Staking pools are a method for many crypto token holders to pool their assets and grant the staking pool operator a validation status, as well as providing stakes to all contributors for their computational resources’ contributions.
A staking pool is a type of pool in which many stakeholders (or bagholders) combine their computing resources to boost their chances of receiving rewards. In other words, by validating and verifying new blocks, they combine their staking power, increasing the chance of earning block rewards.
For many cryptocurrency investors across the world, the notion of a staking pool is unfamiliar, and investing in one generates doubt rather than attracting droves of people. Despite this, staking pools based on a proof-of-stake (PoS) algorithm are available on blockchains that use this model, and stakeholders must lock their crypto tokens in a specific blockchain address or wallet for an annual percentage yield (APY).
There are a number of other benefits associated with investing in a public stake pool that should not be overlooked, such as the fact that you’re buying into a private company. The blockchain also provides stakeholders access to the public stake pool operator, who receives a percentage fee for each crypto token staked.
The advantages of investing in a public stake pool are accompanied by several disclaimers that must be weighed carefully before staking cryptocurrency tokens, especially the staking pool model utilized.
How does it work?
Public stake pools are created for smaller retail investors who want to be a part of the staking process but don’t have enough cryptocurrencies to become validators on the blockchain network. It’s very similar to how mining pools function in a Proof of Work (PoW) blockchain.
Staking pools are usually only available on blockchains that use the Proof of Stake model, or through other protocol features in non-POS systems. Most network participants don’t have enough resources to stake individually, so they prefer to join a staking pool where they can pool their resources with others.
Staking pools usually have their own administrator or pool operators to make sure the nodes/validators stay operational. People who take part in a staking pool agree to keep their assets in the pool for a set period of time, during which they can’t use them.
Naturally, the more you stake, the higher your chances of being rewarded. The majority of staking pools also reward stakers for making longer and more frequent staking deposits: the longer you maintain your assets in the pool, the greater your share of any potential rewards or gains from block rewards will be.
A staking pool is generally managed by a pool operator and the individuals that opt to join the pool have to lock their coins in a particular blockchain address (or wallet). Some pools necessitate users to stake their coins with a third party, but there are many other choices that let stakeholders contribute with their staking power while still holding onto their coins in a personal wallet.
For example, staking pools that are termed “cold” allow for a more secure system since participants may take part in the staking procedure while keeping their money on a hardware wallet. The Proof of Stake (PoS) consensus mechanism is gradually being implemented by many blockchain systems.
The PoS model is more energy-efficient, scalable, have less barrier to entry, and offers faster transaction speeds than the PoW model which blockchains like Bitcoin and Ethereum 1.0 employ. Smaller rewards are given in return for successful block forging (validation) when compared to solo staking because each reward is split among many participants of the pool.
In addition, most pools will charge costs, which will reduce your payout even further. Staking pools, on the other hand, provide more predictable and regular staking returns. They also allow stakeholders to generate a passive income without having to worry about technical implementation or maintenance of setting up and running a validating node.
One can invest in a stake pool with only a small portion of the tokens required to become a validator on a PoS blockchain. The staking pool then rewards users on either a daily, weekly, or quarterly basis – this frequency depends on the cryptocurrency being staked.
Investors may stake their ETH tokens in a staking pool on Coinbase for daily rewards and with no minimum balance requirement, for example. Stake your tokens through various validators on many chains available in the Cosmos ecosystem if you want to stake them on other blockchains.
When you’re ready to stake your coins, you’ll need to select a staking pool. Here are some factors that should enter into your decision:
- The commission rate the pool takes. These usually fall between 5% and 6%.
- The annual percentage return (APR) offered by the pool on different chains. For Cosmos Hub, this is 15%, while Osmosis pays 60% and Juno offers 150%.
Further, many staking pool operators offer singular value propositions that could make them more attractive to potential stakeholders. For instance, Cosmos Antimatter is a newborn validator within the Cosmos ecosystem striving for decentralization of the validator network. Consequently, this would prevent any cartels from forming while sacrificing 100% of their profit to the stakeholder community.
DeFi Staking Pools
In decentralized finance protocols, staking pools operate somewhat similarly to savings accounts; however, these pools are project-specific and require the use of native tokens. project examples include PancakeSwap (a Binance Smart Chain protocol) which features CAKE (its native token) staking pools or multiple other projects also available on BSC.
These staking pools have a secondary aim of locking liquidity into the protocols, assuring that there are enough assets available to meet DeFi demands. A share of revenue generated from various protocols (such as fees and commissions) is included in these DeFi pool rewards.
This is one of the reasons why APY percentages in DeFi staking pools are typically higher than in standard PoS staking pools. Stake pool investors run various risks in both situations. The most harmful is a significant price movement in the staked assets, which may negate any APY gained. For example, earning 40% APY but having a 50% price drop over the year would result in a net loss.
While crypto mining requires investing in equipment, staking simply involves holding cryptocurrency to earn returns. For different cryptocurrencies that operate on a PoS blockchain, there are several stake pools currently available. Over private staking pools that may offer a higher APY, it is recommended by many to choose public stake pools at notable exchanges.
Aside from assessing the stake pool’s standing, it is prudent to pick staking pools that provide regular information on the pool’s performance and are open in their operations. This includes major decisions regarding the pool’s future path as well as how stakeholders are incorporated into the process.
Before deciding on a staking pool for investments, it is suggested that you go through performance appraisals. Consider the cost of membership or registration to see how much money you will make in actual returns from the tokens staked in your chosen staking pool.