Since you're here, I'll assume that you are familiar with the Udacity platform, nanodegrees and it's scholarships.
But I'll still describe in very brief in case of exceptions.

Udacity is an online learning platform with a mix of free courses, and paid nanodegree programs.

Why/what of Nanodegree programs!

So these nanodegree programs like 'Full Stack Developer Nanodegree' or 'Cloud DevOps Engineer Nanodegree' are more than courses, and kind of like a full 'enough to be decent at' path of learning something. Especially as a beginner to something, you get confused with a lot of resources. And you often do not end up learning things rightly.
Having a full-fledged roadmap+resources is really helpful. And while pursuing nanodegree, you get to do 4-6 projects including one final capstone project that prepares you.
However nice these might be, truth is these programs are too expensive for some of us.
This is where scholarship challenges come in.

Table of Contents

• Applying
• After getting selected for Challenge Course
  • Completing course content
  • Community Involvement

So let's begin!

In this blog, I'm going to talk from my experience of getting the 'Cloud DevOps Engineer' Nanodegree.
Most of the Udacity Scholarship rounds have the same basic procedure. (Except a few lately sponsored by AWS)

Applying

You can find the latest scholarship openings on this page.
Most applications consist of a questionnaire where questions are asked about you, your experience level, your motivation to get this chance, and what impact it will have on your career.
(If there are prerequisites, there may be very basic 4-5 short/MC questions testing knowledge on them.)

This part is mostly personal and there are no right answers, and usually between ~5K-15K people would be selected among tonnes of applications. (so it might be that you just had bad luck sometimes.)
My suggestion would be to as honest as possible here while giving a thought and making points of how opportunity can help you.

This application is usually very short, not lengthy.

After getting selected for Challenge Course

This is the most important part and the part which you can do something to control (Although it doesn't seem so to people when they start).

To get selected for full nanodegree scholarship, you need to complete a given amount of course material during a specified period + you need to be active in the student community on Slack.

Completing course content

Course content is some introductory or related part to nanodegree you are aiming for. You need to complete course content (along with quizzes) before the given deadline.

The challenge course is long enough for you to be able to complete the course at your own pace.

Some tips that can prove useful:

• Schedule study sessions every week. Especially if you have a busy life, or are invested in other things, it's a good idea to schedule 2-3 small study sessions every week to make sure you complete your course on time.
• Be ready to binge learn. This might sound weird, but sometimes binge learning helps you cover a great deal of course, specially if you are lagging. It also really depends on the topic you are doing, does it require depth? or are you doing related topics that can be done together? I offer this advice because some people (guilty!) are busy sticking to schedule if they make it, that they're not open to the idea that learning can have different ways. (Study Jams are also hosted for the same purpose)
• Be involved with community. This point might seem like stating the obvious since it's one of the criteria, but community managers and 'student leaders' plan enough activities/mini-challenges to help you complete the course if you are lagging, or test your knowledge if you are done with something. You will be more 'with the course' this way.
• You're here to learn, don't stop yourself from learning more. Depending on your time, you can choose to complete the course and learn beyond it. Prepare yourself to enter the field even if you don't get selected.

That's it for this part. Mostly there is enough time to complete the course and the criteria are clear.

However, the most confusing part is community involvement. So if you're someone who just joined the challenge course and is overwhelmed with Hows, the next section would help you out. (It is more important too because the community can help you stay on track for the first requirement)

Community Involvement

Let's address this section through some common questions and doubts people have about this part at the very start.

Is this necessary? This criterion looks meaningless and vague to me, why not take a test or something based on course knowledge?

It might seem so, especially if you're in a hurry and feel that this is not something you will learn from.
I can say soft skills are important, but I know that answer is not satisfying enough for someone who has this question.
Having a community around it, that is active would help you with questions, you can present your work and have more revision, you can skip the activities that look vague and take part in or design quizzes or other knowledge-based activities.

The addition of a community is a much bigger chance to learn things, and it will increase your breadth of thinking because ideas and learnings would come from a lot of places.

There is so much noise on these channels, my hands are tired from scrolling. Do I have to read every message?

No, you don't. No one is required to do that. Whenever you open slack, see some of the recent messages and announcements, and reply to or read those which you can get to.

Wow, this looks like more extroverted people are meant for this. I'm so overwhelmed by the number of people.

I got 2 challenge program participation opportunities before Cloud DevOps, but I got intimidated by the amount of noise on channels and left. But for this one, I was waiting for a long time, so I went ahead and asked the same question to my peers.

Truth be told, it is very noisy and repetitive, mostly because its the start and too many people have too many questions, plus everyone wants to be active.
Trust me, the noise will decline in some time, and so will active people. Things would get less repetitive once everyone's settled down.
All you need to do is be active once a day for a while, reply to conversations you have some knowledge or perspective on, ask questions, and just be there as much as you can be. (Do not miss announcements and try to be active in some AMAs)

For people like me, notifications can be overwhelming too, so I turn them off. You can choose to do that too.
Again, noise will decline. Stick Around!

How will I stand out among so many people? How will I be evaluated?

This question eats up people at the start because we want to be in control and know the steps, while Slack initially looks as crowded as Mumbai local train.

"You do not have to do everything, just do something"

• Reply to the last messages of AMAs or otherwise that you get to read when you come online.
• Participate in channels you find useful.

It's important to stop worrying so much. 30% of people completed the Cloud DevOps challenge course, a part of whom weren't active on slack consistently.

• By doing what you can do, participating in what you feel useful, answering what you can, or asking questions, you are already participating enough.

If you need some specific points beyond the above tips,

• Participate in AMAs, answer other people's questions (a lot of them at the start would be repetitive and you can answer some). Also, keep updated with announcements and calendar, a lot of people would ask questions already answered in those.
• Participate in at least some challenges/activities.
• Remain consistent in your presence on the group. Do not disappear for longer periods if you can.
• If you want to step beyond, try to innovate or organize/help organize activities. (Not a necessity to get selected)
• Avoid spamming, your number of messages does not mean anything.
• Stop trying to find control, and make use of the community to have an amazing learning experience.

"Don't make something that's there to help you, your intimidation".

Eventually, if you stick around, you will start recognizing people, develop stories with some. It's an effortless process that will happen when you make use of the community to learn, truly learn, to know that you might or might not end up getting nanodegree, but you got this chance and community now, and you will make use of it, so you can continue your learning NO MATTER WHAT! So be there for whatever works for you, instead of wondering about this question anymore.

I am a complete beginner to this field, while I see many people who know much more. How am I supposed to increase my engagement when I do not have anything to say?

Firstly, you will have things to say eventually. Also, asking questions is participation, and the challenges, etc will be such that everyone will get to participate, so be patient.
You can also help out in non-technical things like answering general queries. Moreover learning challenges like #xDaysChallange, Study Jams, etc also count as participation.

A change of perspective that can help people having this doubt: You are getting a community where everyone is eager to answer and help each other out. And you are at a point where your need and potential to gain from it is maximum. Try to make full use of it. This is a good thing, not bad.

Should I stick around if I completed the course?

Definitely! Being consistent in the community is important. Apart from helping out others, hosting webinars/AMAs, there can be quizzes, etc that you can participate in too.
You can change the volume of your participation, but still, be there.

Do I need to participate in all challenges?

Really? After all, these answers above you are asking this? :'(

The number of challenges can be overwhelming eventually, organized by community managers, student leaders, and even non-student leaders. Participate in whatever few suit you. Try to be part of some 'course completion ones' at least like Study Jams(binge studying sessions), xDaysChallange, etc.

Phew, these were some long answers to write. Community participation is a complicated intimidating thing from a beginner's eye. Feel free to comment any other questions you might have/suggestions if you have gone through the process.

Eventually, you will figure out your own best way to participate.

Some tips straight from Udacity

Thanks for reading! :)
Also check out this amazing TED talk (especially if you vibed a bit with perspective part):