Polkadot token economics
January 26, 2022
An overview of validator rewards — and how Polkadot token holders are encouraged to participate in the network
Polkadot is a scalable, heterogeneous, multi-chain platform that connects blockchains, enabling new developers to build blockchains that trustlessly communicate in a secure environment.
To overcome the scalability and interoperability challenges faced by many blockchains, Polkadot creates a “sharded” ecosystem which includes a main relay chain plus individual parachains (“shards”). The relay chain is responsible for achieving consensus and transaction delivery (message-passing) among the parachains. When multi-threading and parachains are factored in, Polkadot can process as many as 1 million transactions per second.
Total initial supply
10 million DOT
Total planned inflation
10 million minted DOT + inflation
Dependent upon the staking rate in the network, but maxes out at 10% as the staking ratio approaches 50%
What is Polkadot’s consensus method?
Polkadot uses Nominated Proof of Stake (NPoS) as its consensus method: there is a known and limited number of validators in the active set, which is decided by governance. Inclusion in the active set is determined by your total self-bonded and delegated stake.
The minimum stake needed to get in the active set varies daily, and depends on the number of validators attempting to be included and the amount of stake on each. In an NPoS system, each elected validator has equal say in consensus.
How are validators rewarded for their work?
Once included in the active set, every validator has equal voting powers and gets equal rewards. For example, if there are two validators — one with 15k DOTs and another with 100k DOTs — assuming both are in the active set, they will receive equal rewards on an annual basis.
Because of this equitable distribution of rewards, it is preferable for a DOT holder to distribute their stake and run multiple validators. Optimizing your participation on Polkadot or any NPoS network requires more active management than other PoS networks.
How should your stake be distributed?
On Polkadot, there is no minimum self-bond to run a validator. So it is possible to meet the minimum stake necessary to be elected to the active set with almost 100% nominated DOTs. The goal is to get into the active set without hitting a level that is significantly higher than the minimum.
Thus many validators maintain a low self-bond and delegate the majority of their DOTs to themselves from a separate account. This set-up allows them to remain flexible and distribute their stake as the minimum for election to the active set changes.
How are rewards distributed to validators and their nominators?
Every validator in the active set receives the same amount of DOTs for the same amount of work. They then take a validator fee (a percentage service fee) before distributing the remaining rewards to their nominators (delegators to the validator) and the validator’s self-bonded stake on a pro-rata basis. All rewards are distributed automatically on-chain.
Why should I run a node early?
Polkadot employs a non-linear model to set inflation. Those staking in its early days saw steadily increasing inflation until 50% of the supply was staked. This model was a significant incentive for token holders to participate in the earliest, most critical days of the network.
The blue line in the graph below is the rate of inflation in the network, and the green line is the rate of reward (inflation divided by the staking rate)
Source: WEB3 FOUNDATION
What risks do validators and nominators face when staking DOT?
Validators can be slashed for misbehavior (being offline, for example, or equivocation). The slashed amount is a fixed percentage. A validator with more stake gets slashed by a higher total of DOTs. Since rewards are evenly distributed among validators elected to the consensus group, there is no economic advantage in staking more DOTs than necessary to be in the active set. In fact, staking excess DOTs increases the loss in the event of slashing.
In general, Polkadot slashing is based on security threat levels:
Max % slashed
Low security threats such as isolated cases of unresponsiveness
0.1% (or kicking the validator out of the active set)
Misconduct that occurs in good faith but is due to bad practices
Misconduct unlikely to happen in good faith or by accident, but does not lead to serious security risks or resource use
Misconduct that a) poses a serious security risk to the system, b) shows large levels of collusion among validators, and/or c) forces the system to spend a large amount of resources to deal with them
Why choose to run Polkadot nodes on our platform?
By design, Polkadot requires more active node management than PoS networks. Coinbase Cloud makes it easy for anyone to run reliable, automated, and decentralized Polkadot validating nodes that strengthen and secure the network.
We are uniquely positioned to provide unparalleled, enterprise-grade node infrastructure for Polkadot validators:
Automatic scaling Unlike many other infrastructure providers, our platform allows for automatic scaling of validators per account, and distributes a customer’s stake to increase their presence in the elected validator set. Because our platform optimizes infrastructure automatically to meet our customers’ needs, we greatly reduce the risk that comes with doing this critical work manually.
Enterprise-grade infrastructure security By ensuring our customers’ stake is distributed across as many nodes as possible, we reduce the risk of unnecessary slashing losses.
Easy-to-use platform We designed an intuitive user experience that is surprisingly simple given the complexity of the underlying technology. Our platform’s automatic node management workflow frees our customers from the worry of constantly checking or managing their active participation. We also keep our customers in full control.
Protocol experts We’re experts in nodes, participatory infrastructure, and protocol: we run validators across all major Substrate-based chains, cross-leveraging optimizations and security practices. We test all software, infrastructure, and protocol upgrades on our own infrastructure, ensuring any breaking issues are caught well before propagating changes to our customers’ infrastructure.
Access to protocol specialists Our dedicated protocol specialists keep Coinbase Cloud customers up to date with on-chain governance votes and changes in the validator ecosystem. They provide advice, insights, and guidance that arms our customers with critical information to help them better manage their participation.
Premium provider We are the world’s premier multi-cloud, multi-region infrastructure provider specializing in permissionless participatory networks.
Proprietary double-signing protection We use innovative double-signing protective software to ensure we never double-sign a block.
Custodian agnostic As a non-custodial infrastructure provider, we can work with you to participate in Polkadot regardless of your custody solution.
There are many ways in which holders of DOT, the Polkadot token, can earn participatory rewards: