difference between validators and nominators?
It's quite expensive to become a validator on Polkadot — but this doesn't mean you can't get involved in the staking process.
The latest figures suggest that node operators need to have 2 million DOT staked by delegators in order to operate — and at the time of writing, that's worth $14 million.
Each delegator also needs to stake a minimum of 120 DOT in order to win the right to participate in the block validation process.
It's important to note that Polkadot does things slightly differently because it implements a Nominated Proof-of-Stake mechanism.
This encourages DOT holders to become nominators, and they'll be tasked with picking up to 16 others as validator candidates. Everyone then locks up their tokens to get rewards.
As Polkadot's website concerns, fairness is a key consideration: "The staking system pays out rewards essentially equally to all validators regardless of stake. Having more stake on a validator does not influence the amount of block rewards it receives."
Of course, for crypto enthusiasts with limited technical knowledge — or those with little time — staking through exchanges instead can be a tantalizing proposition.
What type of yield is on offer for stakers?
This can vary from one platform to another — but it's crucial to check that the yield is sustainable.
Before the recent crypto contagion set in, many investors were wooed by sky-high returns that ultimately proved unsustainable. As a result, thousands of customers at multiple platforms now remain locked out of their accounts — with withdrawals frozen. While it is possible to get interest rates that beat what's on offer at mainstream banks, it's important to tread carefully and go with a trading platform you can trust.
Across mainstream brands, the yield for Polkadot staking varies between 9% and 16.5%. That's quite a large spread — and as you would expect, each proposition comes with a distinctive range of pros and cons. In order to secure greater gains, some investors use staked $DOT derivatives — or lock it into liquidity pools. While growing your savings in this way may seem tempting at first, it's important to remember it isn't without risk.
The old adage in investing circles is that you should only invest what you're prepared to lose. In crypto circles, what really matters is understanding the nuts and bolts of how things work, and whether it's sustainable. You should also consider the lock-up periods that are associated with different staking propositions.
Doesn't staking impact liquidity?
It can do — and in some cases, you may have to lock up your DOT for 120 days.
A lot can happen in 120 days — case in point, DOT fell from an all-time high of $55 to lows of $17 over this timeframe… down 69%. This painfully shows why it's important to assess your options, and consider staking providers where you can earn yield without enduring long lock-up periods and helplessly watching your crypto plunge in value.
In some cases, it can take 28 days to unbond from a validator node — while in others, you can choose between fixed periods of 30, 60, 90 or 120 days.
But XGo is completely rethinking this approach. This platform offers no lock-ups on withdrawals and no unbonding period, meaning you're fully in control. Better still, rewards are paid out daily — and you can transfer your assets at any time.
Given how there's heightened fear in the crypto markets, and a lot of uncertainty driven by the Federal Reserve's mission to increase interest rates and tackle red-hot inflation, this much-needed flexibility helps keep HODLers in the driving seat.
Are there any other limitations to consider?
Yes — as your funds may need to be locked up in order for rewards to be generated.
With some non-custodial staking providers, you need to delegate a minimum of 120 DOT in order to stake — that's worth about $840 at the time of writing. Worse still, failing to withdraw rewards regularly can mean they vanish after just 12 weeks.
In some cases, you can lose your rewards and end up paying punishing fees if you try to redeem your DOT early, too.
XGo does things differently and says it offers staking rewards for DOT balances of up to $10,000 through its Superfluid rewards mechanism.
The project's founders say they want to offer exciting products as they make a foray into centralized finance — and give retail crypto users the options they deserve.
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