What Is Nominated Proof of Stake (NPoS)?

By Lipsa Das

Consensus mechanisms lie at the core of how a blockchain works, ensuring its security and validity. Simply, it’s how blockchains can operate on multiple computers instead of on a centralized server. Currently, there are two broader categories of consensus mechanisms: Proof of Work (PoW) and Proof of Stake (PoS). 

Both of these systems require a way to ensure the participants validating transactions behave honestly. This is a core feature of any blockchain. For Proof-of-Work blockchains, miners solve complex high-intensity mathematical problems, and this requires expensive equipment. Then to secure a Proof of Stake network, validators lock up crypto as collateral instead. Even within the Proof-of-Stake category, there are countless variations aiming to achieve specific things.

One such example is Nominated Proof of Stake (NPoS). While NPoS is built upon the basis of a decentralized Proof-of-Stake system, it also aims to be more democratic than its predecessor by introducing nominators and validators. 

But there’s a bit more to it than that.

In this article, Ledger Academy will unpack what a Nominated Proof of Stake is, how it works, and some of its advantages and disadvantages.

So, without further ado, let’s dive in.

What Is Nominated Proof of Stake (NPoS)?

Nominated Proof of Stake is a variation of the Proof-of-Stake consensus mechanism that aims to be more democratic, and therefore more fair, than its predecessor. Put simply, it allows token holders to nominate validators to represent them in the block validation process. Only nominated validators can participate in block formation and each individual nominator can nominate a specific number of validators. 

To follow, these networks automatically distribute the stake among the participating validators evenly with penalization mechanisms for both validators and nominators in case of malicious activities. Polkadot was the first blockchain to create and use the Nominated Proof of Stake system, supporting its core mission of interoperability and decentralization.

But how does it work exactly?

How Does Nominated Proof-of-Stake (NPoS) Work?

Well, Nominated Proof-of-Stake combines the traditional Proof-of-Stake mechanism with stakeholder voting by dividing the network into two participants: validators and nominators.  

Block validators have a similar function to a traditional PoS validator. These validators help maintain security by verifying the validity of transactions for the blockchain’s next block. However, there is a key difference: Instead of being chosen randomly, like in most PoS mechanisms, validator nodes are nominated by another node. 

The NPoS voting mechanism follows the sequential Phragmen election technique focusing on fair representation. While that may sound complex, let’s break down what it means.

Firstly, each block is processed by an active validator set. This is a group of validators chosen by the nominators. Nominators can nominate a specific number of validator nodes. Next, validators receive slots in the validator set relative to the stake backing them.

To choose which validator is best for the job, nominators can also look at a variety of metrics, such as their track record, on-chain ID, websites, and any other supporting links. This due diligence is imperative because validator actions directly impact the nominator’s stake. 

The validators which receive the most nominations, and thus have a higher stake backing them, become the validator set for that block. This changes every “era”, a predefined amount of time, ranging from 4 hours to 24 hours. Once the active set is finalized, the network distributes the stake between all chosen validators to keep the process fair.

NPoS Vs DPoS: What’s the Difference?

If you know anything about delegated proof-of-stake, you may have noticed these two consensus mechanisms behave quite similarly. Despite their similarities, they are not identical. 

Validation in both NPoS and DPoS blockchains both revolve around two different network users, one with the power to vote the other in. However, these voters are named delegators in DPoS and nominators in NPoS. 

But there’s also another key difference. With NPoS, both nominators and validators put up a stake as collateral. This means that both nominators and validators may be punished for bad behavior via slashing. On the other hand, in DPoS, only validators receive punishment for bad behavior. Meaning in a DPoS system, delegators are not punished for the actions of malicious validators, ususally that is. Today, some DPoS mechanisms do include ways to punish delegators too. So in fact, the line between these two mechanisms can sometimes be blurred.

Advantages of NPoS

There are a whole host of reasons you might want to use nominated proof-of-stake, even just for its lower energy consumption and easier scalability. But what about its advantages over other proof-of-stake consensus mechanisms? Well, the main reasons for choosing a NPoS system are simple to enhance security and democracy.

A Democratic Approach to Validator Selection

To explain, compared to traditional PoS, NPoS creates a fairer ecosystem by allowing nominators to select validators they trust. Blockchains using NPoS typically use systems such as election and game theory, or even discrete optimization. These mechanisms ensure the entire process is fair. Once these validators are chosen, the network evens out the playing field further by distributing all stakes evenly. 

Fair Punishment for All Participants

NPoS prioritizes network security at the highest level. To enable this, NPoS implements a robust system of rewards and punishments for both validators and nominators. In contrast to traditional systems like DPoS that only punish validators, NPoS slashes the stake of the nominator who vouched for the validator too. This encourages validators and nominators to act honestly to avoid penalties. This lower risk of collusion also makes the network much more secure.

Disadvantages of NPoS

Participating in an NPoS system has several advantages, like a democratic process. However, there are certain drawbacks to this proof of stake variation as well. Let’s look at the key drawbacks.

Nominating Malicious Validators

As a nominator in an NPoS network, you assume a lot more risk than a traditional PoS system. To illustrate, nominators are directly penalized for choosing malicious validators, which means losing part or all of your stake in case of any problems. Your rewards are also tied to the validators’ performance, so choosing correctly is important.

Active Validator Set

NPoS allows nominators to choose a predetermined number of validators at a time. However, not all of the validators you nominate might make it to the active set. For example, on the Polkadot network, nominators get to choose up to 16 validators. If you nominate 15 validators and only four make it to the active set, the network distributes your stake among them.

Proof-of-Stake Consensus Mechanisms: More Than Meets the Eye

While Proof-of-Stake is a secure and eco-friendly consensus mechanism, not all blockchains implement it similarly. Some blockchains are more centralized than others — whether due to the fewer validator nodes, lack of decentralization in the staking process, or uneven power distribution.

When choosing a Proof-of-Stake blockchain, it’s important to assess the level of centralization and its effect on the blockchain’s long-term viability. A decentralized blockchain offers the highest level of security and ensures that your crypto assets retain their value over time.

Choosing a decentralized blockchain is just the first step, though. When it comes to security, how you interact with a blockchain is also equally important. Opting for non-custodial wallets, like those Ledger offers, puts you in full control of your private keys. With Ledger, you can directly interact and explore blockchains safely without relying on third-party entities.

With self-custody options like those that Ledger offers, you are the master of your own assets. Choosing self-custody is choosing true ownership of your assets.