Pooled Staking: How Do Crypto Staking Pools Work?

By Lipsa Das

Public Blockchains work entirely on a decentralized ecosystem, with thousands of computers worldwide working together to validate transactions. For this system to work, these computers need a way to trust each other and make decisions together — and they do so using a consensus mechanism. One of the most popular consensus mechanisms for public blockchains today is Proof-of-Stake. But you can’t have a Proof-of-Stake network without staking.

To explain, keeping a Proof-of-Stake network secure requires participants, called validators, to lock up a specific amount of cryptocurrency as collateral. These validators process transactions on the network. In return, they receive rewards (or have their stake slashed if they act maliciously).

While these validator rewards are pretty lucrative, becoming a validator requires you to lock up huge amounts of crypto. For instance, Ethereum requires 32 ETH to stake independently, which not everyone might have lying around.

Luckily, there are other ways to earn staking rewards without needing to shell out a huge upfront investment. One of the most popular of these methods is pooled staking. 

So what is pooled staking, and how do staking pools work exactly?

Let’s dive in.

What Is Pooled Staking?

Put simply, pooled staking is a way for users to combine their staking resources to participate in the staking process together. Users combine their funds designated for staking via staking pools. By pooling their funds together, they also receive rewards together. And when it comes to dishing out those rewards, remuneration depends on an individual’s contribution to the staking pool. The more you stake, the more you receive—all without lifting a finger. In other words, pooled staking allows you to make passive income without having to worry about validating transactions or locking up more funds than you want to.

To understand how this works, let’s take a look at what a staking pool is and how it works exactly.

What Is a Staking Pool?

A staking pool is a store of shared funds joined together for the purpose of staking as a group. It’s where all of the shared funds go on a pooled staking platform. 

Typically, staking pools require operators who are responsible for using the funds to perform native staking, and handing out proportional rewards to a participant’s contribution. But that’s largely where the similarities between them end. That’s because the control the operator retains depends on the platform. For example, more centralized platforms might use a single entity as the operator, while others may take a more decentralized approach, making use of DAOs and self-executing smart contracts.

While there are countless staking pools on countless blockchains, it’s important to note that only Proof-of-Stake blockchains support this feature. Only PoS networks, such as Ethereum or Tezos, require users to stake their funds, and, as such, they are the only type of networks that support pooled staking.

How To Choose a Staking Pool?

Now you know what a staking pool is, but what about how to choose one for yourself? 

Well, staking pools use various strategies to maximize investor returns and participation. For example, some pools may stake on different blockchains, some pools may utilize different crypto staking algorithms and others may offer different levels of security. 

Let’s take a look at some of the things to consider when choosing a staking pool:

Public or Private Staking Pool

Firstly, you’ve got to consider whether you want to use a public or private staking pool. To explain, public staking pools refer to exchanges or independent pool operators that allow anyone to join. In contrast, private investment groups operate on an exclusive or invite-only basis. Using a private staking pool can mean much greater rewards; however, they can also pose greater risks. The financial incentive to join the pool could be a good disguise for a more malicious purpose. Remember—if it sounds too good to be true, it probably is. 

The safety of your funds depends entirely on the staking pool’s inner workings and—more than anything—its operator.

Centralization

On the topic of control, when using a staking pool, it’s important to understand where your tokens are being stored and who has access to them. For example, using a centralized exchange for pooled staking typically means you must use their own custodial wallets. This is not ideal, as should anything bad happen to the exchange, your funds could be at risk. In this scenario, a central entity has more control over your funds than you do.

Even if you use a platform that controls its staking pool via a smart contract, that doesn’t always mean it’s decentralized. Make sure you DYOR on the team and only use trustworthy platforms. If the pool operator is one central entity, you might want to reassess your choice.

Liquid Tokens

If your staking pool issues liquid tokens, you must also be careful about their distribution and allocation. While not all pooled staking platforms offer liquid staking tokens to users, others do. 

To explain, liquid staking tokens are pegged to the value of the initial asset you stake. So, if you stake 1ETH on a liquid staking platform, you receive 1ETHs worth of LSTs. This is great if you want to participate in DeFi or blockchain apps while staking.  However, these tokens also pose risks.

For instance, if there are whales in your staking pool, a large amount of staked ETH can end up under their control. This can lead to censorship or direct value manipulation. In the same vein, if the pool operator mismanages the token by minting too many, they could devalue the LST’s price. This would mean that the LSTs would be worth less than the initial asset you staked, meaning you lose money.

Security

One final thing to consider before diving into pooled staking is security. To explain, most staking pools require depositing cryptocurrency with a third-party smart contract or operator. While these platforms have varying degrees of security, there are now secure alternatives that let you hold your coins in your personal hardware wallet.  These are often called “cold staking pools” and they offer considerably more security than other types of pools. You don’t need to trust a centralized entity’s custodial wallet, and you don’t need to use an internet-connected wallet. This is extremely secure, however, the rewards may be much lower compared to other types of staking pools.

How Do Staking Pools Work?

Now that you know the types of staking pools, let’s look at the intricacies of how staking pools work. This section will dive into the fees, lock-up periods, and annual returns you can expect from a staking pool.

Fees

Joining a staking pool requires participants to pay a fee to the pool operator or the smart contract. These fees cover the costs of running and maintaining the staking pool, including transaction fees, infrastructure costs, and the operator’s profit margin. This fee varies from platform to platform, but is typically around the 5% mark. Take note though—the staking pool will take that fee directly from your rewards.

Lock Up Periods

Most staking pools have a lock-up period, meaning you won’t be able to access your staked funds for a specific time period. Typically, these lock-up periods follow the specific chain’s requirements to ensure the funds are stable while validating transactions. However, not all staking pools have lock-up periods. As previously mentioned, Liquid staking, is a type of pooled staking which gives the user tokens in exchange for staked funds. This allows the staker to use equivalent tokens for DeFi or blockchain apps while still receiving rewards for staking the initial currency.

APR

Annual return on investment, or APR, estimates the potential annual revenue from a staking pool. APR typically ranges from 10% to 150%, but like most things in crypto, it can fluctuate wildly.

For example, private staking pools offer a higher APR range because they want to attract more investors. However, this approach can be risky. A new and untrustworthy staking pool may have ulterior motives—they could lure you in with attractive APR, but that doesn’t mean the platform is secure. In most situations, exchanges are more reliable, even if they offer a lower APR. But of course, you want to consider how centralized that exchange is before you stake your coins blindly.

Advantages of Pooled Staking

So now you know about all of the features of pooled staking, you might want to know about the benefits. Well, on a base level, beginners prefer pooled staking for various reasons, such as ease of use, lower barrier to entry, and consistent rewards. So let’s take a look at how some of those benefits work.

Lower Barrier To Entry

Participating in individual staking requires depositing a significant amount of collateral, usually thousands of dollars, and specialized equipment like nodes. Pooled staking offers an alternative way to get into staking with a significantly lesser investment and without operating a blockchain node yourself. 

Staking pools usually have varying minimum set-up amounts depending on the specific blockchain network, staking pool operator, and the rules they set. Starting with pooled staking is quick and easy — you don’t need any special or extra equipment. Plus, you get frequent and consistent rewards even when you don’t contribute all that much.  

Flexibility

Some pooled staking platforms follow a liquid staking model. With liquid staking, you receive new tokens that represent your original cryptocurrencies in the staking pool. These assets are pegged to the value of the original funds. Thus, you can trade them or use them to participate in other decentralized finance platforms. However, liquid tokens come with a depegging risk, where your new tokens might drop in exchange value. The assets are pegged to the initial asset’s value using a smart contract. This poses a smart contract bug risk, among other potential exploits.

Disadvantages of Pooled Staking

While pooled staking allows smaller users to get a cut of the staking pie, the downside is that staking pools are operated by a third party — a smart contract or platform. This affects the individual staker in two ways — staking rewards and overall security.

Fees and Rewards

First of all, staking rewards are usually on the lower side in pooled staking than in normal staking. This is because a successful block has a set block reward, which gets split between all the pool participants. On top of that, the third parties that enable pooled staking usually charge fees — reducing the effective staking reward even further.

Security

Staking through a third party means trusting them with the security of your assets, which introduces a major risk. Remember—your funds are only as secure as the smart contract or platform storing the pooled tokens. 

Since these staking pool contracts usually hold large sums of money in one place, they are usually attractive targets for hackers. Staking pool exploits are common, with even reputed platforms facing attacks of millions of dollars. Typically, these exploits happen due to coding errors or vulnerabilities in smart contracts and a lack of proper monitoring. But sometimes, they can also be intentional.

How To Stake Crypto Securely Using a Staking Pool

With Ledger Live, you can easily explore pooled staking without learning any of the technical complexities. Ledger Live directly works with Kiln — a trusted enterprise-grade staking platform, powering some of the top staking pools in the Ethereum ecosystem. 

To get started, simply connect your Ledger device securely to Ledger Live. You can access Kiln’s platform directly from the app with a few clicks. Kiln is a Ledger Trusted staking partner — which means the staking contract is thoroughly tested and audited for bugs. Further, Ledger Live only supports normal staking pools, not liquid ones, so you can be doubly sure about the value of your staked tokens.

Then, if you’re ready to dive into liquid staking, you can check out Lido, another great pooled staking option within the Ledger ecosystem. This is a great option for more experienced web3 explorers, as the liquid staking feature also comes with the aforementioned risks.

So, with Ledger’s strong security infrastructure, you have a range of pooled staking options—the choice is now yours.