Nominators are one of two main actors who are involved in a blockchain network that uses the nominated proof-of-stake (NPoS) consensus algorithm.
Nominators are one of two main actors who are involved in a blockchain network that uses the nominated proof-of-stake (NPoS) consensus algorithm, the other being validators.
In regular proof-of-stake (PoS) networks, the power of an entity that is mining or validating network transactions is wholly reliant on the number of network tokens they hold. The more tokens of that network held by the miner or validator, the more mining power they have. This same power is also used in other types of decision-making scenarios and is popularly used in governance functions, with validators voting on proposals for future development of the network, for example.
However, in most environments, as some implementations of decentralized autonomous organizations (DAOs) have demonstrated, not all validators or miners will use their voting power in every decision-making event. This can be because they are not available to vote actively on every single event. It can also simply be because they may choose not to vote because they are unable or unwilling to commit the time or resources to understand the often complex technical considerations required for some decisions.
One solution for this is PoS variation called NPoS, which involves the process of selecting (or nominating) validators that are allowed to participate in the consensus protocol. NPoS is most well-known to be used by Substrate-based blockchains like Polkadot and Kusama.
As mentioned earlier, validators and nominators both play crucial roles in NPoS.
Validators form and secure the network, maintaining the services provided by it through the production of new blocks and validating parachain blocks. They run perpetually, using the network’s native tokens to back them as validators and to incentivize their continued abidance by the protocol’s rules. Failing to abide by the rules penalizes them (commonly referred to as “slashing,” while keeping the rules rewards them with a share of the fees generated by use of the network’s services.
In NPoS, however, validators must be elected to participate in every active set, which is a determined period of time that typically becomes longer at latter block heights. This is where nominators come in
Nominators are also token owners but, for reasons mentioned above, are not actively participating in consensus. Instead they use their economic backing (in the form of tokens owned) to nominate the validators of their choosing to be designated for active slots. Nominators are incentivized to do this by earning a share of the rewards that their nominated validators in active slots earn. Like validators, they must also play by the protocol rules or face penalties.
Validators are assigned active slots proportionally to their nominations. Thus, validators who receive more nominations and a higher value of tokens backing them are more likely to be elected into the next active set of validators.
Because rewards are eventually distributed proportionally to the validaotr’s overall stake, nominators stand to earn higher rewards for nominating perhaps less-established validators who may have smaller stakes backing them. This incentivizes nominators to seek out a more diverse group of validators instead of nominating the same ones for each set.
On the other hand, misbehaving validators will get penalized, reducing rewards for nominators. This incentivizes nominators to conduct due diligence on validators to seek out good-behaving ones.
In this way, NPoS can improve decentralization of blockchain networks by maximizing the decision-making power, while maintaining fairness through proportional and justified representation.
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