Ever wondered what is staking pools? Cryptocurrency stacking is the storage of tokens on a cryptocurrency wallet or exchange to ensure that the blockchain works. Validators receive remuneration for ensuring transactions on the blockchain. This article defines and explains all the pitfalls related to staking.
Crypto staking pool explained
Let’s look at the concept of a stacking pool using the most popular Ethereum network as an example. But first, we define staking.
What is staking?
Staking is the process of assigning a certain amount of tokens to the blockchain’s governance architecture and thereby locking them out of circulation for a predetermined duration.
The protocol of a specific network secures an investor’s holdings, comparable to placing money in a bank and agreeing not to withdraw it for a given length of time, which helps the network in a couple of ways.
What is crypto staking pool?
Crypto staking is similar to depositing money in a bank, in that an investor locks up their assets, and in exchange, earns rewards, or “interest.”
The mining pools concept might be familiar to many from Bitcoin, where computing power is combined and increases the probability of mining a block, then dividing the coins according to the efficiency of each participant. The PoS algorithm allows the same trick, only instead of processors or video cards, coins are pooled together to form a Proof of Stake pool.
In the Ethereum 2.0 blockchain, the minimum entry amount to participate in Proof of Stake (PoS) validation is 32 ETH. By pooling efforts, users can profit from staking without complicated organizational training for the role of a validator. Staking pools allow anyone to interact with validators and lock in some crypto to work with them, making gains and paying only a tiny commission for validation services.
Why staking pool?
First, by restricting the supply, this might drive up the price of a token. Second, if the network employs a proof-of-stake (PoS) mechanism, the tokens may be utilized to regulate the blockchain. A proof-of-stake (PoS) system, as opposed to a proof-of-work (PoW) system that includes “mining,” may be somewhat difficult, especially for crypto newbies.
Coins are staked in PoS systems to establish new blocks in the blockchain, for which players are rewarded. Winners are chosen randomly, ensuring that no single entity has a monopoly over forging.
It might be tough to set up a staking system on your own. You must manage and administer a node on your own. Furthermore, you must be familiar with the cryptocurrency’s architecture, which may necessitate prior expertise that many investors lack.
By forging, a staker can get a proportionate return based on how much of their total assets are staked and how long they are staked for. Stakers can also combine their assets into a “staking pool” to meet any required minimums. It is also possible to “cold stake” on some networks, which requires staking cash or tokens maintained in a “cold” wallet, or one that is kept offline.
How staking pool works
The validator is screened and the network allows it to participate in transaction validation. To do so, it must provide a dedicated server 24/7 to perform the necessary calculations on it. By reserving a large amount of cryptocurrency, he starts solo-stacking. It’s profitable for each validator to open a service and attract even more coins to the stacking: this will increase his reward and he can get additional income from the commission that will be paid by the attracted users.
This is how the pool appears. Any user can transfer his coins to the validator’s contract address and join the mining. The minimum amount for staking and the commission percentage are fixed and known in advance.
The proof-of-ownership algorithm is designed so that as the total amount of staking increases, the annual percentage of the reward decreases. At the same time, the emission decreases. Therefore, do not worry too much if instead of 15% per annum at the beginning of the contract you see that the network now pays 5% per annum. The amount of interest in dollars does not decrease from this.
Staking pool example.
Vitalik: Imagine Vitalika has a wallet with 1000 SOL coins. He doesn’t want to stake his coins within a pool, he wants to do it solo. There are slim chances that Vitalik’s wallet will be chosen to validate the block. Say a block chain has 1,000,000 SOL staked, then Vitalik has 1 chance to 1000 to be chosen under our perfect conditions.
Satoshi: Satoshi understands how staking pools work. He participates in the staking pool by putting some of his money into it. His wallet is the same 1000 SOL. However, instead of acting alone, Satoshi joined a staking pool. It has 100 people, each having 1000 SOL. Totaling in 100,000 SOL. Which gives 1 to 100 chances of being picked as a validator. By taking part in staking pool, Satoshi has a higher chance of earning more profit. The reward is divided among the pool participant. Satoshi will also pay small service charge fees.
Staking pool advantages
The entry threshold is a major plus. You don’t have to have dozens of ethers or thousands of crystals. It’s elementary to place a cryptocurrency in a few mouse clicks, and it starts generating income. This is very handy if you plan to invest in it for years to come — you will get additional growth.
Since the pool always monitors the state of its servers and the validation process, its participants can safely count on a stable, round-the-clock profit. And often withdraw it at will at any time. Although there are also contracts with a freeze for a certain period of time.
Staking vs liquidity pool
To understand the difference between a rate and a liquidity pool, let’s bring together three closely related terms, which are the following.
The term “liquidity” means how easy users can convert one crypto to another. In other words, liquidity means how easy it is to sell and buy cryptocurrency without losing value.
DeFi projects need as much liquidity as possible. For example, a low-liquidity credit platform can’t issue new loans simply because it runs out of funds. Liquidity is the essence of any DeFi protocol.
Liquidity providers (LP)
Users who contribute funds to the liquidity pools. Projects regularly pay providers part of the service fees, issue governance tokens, and conduct airdrops in some cases.
DeFi’s liquidity pool is modeled on a “smart contract” that simultaneously stores two tokens and allows fair-price transactions. The exchange value of crypto increases when liquidity levels are high, which is why the liquidity pool is considered the backbone of cryptocurrency.
For example, a USDT/XTZ pool stores USDT and Tezos coins. When a DEX user exchanges USDT for XTZ, the exchange adds USDT to the USDT/XTZ pool and returns XTZ to the user from that pool. The exchange rate depends on the proportion between the tokens in the pool. The fewer XTZ are left in the pool, the more USDT you have to pay for the exchange and vice versa.
How you can benefit from staking pool
There are many so staking opportunities that they can easily bake your noodles. Let’s scrutinize it on a practical example to kickstart your earning through staking.
How To Stake COLX In 3 Steps
COLX is a PoS privacy-based crypto that you can stake. Follow these steps to start earning using COLX staking
- Go to the COLX website. Click on the Download COLX Wallet button and choose your OS to keep going. Once you choose, you’ll be asked to unlock your wallet.
2. Protect your wallet using encryption. Navigate to settings and encrypt the wallet. You will be asked to set a password if your wallet is not encrypted. Do not lose this password as it’s required to access your wallet. Restart your wallet after that.
3. Edit Your Keystore file. Open the Keystore File by selecting Tools > Open Keystore File. If prompted, choose your preferred text editor. In the configuration file, add “staking=1”. After that, save the file and restart your wallet.
4. Get Your Wallet Unlocked. Navigate to SETTINGS and choose the UNLOCK WALLET option. Enter your password and make sure the option labeled “For anonymization and staking only” is checked.
Now that you’re all set up for staking all you have to do is wait (8 hours) to get staking rewards. Once you see the arrow in the bottom corner of your wallet turn green you will be staking.
You can also calculate your rewards in advance. Here’s how COLX Calculator looks like.
COLX leverages the following formula to calculate returns:
T / (P * B) = estimated number of days per reward you can get
Where T is a total number of COLX staked at the moment.
P — your staked COLX tokens, B — daily number of blocks.
You can also stake your coins on major crypto exchanges such as Kraken and Binance. Both exchanges offer reasonable fees and a broad pool of crypto to lock in.