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Staking Pools Guide: How They Work and How You Join

Staking the coins you hold is a relatively easy way to earn more coins without having to be a miner. A tightly-knit community developed staking pools to let people maximize the potential of their investments.

This Staking Pools 101 will let you know how to get into staking on the ground floor.

Why Pools Matter for Proof-of-Stake

Staking Pools 101
Source: Pixabay

Cryptocurrencies like Bitcoin rely on a system called Proof-of-Work to decide how the blockchain expands. A network of people, referred to as miners, race each other to calculate complicated algorithms using powerful computing technology. The first one to get the right answer gets to add their block to the blockchain and gets rewarded newly-minted coins.

Since everyone on the network can see that miner got the right answer, a consensus forms around the newly-extended blockchain without anybody having to trust a central authority.

There are a couple of drawbacks to consensus algorithms using Proof-of-Work. First, the computer hardware needed to perform the calculations is so expensive that it concentrates power around well-financed companies. Second, the computers consume enormous amounts of electricity.

How PoS works

Proof-of-Stake (PoS) offers a more energy-efficient alternative to Proof-of-Work (PoW). Depending on how a project designs the protocols of its blockchain, PoS can also be more decentralized. A PoS system replaces the complex calculations of a PoW system with something much simpler — ownership of the blockchain’s token.

Related: Proof of Work Vs. Proof of Stake – What’s the Difference?

Theoretically, anyone who owns the token has the ability to process transactions onto the blockchain. That accessibility can make it more difficult for a powerful few to gather undue influence over the blockchain. In addition, adding a block doesn’t require as many computations, which makes the power-consumption of a PoS blockchain less of a burden on the environment.

From blockchain to blockchain, PoS takes different forms and gets implemented in different ways. But they all share the same overall structure.

Becoming a stakeholder

The first step to becoming a stakeholder is to lock away a certain number of coins in the blockchain’s digital wallet. You retain ownership of those coins, but you can’t spend them without giving up your right to participate in the transaction process.

Keeping the wallet connected to the internet makes your computer part of the network of stakeholders. As long as you’re connected, your stake gives you a shot at adding transactions to the blockchain.

Selection algorithm

Each PoS blockchain has a different way of selecting which stakeholder has the right to process transactions and earn mining rewards. The simplest approach is a random selection from the pool of participants.

Some blockchains add an aging function. When you first join the selection pool, you get put to the back of the line. The people who have waited longest get a better shot at being picked next.

Other blockchains base the selection on how the size of the stake. People who have set aside more coins, or groups of people who have pooled their stakes, are more likely to get picked.

Add value to the blockchain

PoS systems are becoming more common as blockchains become more sophisticated. Some projects still use PoW miners to handle the basic processing of transactions while using PoS stakeholders to perform higher-level functions for distributed applications (dapps).

Another advantage of a PoS system is that, at heart, it is a way to cast votes to reach a consensus. Those votes don’t have to be limited to transaction blocks. The votes can form the basis of a governance system, letting the stakeholders decide on the future direction of the blockchain’s development.

PoS and the blockchain’s future

Ethereum is the second-largest cryptocurrency after Bitcoin. It was founded as a pure PoW-based blockchain, but the project’s developers are hard at work on a PoS system that will let the blockchain support new features. Codenamed Casper (no relation), the staking system will let stakeholders deliver new services to Ethereum-based applications. Cardano is another PoS project under development.

Joining a PoS system as a stakeholder becomes more than a way to earn more coins. Stakeholders become active members of the blockchain’s community and help shape the future of distributed ledgers in society.

Advantages of a pool

Most PoS blockchains let you stake coins on your own. In many cases, however, that won’t let you make the most out of your stake. Your stake must remain connected to the network around the clock. Even a brief misconnection could disrupt your earning potential by sending you to the back of the line. Joining a staking pool offers some significant advantages.

Always connected

Running a masternode requires a server that’s always has a high-speed connection to the internet. Some people don’t want to — or aren’t able to — deal with the complexity of server setup and maintenance. Other people live in regions where internet or electricity services aren’t reliable.

Staking pools take the hassle out of staking by taking care of all the technical details. Whether running on their own hardware or with a virtual private server provider, the staking pools guarantee that pools are always serving their blockchains.

Steadier, more predictable earnings

A small stake will have a difficult time generating consistent results. Some blockchains give larger stakeholders preferential treatment. Even if the blockchain project treats all stakeholders equally, a small stake may not get a cut of a block reward in any given month or year.

The large size of staking pools increase the odds that they will get picked to write a block or vote on a block that gets written to the blockchain. As a result, rewards come in more frequently and more consistently.

Risks of staking pools

In many ways, the status of third-party staking pools today is very similar to the early bitcoin exchanges. There is no guarantee that the pools are being run professionally with a security-first philosophy. All of the bad things that happened to the bitcoin exchanges — from hacks to server crashes to scams — could happen to the staking pools.

If you consider these to be unacceptable risks, consider a PoS blockchain project that has its own internal approach to pooling stakes.

Built by enthusiasts, not professionals

Many staking pools were built by community members to help solve inequality issues. Before staking pools, only well-financed stakeholders could actually generate coins. Even though some staking pools have good intentions, there is no guarantee that they are all taking a professional approach.

Lack of transparency

You will rarely see any information about the operators’ identities, their background or anything else that could inspire trust.

Regulatory uncertainty

Regulators are just now beginning to apply money service business rules to the crypto exchanges and PoW mining pools. Whether PoS staking pools are even on the regulators’ radars is an open question.

As a result of this grey area in the regulations, staking pools often don’t require proof of identity to join their services.

In-House Staking Pools

Decred

Decred
Source: Decred

Decred PoS overview

Decred is a hybrid PoW/PoS blockchain that powers a decentralized cryptocurrency. PoW miners process a cryptographic algorithm in order to add a block to the blockchain and generate 30 new decred coins. 3 of the coins go to fund Decred’s development, 18 go to the miner, and the remaining 9 go to the “stakeholders” who voted to add the block.

In Decred’s system, stakeholders lock away some of their decred coins to get a “ticket” representing a right to cast one vote. Any stakeholders picked to vote are given their share of the block reward and are refunded the price of the ticket.

Decred stake pools

The design of Decred’s system means that stakeholders can give their tickets to a pool without placing their coins at risk.

Rather than building pools within the Decred client, the blockchain’s protocols allow third-parties to build their own Decred staking pools. Decred lists 17 staking pools that members of the Decred community have created.

You may have trouble joining certain pools. Since pooling is a community-driven feature, people are very reluctant to engage in behavior that erodes Decred’s decentralized nature. Pools that have grown to the point they get 5% of the network’s votes will voluntarily suspend new member signups. Decred also encourages people looking for pools to avoid pools that have more than 5% of the network votes.

Waves

Waves staking system
Source: Waves

Waves PoS overview

Waves is a PoS blockchain that provides a platform for developing and running distributed apps. The project uses the word “miner” to refer to people who host a PoS masternode.

Unlike Bitcoin and other so-called inflationary cryptocurrencies, Waves PoS mining does not generate new coins. The only reward for mining is the 5% fee people pay to get their transactions added to the blockchain.

The Waves algorithm gives preferential treatment to people who have staked more waves than others, so pools have an advantage over single stakeholders.

Waves stake pools

Waves built a pooling system inside the Waves wallet. Rather than send your waves to an outside group, you can “lease” your mining rights to a miner on the Waves blockchain. The miners get to boost their chances of adding a block and you get a share of the transaction fees the miner generates.

Multi-blockchain staking pools

These services let you join pools for many of the small market cap PoS blockchain projects. You will usually find two kinds of pooling opportunities: you can join a proof-of-stake pool or you can contribute stake to a masternode. These are blockchain-specific and depend on how each project structures its PoS system.

Before you hand your coins over to these or any other staking pool, make sure you’ve done your research. How open are the people running the pool about their identities? What kind of security procedures do they have in place to protect your coins? And how do you know that these niche blockchains are legitimate?

Related: Don’t Trust ICO Listing Websites – Do Your Own Research

A poor choice could mean losing your coins to a bad actor or sloppy security procedures.

SimplePoSPool

SimplePoSPool
Source: SimplePoSPool

Simple PoS Pool has a completely automated system to make pooling stakes, you guessed it, simple. The listing includes 22 staking pools as well as 24 masternode pools.

There is no minimum deposit. Simple PoS Pool processes withdrawal requests manually once a day.

Through the end of 2018, the service fee is only 1%. Starting in 2019, however, the service fee will increase to 3%.

The fees don’t just pay for running the various masternodes. They also fund a multi-tiered referral program. You get 10% of the fees your friend pays, plus 5% of the fees your friend’s friend pays, plus 3% of the fees your friend’s friend’s friend pays, plus 1% of the fees your friend’s friend’s friend pays.

Stakeunited

StakeUnited
Source: StakeUnited

StakeUnited calls itself “the world’s first automated & managed PoS + Masternode pool.” The service implemented firewalls, 2-factor authentication and other security procedures to protect its wallets. StakeUnited’s listing includes 46 staking pools as well as 10 masternodes.

There is no minimum deposit. StakeUnited processes withdrawal requests after receiving the next stake reward.

The staking pools charge a 3% fee on any rewards you receive. The masternode pools charge a 5% fee.

A referral program pays 10% of any fees your friend pays.

Stakinglab

Staking Lab
Source: StakingLab

German staking pool, StakingLab, has set itself up to support novices just getting started with staking. Unlike other pools, StakingLab describes its approach to listing a blockchain on its service. They claim they speak with blockchain projects directly rather than relying on web research. You’ll find 44 projects on StakingLab’s listing.

For staking pools, you will pay a 3% fee for all rewards you earn. In addition, StakingLab charges a 0.1% fee on all withdrawals. Masternodes pay a higher 5% fee, but there is no withdrawal fee.

StakingLab also offers an “InstantNode” which lets you join a Masternode pool as if it was a PoS pool. You get rewards as soon as you make your deposit and can withdraw at any time. The flexibility comes at a price: a 3% deposit fee, a 0.2% withdrawal fee and a 7.5% fee on all rewards you earn.

Like a multi-level marketing system, StakingLab’s referral program scales as you get more friends to join StakingLab.

Christopher Casper

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