This article explains what stake pools are and why they are important to the ecosystem in a way that even beginners will understand. Furthermore, you will learn about the advantages that stake pools provide to investors. This article is broken down into several chapters:
Understanding the Basics:
Stake Pools Explained
o The Definition of Stake Pools
o Staking Pools vs. Solo Staking
o Solana’s Stake Pools Program
o Staking Pools at Solana
In order to understand staking pools, it is important to be familiar with how Proof-of-Stake (PoS) blockchains work and what staking is.
Proof-of-Stake (PoS) is a mechanism used for the maintenance and operation of a blockchain network. It operates differently than the mining consensus system of Proof-of-Work protocols. The core idea of PoS is that anyone can "stake" tokens to be eligible for the ability to participate in the maintenance of the ledger, by composing, adding, and verifying the next new block to a blockchain.
The quantity of tokens you have locked up for staking defines your chances of getting picked - the more tokens you have locked up, the more likely it is that you will be chosen to add and validate the next block. This is similar to a lottery drum. The more stake one has, the more tickets one can place into the drum. At regular intervals, tickets are picked at random. Some popular PoS networks are Solana, Cardano, and Polygon.
Staking is the process of actively engaging in transaction validation. At its core, staking entails ‘locking’ the blockchains' native assets in a smart contract for the purpose of maintaining the security and operations of a blockchain network. Then, the individual who made these tokens available for network maintenance receives some type of compensation for letting their funds be locked.
Usually, the process of staking consists of a token holder, known as a delegator, choosing a mainnet validator, which is a node operator, to stake their tokens. Then the validator will receive rewards for operating the node and pass a share of these rewards to the delegator. Staking evolved a lot and nowadays users can delegate from cryptocurrencies to NFTs.
You can learn more deeply about Proof-of-Stake and Solana staking in this article.
Now that you are familiar with how Proof-of-Stake blockchains work, we can start explaining stake pools. It is important to highlight there can be some changes depending on the network you are staking at. The Cardano blockchain, for example, implements mechanisms like saturation to stake pools dynamics with ADA holders, which is not used in other protocols like Solana. But let’s dive into the common ground of stake pools. As stated, the chances of being picked to validate a block are related to how many tokens are delegated to a given validator.
At their core, staking pools consist of individuals delegating a given digital currency to a manager, also known as stake pool operator, who will then select to which validator node the stake received from multiple individuals will be sent. The choice of validators will be based on the stake pool operators strategy.
In exchange for their contribution to the stake pool, every person that decides to become a stake pool owner receives liquid tokens in exchange for the cryptocurrency that they staked. These tokens reflect their proportionate ownership of the stake pool, so their own stake pool share. The benefit of this is that these stake pool tokens can be used in DeFi applications, which means that the stakers don’t lose access to their assets and can actively use them to diversify their investment portfolio. Once they unstake, they can access a determined amount of rewards earned during the period they left their crypto in the pool.
As explained, it is simple to stake directly with a single validator. However, if a user wishes to distribute their stake over numerous validators to increase the decentralization of the network, the management of their assets becomes far more complex. Most token holders still choose the simplest choice of directly staking with validators. This makes the network more centralized, thus harming its censorship resistance and making it less secure for all participants.
Stake pools aim to overcome this centralization by purposefully distributing their stake over tens or even hundreds of smaller validators. This provides significant advantages for users and stakeholders. For starters, it reduces the impact of downtime at their selected validator since the investment will be spread across many different validators, making their returns safer. Then, it increases network security due to the fact that tokens will be better distributed across the blockchain.
In return for these benefits and handling stakes from multiple investors, staking pools may charge a small percentage fee. Some might also charge a fee for deposits or withdrawals. Nonetheless, staking pools are also crucial to ensuring decentralization and censorship resistance in blockchains.
Keeping in mind the benefits of staking pools, the Solana Foundation created its native Stake Pools Program for the open-source and decentralized Solana network. The aim of the program is precisely to optimize network security, resist censorship, and reward SOL holders in the process.
By educating and incentivizing its community to stake SOL with staking pools, Solana is distributing the network assets to smaller validators. This makes the maximal security group, which is the smallest group of unique nodes that comprises ≥ 33.33% of the total stake on the network, larger. The larger this group gets, the more secure Solana becomes, since the number of validators in this group represents the number of nodes that would need to be compromised to halt the network. The management of these metrics makes the Solana blockchain more secure.
There are several staking pools that are a part of the Solana ecosystem. Some public stake pools consist of hundreds of participants, while others like a private stake pool include only a few members. Here are the most popular ones:
While the above are considered some of the best stake pool platforms on Solana, there are other ones. Some examples of these other platforms are Binance and Coinbase.
Participating in stake pools is the easiest way to gain rewards and grow crypto assets, while also contributing to network security. When staking at Solana stake pools, investors do not only make reliable and safe investments, but they also co-create the network and help it maintain its positive traits. While staking is the future of blockchain and staking pools are just what is needed to make this future even more secure and resistant to censorship. With networks like Solana, one can pick the pool that is most compatible with their financial needs and goals.
Missing anything? Thoughts, feedback, or questions about the post?
Please note that none of this is to be considered financial nor investment advice. We highly advise you to always do your own research (’DYOR’) before interacting with any of the projects or tools we write about. Crypto is a highly dynamic and fast paced environment with lots of moving parts that can quickly change.