Staking Pool Meaning
What is a Staking Pool?
Staking is the process of locking funds to maintain the operations and security of a cryptocurrency network. It is only possible in proof-of-stake (POS) networks like Ethereum, Solana, and Cardano. Typically, PoS networks rely on the staked assets for decision-making and validating blocks. So where does a staking pool come in?
Validators earn rewards for validating blocks, but validators are selected based on factors including staked amount and randomization. The network is more likely to select a validator with higher stakes, since they have more to lose by being dishonest. Network participants can combine their assets in a staking pool to increase their chances of being selected as validators.
Staking pools are run by pool operators or administrators. Individuals contributing to the pool lock their funds in a specific wallet. By combining their resources, they increase their staking power. This improves the chances that the consensus mechanism will select their pool to verify a batch of transactions and add them to the blockchain. The staking reward is distributed among the participants based on their contributions.
Types of Staking Pools
The common types of staking pools include third-party staking pools and cold staking pools.
- Third-Party Staking Pools: Also called custodial staking pools, these pools require users to lock their funds with a third-party staking pool service provider, such as an exchange. It often means that the users hand over custody of their private keys and digital assets to a third party. It controls the entire staking process and, based on the agreement, sends the staking rewards to the user’s wallet.
- Cold Staking Pools: Also called non-custodial staking pools, this option allows users to stake coins while still maintaining control over their private keys. For instance, users can hold their funds in a non-custodial wallet while still participating in the staking process. Ledger device users can connect their devices to Ledger Live to explore solo staking, delegated staking, or pooled staking without losing control over their private keys.
Staking pools allow individuals to earn passive income without worrying about the technicalities of operating a validator node. However, compared to solo staking, the returns are relatively low as it is distributed across pool participants. However, staking pools offer more consistent and regular staking rewards.