Staking Pool: The Future of Cryptocurrency Investments

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Staking Pool: T...

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Staking Pool: The Future of Cryptocurrency Investments

7 mins read / updated on Wed Jan 17 2024

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Wondering what is a staking pool? It is a method where multiple users combine their resources to increase their chances of validating blocks and receiving rewards​​. In cryptocurrency, staking is a fundamental part of Proof of Stake (PoS) systems, such as Ethereum 2.0. Staking pools have made this lucrative opportunity accessible to more people, not just those with large portfolios​.

In the world of Ethereum, for instance, the minimum requirement for staking independently is 32 ETH, which can be quite expensive. This is exactly where a staking pool comes in, allowing users to stake any amount, even less than 32 ETH​​. This widespread accessibility has made these pools incredibly popular and easier to use.

The mechanism behind a staking pool involves using smart contracts or liquidity tokens, usually ERC-20 tokens. These offer a layer of sovereignty and security by giving you control over your tokens​​. The pool, in many ways, mirrors the functionalities of centralized exchanges but with added benefits, such as the ability to control your tokens and the freedom to trade them like any other token​. Let's talk about stake pools in depth in this blog.

What Is a Staking Pool?

A "staking pool" involves multiple users combining their unique resources to increase their overall staking power, thereby enhancing their chances of getting the rewards. This increased staking power allows for more blocks to be verified and validated via the Proof of Stake (PoS) mechanism, which heightens the total sum of rewards a staking pool can amass.

These pools can be either public or private, with each of them usually having a pool administrator who maintains the nodes or validators in operation. The beauty of a staking pool is that it opens up staking to crypto beginners and intermediates, not just those with large portfolios. The minimum requirements are much lower than solo staking [32 ETH], making it incredibly popular. The overall fund of many pools depends on the number of users within the pool, with many having vast digital assets.

DeFi Staking Pools

In the DeFi (Decentralized Finance) space, pools have gained a good amount of traction. The Ethereum protocol doesn’t natively support pooled or delegated staking, but due to the increased demand from users to stake less than 32 ETH, a variety of solutions have been built to meet this demand. One such solution in DeFi staking pools is the concept of "liquid staking derivatives."

These derivatives allow users to swap any amount of ETH for a token representing staked ETH, returns from the staking rewards applied to the underlying staked ETH. However, these derivatives have their pitfalls as they tend to create cartel-like behaviors, where a significant amount of staked ETH is under the control of a few centralized organizations rather than being spread across many independent individuals/ getting decentralized.

Also Read : What is Liquid Staking?

How Staking Pools Work?

They work by enabling users to stake their digital assets collectively. When you join a staking pool, you contribute to the pool's overall staking power, which increases the chances of the pool being chosen to validate blocks and grab rewards. The rewards received are then divided among the pool members.

Note: The rewards you receive from a staking pool will always be less than what an independent staker can get rewarded, as the overall rewards must be split with the other pool members.

Why Stake with a Pool?

Staking with a pool seems to be more advantageous than staking with fewer funds. As a participant in a pool, you don't need a large portfolio to participate in staking. This democratizes the staking process and opens it to a large range of participants or say stakers.

Also, staking with a pool allows users to get better rewards. While the returns may be lower than staking independently, the rewards can still be worth it! For example, staking Ethereum as an independent validator can receive around a 6% annual reward percentage, whereas staking in a pool gives you about 4-5%.

How much can you make by pool staking?

There is a consensus that reward collection from pool staking can be significant, though it is lower than solo staking due to shared rewards​​. It depends on several factors such as;

  • The popularity of the digital asset
  • Duration of staking
  • Pool's performance and
  • The pool's size, as bigger pools have higher chances of validating blocks, but rewards are shared among more participants​​.

You also need to know that the fees which are usually taken from the rewards, also impact profits​​. Hence, pool staking may provide a steady rate of rewards but they also come with risk and should be carefully considered based on your risk appetite.

Also Read: Benefits of Staking

Frequently Asked Questions[FAQs]:

Now, let's delve into some frequently asked questions about staking pools!

  1. What is a staking pool?

A. It is a group of coin holders merging their resources to increase their chances of validating blocks and receiving rewards. They work on the principle of combining their individual staking power to increase their overall staking power.

This, in turn, increases their chances of receiving the staking rewards, as the combined staking power allows for more blocks to be verified and validated via the Proof of Stake (PoS) mechanism. They are particularly prevalent in Ethereum due to the 32 ETH rule, which requires a user to hold at least 32 ETH to become an independent validator​.

2. Is it profitable to run a staking pool?

A. Yes, running a staking pool can be profitable, but the rewards depend on various factors. The amount you stake, the value of the staked cryptocurrency, the performance of the pool, the pool's size, and the pool's fees all play a role in determining profitability.

Generally, staking more funds within a pool increases your chance of being rewarded. However, these rewards will always be less than what an independent staker can receive, as the overall rewards are shared among all pool members​.

3. What is an example of a staking pool?

A. Several platforms offer pool staking. Large exchanges like Binance and PancakeSwap allow users to stake in a pool. Cardano (ADA) is a popular option for pool staking, along with Ethereum.

Some of the biggest pools out there are ADA pools, like Zetetic, Sunshine Stake, and Pilot Pool, all of which have over 50 million staked ADA​.

4. How do stake pools make money?

A. Stake pools make money by validating blocks and receiving staking rewards. The more computing power (or staked coins) a pool has, the higher its chances of validating a block and receiving the associated rewards. These rewards are then shared among all pool members, usually proportionally based on the amount each member has staked.

5. What are the benefits of staking in a pool?

A. It has several benefits:

[a]. Allows users with less than the minimum required amount for solo staking (like the 32 ETH requirement in Ethereum) to participate in staking and grab the rewards.

[b]. By pooling resources, participants increase their chances of getting the rewards.

[c]. Pooled staking options often utilize smart contracts & liquidity tokens, which can be held in the user's wallet, adding a layer of sovereignty and security.

Also Read: How to Stake Matic

6. What are the risks of staking in a pool?

A. There are certain risks such as:

[a]. You don't have direct control over the validator client attesting on your behalf.

[b]. Another risk is that a large amount of staked ETH may end up under the control of a few centralized organizations rather than being spread across many independent individuals, potentially leading to censorship or value extraction.

[c]. There is also the risk associated with the pool's performance and the commitment of the pool administrator​.

7. How do I choose a staking pool?

A. When choosing a stake pool, it's essential to consider several factors. One is the size and popularity of the pool; a larger pool often has a higher chance of validating blocks, but the rewards are shared among more participants, which can decrease individual returns.

Pool performance is also crucial, which relates to how well the pool is maintained and operated by the pool administrator. You might want to check how much the pool administrator has pledged to the pool, as this can serve as a solid indicator of the pool's commitment​.

Additionally, it's important to consider the security measures and trustworthiness of the pool. Pooled staking options that utilize smart contracts & liquidity tokens can offer an extra layer of security by giving you control over your tokens. However, they don't give you direct control over the validator client attesting on your behalf​.

8. What are the fees associated with staking in a pool?

A. Joining a stake pool has some costs to it. Pool fees are usually taken from the rewards you get. Each pool will have different fee rates, so it's crucial to know these before getting started. The specific fee structure will depend on the pool, but it's usually a percentage of the staking rewards.

9. How do I stake my tokens in a pool?

A. Staking your tokens in a pool often involves a simple process, but the exact steps can vary depending on your chosen stake pool or platform. Many big exchanges like Binance and PancakeSwap provide such services. These platforms usually have a dedicated section or page for staking, where you can deposit your tokens for staking.

10. How do I unstake my tokens from a pool?

A. The process of unstaking tokens from a pool can differ across platforms but typically involves a similar process to staking. You would navigate to the staking section of the platform, find your staked tokens, and select an option to withdraw or unstake them. It's important to note that some platforms may have a lock-up period during which you cannot unstake your tokens.

11. What happens if my validator goes offline?

A. If a validator goes offline, it can result in a loss of potential rewards or even penalties in some cases. This is because the validator's job is to actively participate in the network consensus, proposing and validating new blocks. If it fails to do so, the network may penalize the validator by reducing their staked tokens, also known as slashing.

12. What happens if the network is attacked?

A. In the event of a network attack, various measures are in place to protect the network and its users. One such measure is slashing, which penalizes malicious validators by reducing their staked tokens. This makes it expensive for anyone to attempt an attack on the network.

13. What is the future of staking pools?

A. The future of staking pools looks promising. As more cryptocurrencies move toward Proof of Stake mechanisms, the demand for pools will likely increase. However, it's essential to consider the pros and cons before joining a stake pool, as each comes with its own set of benefits and risks​​.

By:

Zainab Saberi

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