Understanding a Staking Pool: What Is It?

A staking pool enables multiple stakeholders to combine their resources to increase their chances of receiving a reward. So, by uniting their staking power while checking and confirming new blocks, the stakeholders have a higher probability of receiving the block rewards. Although the idea of a staking pool system resembles that of a traditional mining pool, this setup can only be used on blockchains that have the Proof-of-Stake (PoS) model or through the design features of a protocol in systems without PoS.

Key Takeaways

  • Crypto staking pool combines all the assets staked by the investors to unify their staking power.
  • It has a stake pool operator and one or more stake pool owner(s)
  • It allows the investor/stake pool owner to participate in the protocol and receive rewards without needing to constantly be online.
  • An essential part of a staking pool is the trust investors have in the stake pool operator.

Main Players and the Usage of Staking Pools

The key figures that manage a staking pool are the pool operator and the stakeholders that have joined it to leave their coins in a blockchain address (or wallet) of their choosing. Though in some pools stakeholders are required to stake with a third party, there are various alternatives for them to contribute with their staking power while keeping their coins in a personal wallet. Staking pools provide stakeholders with more predictable and regular staking payouts. Aside from that, they allow investors to generate a passive income without having to deal with the technical implementation or maintenance of a validating node.

Staking Pools Crypto: Benefits and Risks of Using Them

Crypto staking pool reduces some of the disadvantages of the PoS, where the investor must constantly be online to produce a block for crypto transactions. Such features may result in high power consumption and have a risk of hacking. On the other hand, the staking pool crypto makes sure to have an adequately controlled foundation and well-secured production of blocks, so as not to worry the investor. It allows its participants to join a protocol and be rewarded without needing to continuously use an online node on a DeFi platform.

The investors who participate in a staking pool by staking their assets into it cannot use them until they are redeemed, or the staking term ends. This procedure improves the security of the network, as well as checks and validates new blocks. And part of the earnings from the block rewards is also given to the participants.
However, despite its advantages, the main risk of a staking pool is that it is heavily based on trust. Investors leave their coins with the staking pool operator often without extensive knowledge about how reliable they are, which is why research is essential for choosing a staking pool.

How to Choose the Right Staking Pools?

To select the right staking pool for coins that fits them, investors need to look out for several differences pools usually have. Those can be combined into groups: the ones within the protocol and those outside of it. Within protocols, it is advised to look out for:

Saturation

A capping mechanism that shows when rewards will stop going up with increases in stake by measuring the stake within the pool. To earn more rewards, it is suggested to delegate to a pool closer to saturation.

Rank

The long-term expected outcome shows the ranking based on the possible rewards the investor will receive if they put the intended amount. 

Live stake

The percentage of the entire stake in the pool’s system.

Pool margin

The portion that the stake pool takes before dividing the remainder between the investors.

Pledge

The amount that the participants commit to putting in their stake pool. However, be careful. Although the stake pools that do not meet their pledge requirement can produce blocks, rewards will not be produced.

Cost per epoch

A set fee per epoch that covers the staking pool’s operational costs.

Produced blocks

The number of blocks created so far.

Some off-protocol components an investor may be interested in looking out for are:

  • If it is operated by someone they trust
  • Is in a location they like
  • Is owned by more than one stakeholder
  • Provides information about its performance on a regular basis, and others.

Final Thoughts

To conclude, multiple stakeholders are able to combine their resources and increase their chances of receiving a reward using a staking pool. The pool is managed by the stake pool operator (who is responsible for its setup and operation) and the stake pool owner(s) (who delegate their stakes to the pool). Its main benefit is that it allows the investor to receive the rewards without having to be continuously online. However, as a byproduct of that, the owners need to have a strong trust in the operator.