Beyond holding DOT, though, investors have been excited about this token because of the opportunity to stake it and earn an annual percentage yield (APY) of about 10% to 13%. But before you jump in, let’s first understand what Polkadot is, the risks associated with staking DOT, and where to buy DOT in Canadian dollars.
What is Polkadot?
Polkadot was co-founded by Gavin Wood, whose name you might recognize—he also co-founded Ethereum and coined the term “Web3.” The Polkadot network enables the exchange of information and transactions between different blockchains. (A blockchain is a digital ledger distributed across a network of computers, and it’s the technology underlying bitcoin and other cryptocurrencies.)
Polkadot is the protocol that can potentially connect blockchains like Ethereum (ETH), Solana (SOL) and Cardano (ADA), enabling a decentralized but interoperable version of the web in which information or value from one protocol can be shared with another.
Like other decentralized blockchains, Polkadot has a governance token, DOT. Holders of the coin can participate in making decisions about the future of the blockchain. And, since Polkadot uses the proof-of-stake consensus mechanism to validate transactions, secure the network and create new coins, DOT holders can stake their coins to earn rewards, currently estimated at up to 13% per year.
How does Polkadot staking work?
To understand Polkadot staking, it helps to know how blockchains work. Since they’re decentralized (not governed by a central authority), blockchains require a consensus mechanism to keep themselves secure, validate transactions, and create and distribute new coins.
The two most widely used consensus mechanisms are proof-of-work (PoW) and proof-of-stake (PoS). While PoW typically involves expensive crypto-mining hardware and is extremely energy-intensive, PoS requires coin holders to pledge, or lock in, their coins to participate in blockchain operations. In NPoS, all active validators receive an equal distribution of the block rewards, doing away with the need for competitive mining. This reduces the blockchain’s energy usage.
Polkadot uses a version of PoS called nominated proof-of-stake (NPoS). Investors can opt to stake their DOT either as “validators” or “nominators” to earn staking rewards. By doing this, DOT investors can compound their coins and increase their overall gain over the long term.
- Validators: You can become a validator if you have the technical know-how to set up and run a “node”—a computer in the Polkadot network—with close to 100% computer uptime. Unlike staking on Ethereum, which requires holding at least 32 ETH tokens (or joining a staking pool), Polkadot doesn’t require a specific number of coins; instead, every 24 hours, the network picks the 297 validator candidates with the most coins. Staking platforms may have a minimum duration that you must lock in your DOT.
- Nominators: If you don’t own enough DOT to be a validator, you could become a nominator—someone who stakes their coins indirectly through a validator. You’ll get a percentage of the DOT earned by the validator, minus the validator’s commission rate; these figures vary between validators. You can stop nominating anytime, but you’ll have to wait 28 days to access your coins (more on this below).
Why stake DOT?
Despite the downturn in crypto prices in 2022, Polkadot remains a promising project because it aims to connect other blockchains and help them talk to each other. It could play a role in the growth of Web3 in the years to come, no matter which blockchain protocols end up being tomorrow’s winners.