It Now Costs Over $10,000 To Stake Polkadot (and It’s Still Risky)
Scalability issues have added a roadblock to the adoption of the cross-chain platform
Polkadot is a Nominated Proof-of-Stake (NPoS) network that has been up and running since May 26th 2020. Users vote to determine which validators do a good job, and in return they get rewarded with more DOT coins. Rival project Cardano (ADA) has a similar system, except that there is no minimum staking amount and the risk is only that a user fails to get rewarded. With Polkadot, the computation required to nominate the validators that produce blocks is done off-chain, before being added back to the chain within a single block.
As the network has grown, the time taken to produce a block has increased. Attempting to fit all nominations into a single block has caused network instability, and the developers have made the decision to reduce the number of nominations that are possible on the network. In an update in October 2020, they made an announcement that they were aware of the problem, and had come up with a solution:
In order to fit the solution into a block, the size must be reduced. There are several good options being considered for a permanent solution, but the immediate fix is to eliminate the smallest nominations (measured in DOT). The DOT limit is a dynamic amount — it can move up or down every era (24 hours on Polkadot) depending on the nominations and the election solutions. The current minimum can be seen using this community-developed tool or through these scripts which you can run on your machine. However, this means that for the moment, nominators with a stake smaller than the daily minimum rate will generally not be backing any validator with their stake, and consequently not be receiving staking rewards, as a side effect of the issues above.
It’s hard to have sympathy for the developers, as this seems a lot like a self-inflicted injury. How exactly was this scalability issue not planned for? What were they expecting to happen as new validators and nominators joined the network? At the time of writing, the community-developed tool they mentioned shows 264.97 as the minimum number of DOT necessary to get rewards for staking.
The cost of staking the minimum 264.97 at the current DOT price of $40 is $10,710
This makes becoming a nominator a pretty difficult thing for most people to afford. Early adopters could easily afford enough coins to stake, but the minimum stake amount is constantly changing, meaning that even users who have already nominated their validators can find themselves suddenly staking an insufficient amount. Bear in mind that unstaking tokens takes 28 days, a security feature that makes it harder for bad actors to stake and unstake too frequently.
This is a long time in the volatile cryptocurrency markets, and anyone who wished to sell their DOT might find that they are no longer likely to make a profit by the time their coins are available.
Staking isn’t even safe when you can afford it
Let’s assume you were an early adopter that was able to get 265 or more DOT at a discount price, or perhaps you‘re so rich that $10,710 sounds like a normal amount to spend on one cryptocurrency.
Now you can nominate up to 16 validators, but there’s a catch. When a validator misbehaves it is punished by slashing, which means that a percentage of all staked DOT is taken by the network. This is bad for the validator, who has to pledge a large amount of DOT, but it is worse for their nominators who (probably) did nothing wrong.
A misbehaving validator is defined by the Polkadot Wiki as a validator that engaging in any of the following activities:
Level 2: concurrent unresponsiveness or isolated equivocation. Slashes a very small amount of the stake and chills.
Level 3: misconducts unlikely to be accidental, but which do not harm the network’s security to any large extent. Examples include concurrent equivocation or isolated cases of unjustified voting in GRANDPA. Slashes a moderately small amount of the stake and chills.
Level 4: misconduct that poses a serious security or monetary risk to the system, or mass collusion. Slashes all or most of the stake behind the validator and chills.
Nominating 16 validators is in some ways the safest way to avoid this, as the slashing is proportional to how many validators have been nominated by a given user.
If a validator was slashed for 1% of their DOT, only a sixteenth (6.25%) of the bonded DOT would be affected. This would reduce the slashed DOT to 6.25% of 1%, or 0.0625% of the overall amount. This is a lot better than losing 1% of your DOT, but it’s still a lot worse than any blockchain where staking carries no risks whatsoever.
This example is based on the assumption that all 16 of a user’s nominated validators are active, which is reportedly rare. The assumption is that a nominator will probably only nominate one active validator, and so they will usually suffer the full force of being slashed. Slashing is supposed to encourage users to pick their validators carefully, but it really drives away users who might be interested in staking but have no interest in losing their money.
The developers are working on a fix
While this seems like a problem that could have been foreseen, the developers are supposedly hard at work on fixing this problem. The latest information I could find comes in the form of a pull request, and this has already been included in a release candidate for v30. Three weeks ago the developer who created this pull request stated that v29 is “not yet enacted”, meaning that it could be weeks before v30 is even the next version to be considered.
We could be waiting until the end of summer for them to fix this issue in the production version of the network, and by then many traders predict that the bull market we are experiencing will be coming to a close.
Anyone who buys $10,710 of DOT before v30 is released with the intention of becoming a nominator will probably experience disappointment on two levels:
- The coming bear market is bound to see the price of altcoins like DOT drop.
- The minimum stake amount will probably be removed
It’s an expensive time to become a nominator, and it really isn’t worth the slashing risk at the current price.