What is a Staking Pool?
5 min read
What is a staking pool, is it the same as a mining pool? How do they work? Why should you join one? What disadvantages does it have, can we mitigate them? Here’s the ultimate guide to understand staking pools!
What is a staking pool?
A staking pool allows many stakeholders to pool their staking power and computational resources to validate and verify new blocks, thus increasing their chances of obtaining rewards in return.
This staking pool model is an alternative to mining, used in the PoW (Proof-of-Work) consensus mechanism. However, the idea of staking pools is only possible in PoS blockchains (Proof-of-Stake), and instead of miners pooling computational power (energy-intensive mining takes place in PoW) validators (in PoS) pool their stake.
How do staking pools work?
Usually, different stakeholders stake their funds in a staking pool managed by a third party, so they have their coins locked in a specific blockchain address (or wallet) for a certain period of time. However, there are alternative pools, not all are managed by pool administrators: there are safer staking pools, in which you can deposit your stake power while maintaining ownership of your funds in your personal wallet. These pools are known as cold staking pools, which, like cold wallets, allow users to hold their funds in a hardware wallet or cold storage.
Why stake with a pool?
- Low barrier to entry: If you want to be an independent validator, Ethereum forces you to block 32 ETH tokens, a large amount of funds that only institutional investors (a.k.a whales) might hold. However, in a staking pool you can add your coins to those of other stakers in order to be a stake pool delegator. So yes, being a delegator and verifying blocks and getting rewarded for it is within everyone's reach.
- No technical know-how needed: Joining a staking pool is very easy. You don't have to worry about node maintenance or hardware requirements. Once the stake is deposited node operators run the validators. Each time a new block is created, rewards are distributed to the contributors in proportion to the number of tokens each one had staked, minus a fee for the node operations performed.
- Liquidity tokens: Most of the pools will give you a token representing the amount you have staked (just like liquid staking protocols do) (huge mention to StaderLabs!). This way deposited user funds are not 100% "locked", instead you can use the 1:1 token that represents it as collateral in different DeFi protocols. Liquid staking is such a good way to give utility to your tokens, as you switch from having inactive (if funds remain just staked) to active funds (you can still use your staked funds with that 1:1 delivered token).
Staking pools Vs. Solo staking Vs. Staking as a Service
Which option is better? To do solo staking, to join a staking pool, or to perform Staking as a service (SaaS)? Well, let's walk you through the benefits and disadvantages of joining a staking pool over the other two options:
- Solo staking has a higher barrier to entry when compared to pooled staking: it requires the validator to have the required minimum amount as to be elected to validate and to have the hardware and technical knowledge required to run the operator node. However, solo staking gives users full sovereignty and control over their keys and choices, and also, full control of the earned rewards. On the contrary, pooled staking, although it has lower barrier to entry, comes with the disadvantage of delegating node operations to a third-party, operations for which delegators will have to pay a fee. Besides, no one assures that the third-party is going to act with due diligence, which implies an additional risk.
- Staking as a Service is similar to joining a staking pool: in both cases, users do not run the validator software themselves. What is the difference then? Unlike pooling options, SaaS requires a full 32 ETH deposit to activate a validator. To keep using the SaaS platform, you will need, usually, to pay a monthly fee. Good thing is that rewards accumulate to the staker.
Disadvantages of Staking Pools and how to mitigate them
- Loss of token control: if the pool is managed by a third party, the tokens become locked in the node address, which at the same time is managed by the individual validator.
Solution: Always analyze the pool operator you choose and the blockchain network where you are going to stake.
- Cartel creation: if the pool is managed by a third party, cartels can be created, allowing validators to monopolize the staking power and manipulate transactions.
Solution: It is always good to choose pools that allow the user to participate in the process and make decisions. For greater security there are cold staking pools which, as mentioned above, allow you to keep custody of your crypto tokens.
- Lower rewards: pool rewards are smaller than the ones received by those who do solo staking, since these platforms must divide the profits among all participants and pay the commissions and fees that are usually applied.
Solution: Although reward to validators is smaller, staking pools are a safe bet to generate additional passive income in your cryptocurrency. If you are patient, you can see a great profit coming from your initial investment in the medium/long term.
Liquid Staking and how it address staking problems
Proof of Stake assets have become the dominant asset class in the blockchain space, and this is in part due to the staking rewards that individuals and institutions can earn through a staking protocol. PoS and, therefore, staking have proved to have benefits over mining. However, as it have been detailed before, there are risks associated with the concept of staking, particularly unbonding periods, which limits a user’s ability to transfer, trade, or use the asset as collateral to participate in DeFi. Liquid staking solves this problem by giving institutions and individuals the ability to stake assets, and in turn, receive a liquid representation of that asset in return that they can freely transfer, trade, or use in DeFi. Benefits of liquid staking include:
- Capital Efficiency
- Increased liquidity
- Increased Accesibility to Protocol Staking Rewards
- Eliminates Minimum Protocol Staking Requirements
By choosing Stader to stake with your favorite blockchain protocol (Hedera, Polygon, BNB, Fantom, Terra 2.0, NEAR, and soon Ethereum and Avalanche) you receive also a liquidity token in return, for example, NEARX or MATICX, that you can also use in other DeFi platforms at the same time that your staked funds generate frequent staking rewards. So, basically, your benefit doubles with liquid staking platforms.
It’s safe to assume that liquid staking will proliferate through the entire PoS ecosystem in 2023, and there are already plenty of teams building liquid staking solutions on protocols like Stader: Liquid staking is a major upgrade in the blockchain industry, and liquid tokens are said to be the 3rd generation cryptocurrencies.
As blockchain infrastructure matures, it is important to have multiple and easily accessible entry points for new users, whether they are individuals or institutions. Because of its accessibility and core value proposition, liquid staking is one of the best options for increasing the amount of assets staked, and in turn, increase protocol security rather than decrease it. The liquid staking market is still in its early stages and most liquid staking protocols are less than a year old. That said, it seems clear that liquid staking is here to stay, and staked assets will likely be the foundation of the next generation of financial products built on Web3 protocols.