In a Proof of Stake (PoS) network, participants with the largest amount of tokens have a higher chance of being selected to validate transactions. Stake pools enable holders with smaller stakes to participate in staking to increase the likelihood of getting rewards.
While private pools only yield rewards to their operators, delegators can delegate their coins to public nodes run by stake pool operators.
Stake pool operators commit to support the health of a network and operate their pool with responsibility towards token holders delegating their tokens.
There are quite a few factors to consider before selecting a staking pool to delegate your coins.
In this lesson, we’ll explain matters when you choose a stake pool.
A Proof of Stake (PoS) system relies on network participants to secure and validate transactions by staking (depositing) the blockchain network’s cryptocurrency. Like you learned in our article on how to start staking crypto, there are various ways to stake your crypto. Newbies to staking may be happiest staking on a cryptocurrency exchange or platform where the process is automated. They can also get a staking wallet to stake on their own in a stake pool in order to receive rewards in return for staking their coins.
What is a stake pool?
There are private and public stake pools. While private pools only yield rewards to their operators, delegators can delegate their coins to public nodes to support in securing the network and earn extra income.
It is similar to how people going to the same destination by car get together to “carpool” in order to reduce costs and emissions or a group of miners joining forces in a mining pool: to increase their chances of earning rewards, crypto holders can opt to delegate their coins to a public staking pool in the coin’s native network to help to secure it.
When choosing a stake pool to participate in, you should investigate the following factors:
What should I look for in a staking pool?
While doing your research as a delegator, make sure that you are selecting a professional pool with a detailed and transparent web presence containing all data and information delegates may need about the operator (such as their security measures, team and social media presence) and costs involved, which may vary depending on geographical location and should be kept up-to-date by the pool operator at all times, especially with regard to price fluctuations of the token.
To increase their chances of earning rewards, crypto holders can opt to delegate their coins to a public staking pool in the coin’s native network to help to secure it.
Why do I need to pay service fees for staking?
Why are there costs for participating as a delegator? The set-up and maintenance of a staking pool requires time and expertise. Stake pool operators commit to support the health of a network and to operate their pool 24/7 with resources and energy with responsibility towards token holders delegating their tokens.
For this reason, most pool providers charge participants a service fee that is deducted from their share of the staking rewards. Some networks also charge delegators different types of fees: a staking fee for delegating and a pool margin on staking rewards before distributing them, for example. Pool operators also regularly receive a share of transaction fees and newly minted tokens if they operate their node in full compliance with the consensus.
Most staking pools require a comparatively low minimum balance. For new and inexperienced users who initially want to try their hand at staking crypto on their own, staking pools can therefore be a good recommendation.
What is a pledge in a stake pool?
In order to ensure health and security in a network (like with Cardano), the concept of pledging ensures that delegators are attracted to stake pools while ensuring a high level of network decentralisation. A pledge is a pool operator’s fixed contribution to the overall liquidity of a pool. While there is no minimum pledging amount, high pledges are encouraged since a pool that does not meet this requirement may produce blocks but won’t produce rewards.
Validators holding large stakes are more likely to be elected to validate the next block and to receive high rewards in return.
Therefore, a stake pool operator can pledge an amount of their choice to their pool in order to attract holders who are looking to delegate their coins in line with the premise that validators holding large stakes are more likely to be elected to validate the next block and to receive high rewards in return.
A pool’s desirability indicates how desirable it is for crypto holders to delegate stakes to a pool. A large pledge may also be an indicator that a pool operator is highly committed to the project and its network for the long term. On the other hand, operators who run multiple pools with pledges below saturation level and are not beneficial for a network are referred to as “pool splitters”.
How are stake pools ranked?
Pool ranking is based upon key information such as overall pool performance in block creation (blocks tasked vs. blocks validated), total number of blocks produced, expected returns on investment, total share of coins being staked, a pool’s operating cost per epoch, live stake, minted blocks during an epoch, a pool’s saturation level and other indicators, with the most attractive pools placing at the top of a ranking.
Find out the live stake of a pool before you join - this figure is calculated by adding the stake pledged by a pool operator to this pool and the stake presently delegated to the pool and divide this by the total stake in the system.
While a large number of delegators is favourable to keep a network secure, a large pool may also have more stakes delegated to it and reach a point of saturation, from where the rewards it offers will diminish. This mechanism prevents individual pools from becoming too large and promotes decentralisation of the network through incentivising the set-up of alternative pools. Some pools will also have a delegation cap in place, stipulating a maximum possible amount of tokens that will reject any funds after the total delegation cap is reached.
When choosing a pool, you may also want to consider off-protocol factors that are of personal importance to you, such as whether a pool runs on green energy or is operated by an NGO.
New to Bitpanda? Register your account today!Sign up here
What are staking risks when participating in a stake pool?
If you invest in crypto, you know that volatility is always a fundamental risk and it is the same with staking. Cryptocurrencies are subject to high market fluctuations. If you have staked a coin and the coin’s price has a severe drop all of a sudden, even high payouts may not really absorb your losses.
Also, don’t forget that many projects require you to “lock-in” your coins for a set duration of time which means you cannot unlock and sell them, even if there is a steep drop in price.
Also for this reason, it is vital to stake only in projects that have sufficient demand and are based on a solid business model, so make sure to do your research.
Node operators regularly receive rewards if their node operates in compliance with network consensus and are incentivised to create an environment where it is attractive and safe to stake in a pool. However, depending on the protocol, misconduct of a staking pool operator during staking can be subject to a penalty by the network. A mechanism called “slashing” is coded into numerous protocols to promote proper participation and security.
Slashing automatically deducts set percentages of the validator’s tokens from their holdings in case they don’t comply with the rules, which also affects delegators and delegator rewards. Such breaches of integrity can include: the early withdrawal of coins, downtime (not participating in the consensus and not validating blocks) or double-signing (validating a block more than once).
The higher the stake that has been delegated to a stake pool, the better the chances that it is elected as a slot leader to validate a block for the blockchain and that operators and delegators receive a share of the rewards. On the other hand, the smaller the number of users who are willing to stake their holdings, the higher their possible returns.
Finally, if a large part of a token’s total supply is staked, it means that in this situation the token’s price is supported but the tradable supply and coins in circulation are reduced at the same time, which may lead to price distortions.
In our next article, you are going to learn all about staking rewards.
This article does not constitute investment advice, nor is it an offer or invitation to purchase any digital assets.
This article is for general purposes of information only and no representation or warranty, either expressed or implied, is made as to, and no reliance should be placed on, the fairness, accuracy, completeness or correctness of this article or opinions contained herein.
Some statements contained in this article may be of future expectations that are based on our current views and assumptions and involve uncertainties that could cause actual results, performance or events which differ from those statements.
None of the Bitpanda GmbH nor any of its affiliates, advisors or representatives shall have any liability whatsoever arising in connection with this article.
Please note that an investment in digital assets carries risks in addition to the opportunities described above.