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Before diving into nomination pools, let's briefly look at Polkadot's staking process. Staking involves locking up a certain amount of DOT tokens to support the network's operations, enhance security, and participate in consensus. Stakers play a crucial role in validating transactions, producing new blocks, and ensuring the overall integrity of the network.
In Polkadot, token holders have the ability to nominate validators. Validators are responsible for verifying and validating transactions on the network. By nominating validators, token holders contribute to the security and stability of the network. Nominators, therefore, have a direct impact on the selection and performance of validators.
Nomination pools provide a convenient and efficient way for DOT holders to participate in staking and collectively nominate validators. These pools allow individuals with smaller amounts of tokens to pool their resources together, increasing their chances of successfully nominating validators and earning rewards.
Here's a step-by-step breakdown of how nomination pools operate:
A pool is created by an individual, which is called the pool operator. The pool operator manages nominations and can also contribute any amount of DOT to the pool.
Each nominator (a person who stakes their DOT at the pool) contributes their desired amount of DOT tokens to the pool. The combined total of the pooled tokens determines the collective nominating power of the pool.
The nomination pool operator selects a set of validators to nominate, taking into account their commission fee, reliability and reputation.
As nominated validators get into the active set they produce blocks and secure the network, and generate rewards. These rewards are distributed proportionally among the nominators based on their contribution to the nomination pool.
Nomination pools offer several benefits to DOT holders:
By pooling resources together, individuals with smaller amounts of tokens have a greater chance of successfully nominating validators and participating in staking.
Pool participants can leverage their combined knowledge and expertise to make informed decisions about which validators to nominate, enhancing the overall performance and security of the network.
Participating in a nomination pool allows DOT holders to engage in staking without the need for extensive technical knowledge or managing their own validators.
If you'd like to learn how to join a nomination pool, check our guide.
