As much as some of us don’t want to admit it, Bitcoin is not perfect. It has done wonders for cryptocurrency, no doubt, but that does not detract from its energy consumption issue. Moreover, it has a questionable impact on the environment due to its need for a ‘Proof of Work’ (PoW) algorithm. This is where ‘Proof of Stake’ (PoS) comes in, having been made as an alternative to PoW.
PoS is a concept that states that an individual can mine or validate block transactions according to their coin amount. This basically means that the more Bitcoin or altcoin that the miner owns, the more mining power they possess.
It is not uncommon to see PoS coins popping up in various corners of the cryptocurrency field. These coins do not require energy consumption in order to verify transactions. Not only that, but you can also make a large amount of profit by way of staking the coins. This leads to another significant point, which is that more people are turning to the ‘staking’ option. This method is becoming more rampant among cryptocurrency investors. This is primarily due to possible gains from regular trading not being as plentiful.
As is the case with most beneficial means, many sought out to maximize its effects. In other words, people wanted to expand the potential for future investments. How this specific community went about doing this was by creating ‘staking pools.’ These pools focus primarily on making the most out of the general staking process. It works in a similar fashion to ‘pooling mines’ that are widely available for PoW coins.
The basics of PoS
Mining typically requires a large amount of computing power in order to run an array of cryptographic calculations. By doing these calculations, miners can unlock the computational challenges. The computing power translates into a lot of electricity and power that the PoW commonly needs. Miners often sell their coins for fiat money, which results in a downward movement in the cryptocurrency’s price.
The PoS algorithm aims to address the aforementioned consumption issue. It does this by attributing mining power to a portion of coins that a miner holds. This way, rather than applying energy to answer mathematical PoW puzzles, PoS miners will mine a percentage of transactions. These transactions are reflective of the miner’s ownership stake. For example, a miner who possesses 3% of the accessible Bitcoin can hypothetically mine only 3% of the blocks.
PoS systems are gradually becoming just as common as blockchains are becoming more complex. A number of projects still use PoW miners as a way to handle the basic processing of transactions. In addition, they use PoS stakeholders in order to execute higher-level functions for distributed applications (DApps).
How the pool works
The fixation on staking pools derives mostly from taking advantage of the overall staking capacity. Basically, the bigger the staking pool is, the better the chances of it being picked are. Thus, this betters its chances of a block verification. To further explain, here is an example:
- Person #1: This individual has a staking wallet consisting of 1,000 ADA coins. They don’t want to stake their coins; rather, they want to do it on their own. So, whenever a block needs mining, the blockchain seeks to find the most suitable staking wallet to do it with. In this particular case, the chances are slim that they’ll be chosen to certify a block.
- Person #2: This individual fully understands staking pools. They participate in the pool by way of contributing their number of coins into it. The value of the staking pool is comparatively much higher than other wallets/pools. Thus, there are higher chances that they will receive a reward for resolving a pool. For instance, the pool possesses more than 1 million ADA. This means that the pool has better chances of being chosen for the verification of a block.
When Person #2 takes part in the staking pool, they have a higher chance of earning more profit. Each pool participant receives an equal portion of the rewards. The pool service may also take a portion of the reward as service charges.
A majority of PoS blockchains will allow you to stake coins independently. Often times, however, that will not permit you to make the most out of a stake. Your stake has to maintain its connection to the network 24/7. Even the smallest connection break can disrupt the potential of your earnings. This is done so by essentially sending you straight to the back of the line. By partaking in a staking pool, you are given an abundance of advantages.
- You are always connected. Running a masternode typically requires a server with a high-speed connection to the Internet. There are several people who don’t want to deal with the intricacies of the setup and maintenance of a server. Alternatively, these people are not in a position to deal with it. However, some reside in areas where both Internet services and electricity services are not at all reliable.
Staking pools remove any and all hassle pertaining to staking by way of handling the technical details. They can be running either on their own hardware or with a virtual private service provider. Regardless, these pools ensure that pools are constantly serving their blockchains.
- The earnings are steadier and more predictable. A considerably smaller stake will consequently have a difficult time coming up with consistent outcomes. Various blockchains tend to give larger stakeholders preferable treatment. The blockchain project may give stakeholders equal treatment, but a smaller stake might not get a cut of the block reward. Not in any given month or any given year.
The larger the staking pool size increases the chances that they will write a block or vote on a block that will go to the blockchain. Therefore, the rewards come in at a more frequent, as well as consistent, pace.
With every advantage of participating in a staking pool, there is also a risk. This is to be expected with a community-driven system.
The basic status of third-party staking pools nowadays bears several similarities to early Bitcoin exchanges. There’s no concrete proof that pools are run professionally and with a philosophy of ‘security first.’ Pretty much all bad occurrences on Bitcoin exchanges can potentially occur in staking pools. These include things ranging from hacks to scams to complete crashes of a server.
Here are some of the more notable risks:
- The system was built not by professionals, but enthusiasts. A bulk of the staking pools that were made by community members to solve issues concerning inequality. Predating these pools, only stakeholders with the appropriate finances can actually produce coins. Despite several staking pools having the best intentions, there’s no guarantee that most – if any – are taking a skillful approach.
- The transparency is seriously lacking. It’s pretty rare for you to see any information about the identities of operators and their background. Without this information, it’s very difficult to establish a sense of trust, thus it can be risky.
- There is uncertainty regarding the regulations. Only now are regulators starting to employ the rules of money service businesses to PoW mining pools and crypto exchanges. It’s up in the air as to whether or not PoS staking pools are even on the radar of the regulators. Consequently, this grey area means that staking pools don’t usually need proof of identity in order to join their services.
Now that you have a better understanding of staking pools, you might be wanting some examples. There are two types of staking pools that we will bring up: those that are in-house and those that are multi-blockchain. We’ll begin with the former type, which means that they are pools that exist within an organization.
1 – Decred
This is a hybrid blockchain, specifically of PoW and PoS. It powers a decentralized cryptocurrency that shares the same name. PoW miners process a cryptographic algorithm as a means to add a block to the database. Moreover, they utilize it to generate up to 30 brand new Decred coins. Three of these coins help fund Decred’s development and 18 go to the miner. The nine that remain go to the “stakeholders” who were responsible for voting to add the block.
In this system, stakeholders will lock up a portion of their Decred coins to obtain a ‘ticket.’ This is representative of the right to cast a single vote. The stakeholders that get to vote will receive their share of the block reward and a refund of the ticket price.
Decred’s design essentially means that stakeholders are able to give their tickets to a pool. Furthermore, they can do this without needing to put their coins at risk. Instead of constructing pools within the client, the protocol permits third-parties to build their own staking pools. In total, Decred lists 17 staking pools that community members created.
There are certain staking pools that are difficult to join. Because the community drives this feature, some people are hesitant to engage with that may destroy the system’s decentralization. Pools that garner 5% of the network’s votes will intentionally suspend the signups of newer members. This system also advises those seeking pools to avoid pools possessing over 5% of the network votes.
2 – Waves
This is a PoS blockchain providing a platform for the development and distribution of DApps. This project uses the popular term “miner” to refer to the individuals who host a PoS masternode.
Waves PoS mining, unlike Bitcoin and other seemingly inflationary cryptocurrencies, doesn’t generate any new coins. Instead, the minding reward is the 5% fee that people pay for their transaction to go to the blockchain. The algorithm provides preferential treatment towards those who stake more waves than other people. In this sense, pools possess an advantage over singular stakeholders.
The pooling system exists inside the Waves wallet. Instead of sending waves to an outside group, you’re able to charter your mining rights to a Waves blockchain miner. The miners can accelerate their chances of block additions and you receive a portion of the transaction fees the miner creates.
These services will allow you to join any pools for a majority of the small market cap PoS blockchain projects. Usually, you will uncover two types of opportunities for pooling. You can either join a PoS pool or, alternatively, you can provide stake to a masternode.
These platforms are largely blockchain-specific. Moreover, they vary on how each project builds the general structure of its PoS system.
1 – SimplePoSPool
This platform consists of a fully automated system that makes it simple to pool stakes. There are up to 22 staking pools in the listing, not to mention 24 masternode pools. There aren’t any minimum deposits and PoS pool processes requests for withdrawals manually once per day. As of this year, the service fee is 3% (last year it was 1%).
These fees don’t exist just to pay for running the array of masternodes; they also fund a referral program. Here is a basic breakdown: you will receive…
- 10% of your fees that your friend pays
- 5% of the fees that the friend of your friend pays
- 3% of the fees that your friend’s friend’s friend pays
- 1% of the fees that are paid similarly as the 3%
2 – StakingLab
This is a German staking pool that supports novices who are just starting out with staking. It’s dissimilar to other pools in that it describes its way of listing its service’s blockchain. According to them, they speak to projects directly as opposed to relying solely on research on the web. There are about 44 projects existing on the system’s listing.
Concerning the staking pools, there’s a 3% fee you have to pay for the rewards you acquire. Moreover, there is a 0.1% fee on all of the withdrawals. Masternodes typically pay a 5% fee, however, there is absolutely no withdrawal fee.
On top of all of this, StakingLab provides users with something called an “InstantNode.” This allows you to join a masternode pool in a way that’s similar to if you were joining a PoS pool. Your rewards come once you conduct your deposit and you are able to withdraw anytime.
With that in mind, the flexibility of this system does not come for free. There’s a deposit fee of 3%, a 0.2% withdrawal fee, and a fee of 7.5% on each reward. The referral program belonging to this system scales as you convince more people to join StakingLab.
Whether or not you decide to join a staking pool depends entirely on your concerns and demands. Assuming that you already own a good number of staking coins in your wallet, then it’s probably not a good idea to participate. However, if you own a considerably low number of coins, then staking will help you garner more profits.