Staking pools: Advantages and Disadvantages of Staking Crypto (A Complete Guide)

By magneticart | cryptomagnetic | 9 May 2022

What are staking pools for cryptocurrency?

A staking pool is a technology that allows numerous crypto token holders to aggregate their tokens, offering the pool owner validator status and paying all stakeholders with tokens for their contributions of computational resources.

Many crypto investors are unfamiliar with the concept of a staking pool, and investing in one is met with mistrust rather than enthusiasm. The overall notion of a staking pool, however, is available on blockchains that use a proof-of-stake (PoS) paradigm, which compels stakeholders to lock their crypto tokens in a specific blockchain address or wallet in exchange for an annual percentage payout (APY).

Public stake pools are perfect for retail investors that wish to engage in the staking activity without having to stake huge quantities of a crypto token or join a private staking pool. To become an independent validator on Ethereum, an investor would need 32 ETH, although any user can stake Ether (ETH) and receive incentives in the process.

Source: Photo by Alesia Kozik from Pexels

Source: Photo by Alesia Kozik from Pexels

Returns on staking pools

Staking pools, which are a good alternative for long-term crypto token holders, promise to receive yields in addition to capital gains from token value appreciation.

A stake pool can be joined for a fraction of the tokens needed to become a validator on a PoS blockchain, and users are rewarded on a daily, weekly, or quarterly basis, depending on the coin staked. For instance, on Coinbase, investors can stake their ETH tokens in a staking pool for daily returns with no minimum balance requirement.

Cosmos, the second largest blockchain ecosystem, is another popular place to stake tokens. Investors can stake their tokens on a variety of chains using various validators.

The commission rates, which are normally between 5% and 6%, and how they contribute to the ecosystem, such as writing code for the projects they certify, are all considerations to consider when deciding which staking pool to join. The annual percentage rate (APR) varies each chain, with Cosmos Hub offering 15%, Osmosis offering 60%, and Juno offering 150 percent, which is much more.

Aside from these considerations, many staking pool providers have distinct value propositions that may appeal to potential investors. The fundamental goal is to ensure that no validator cartels form while offering the stakeholder ecosystem 100% of their profit.

What are the benefits of joining a staking pool?

Even if the amount staked is a fraction of what is required to gain validator status on the blockchain, staking pools earn rewards in proportion to the tokens invested.

Staking pools allow anyone to generate a passive income while keeping their crypto assets for long-term price appreciation. Furthermore, investors do not need to be concerned about how a staking pool works or the procedures for setting up and running a validating node, as the staking pool operator takes care of everything on behalf of all stakeholders.

The staked crypto token is used to compensate the validator (or pool operator in the case of a staking pool) with newly minted tokens every time a block of transactions is successfully added to the blockchain. This means that stakeholders will receive a fair share based on the quantity of tokens staked, and they will be able to produce even bigger returns as the price of the staked token rises over time.

Because the minimum number of tokens required to become a validator is so high, even beginner investors will find it significantly easier to lock their coins with a public staking pool operator in order to receive more predictable and frequent staking returns.

What should you know before beginning your staking adventure?

Regardless of the potential profits, the costs of running a crypto staking pool must be carefully addressed before investing.

It's critical to pick a staking pool carefully, because staked tokens operate as a guarantee for the blockchain, and the pool operator, who acts as a validator on the blockchain, must fulfil their job without malice.

If a block is generated with invalid or fraudulent transactions, the blockchain network may burn a portion of the staked tokens, resulting in you and other stakeholders losing money staking crypto.

The ultimate payout is further reduced once platform fees and commission rates are deducted. An APY of 6% could be earned by being an independent validator for ETH. In the best-case scenario, investments tied to crypto staking pools can receive a lower APY of around 5% via pool staking.

Source: Photo by RODNAE Productions from Pexels

Source: Photo by RODNAE Productions from Pexels

What is the best way to start staking?

It is vital to conduct thorough research on all accessible crypto staking pools for a specific crypto coin and select those with a track record of success.

Crypto staking, unlike crypto mining, does not require the purchase of mining equipment to produce profits. There are presently multiple crypto staking pools accessible for various cryptocurrencies that function on a PoS blockchain, and investors are advised to prefer well-known crypto exchanges that operate public stake pools over private staking pools that may provide a greater APY.

Apart from looking at the stake pool's ranking, it's a good idea to pick staking pools that provide regular updates on the pool's success and are transparent in their operations. This includes crucial decisions on the pool's future roadmap and how stakeholders are included in the process.

Winding Up

Before deciding on a staking pool to invest in, it is a good idea to read performance ratings. Consider the membership or entry cost when calculating the expected real returns on the tokens staked, and join a staking pool with a small number of participants to avoid additional dilution of profits.

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