What are staking pools?

If you've heard about staking pools and it seems like an interesting alternative but you don't really understand how it works or its potential, we recommend you keep reading. In this article we will tell you the most important information to take into account about staking pools: what they are, how they came about, how they work and how you can participate safely and with the best guarantees.

What are staking pools?

The staking pools o Participation pools are spaces where a certain amount of cryptocurrencies, . This in order to first have access and participate in a blockchain protocol, either as validation node (in the case of Proof of Stake – PoS) or as hodler within a decentralized finance (DeFi) protocol and, second, of get rewards for such participation in those spaces.

Thus, basically staking enables the interested party to be part of blockchain networks of the PoS type (or other models that use said staking structure) or within the mechanisms that are implemented in DeFi protocols (such as governance, liquidity providers, among others). ).

Thanks to this, staking pools have gained great relevance within the crypto ecosystem. First, by allowing the existence of blockchain networks with consensus protocols alternatives to Proof of Work, where the block generators are miners with great computational power. And second, by generating new participation dynamics in applications and developments related to blockchain, in order to enhance the utility of its tokens and development as ecosystems of solutions both in DeFi and in other aspects of technologies and decentralized applications (DApps). 

How were staking pools born?

The history of staking pools is linked to the birth of Proof of Stake or Proof of Participation as a viable consensus protocol for the generation of blockchain networks. Proof of Stake was introduced by developer Sunny King in 2011, as part of his project PPCoin, also known as Peercoin. Peercoin would then be the first known cryptocurrency to use this protocol, thus replacing the well-known Proof of Work. The idea was to replace miners and their enormous energy consumption with validators, people whose staking on the network enabled them to validate and generate blocks on the network.

Although Peercoin initially advocates the individual staking to the point where there are currently no staking pools on such a network, this did not prevent other networks from taking PoS development and staking to suit their needs. This is how projects like EOS, NEO, Dash (whose masternodes use staking), Decred, Waves, Celo, Qtum, Komodo, and other more current options such as Polkadot/Kusama, Avalanche, Cosmos, and of course now Ethereum were born.

Of course, this was not only seen in the development of blockchain networks, but additionally, it also began to be used in Challenge. Currently, protocols such as AAVE o Uniswap They work thanks to their staking pools and all the options they offer to capture the interest of users and keep their platforms and services running.

At this point, you are probably asking yourself the following questions:

• ¿CHow do the pool of staking mechanisms work?
• What differences exist between validation staking pools and those we see in the DeFi world?

Well, now we review both cases:

Staking pools within blockchain validation

When we talk about staking pools in the blockchain validation we refer to the organization of hundreds or thousands of cryptocurrency users who are willing to stake a certain crypto to enhance the validation capacity of a series of nodes within that network, in order to obtain rewards thus.

A good example of this functionality can be seen in networks such as Ethereum, where now the network uses the Proof of Stake protocol and allows staking on platforms to enhance the validation of blocks and obtain rewards for that work.

At this point, staking has two objectives:

1. Strengthen the validation of a cryptocurrency and sustain its operation.
2. Create a simple medium with which users can stake.

The first is true because as more and more pools are born and grow in staking, they have the potential to protect the network from other malicious elements that seek to attack the network. A logic that we can see in other spaces such as mining pool, where they bring together the power of thousands of miners and together they help protect the network and improve your opportunity to get rewarded for your work. The second part is fulfilled facilitate access to these services, since staking in many networks is a technically complex process, without taking into account the associated operating and maintenance expenses.

Explaining the operation of validation staking with Ethereum

Next, we will review the validation staking operation with Ethereum. Operationally, validation staking is the easiest to see. We can think of staking as a privileged vault that allows us to have a voice and a vote within a network if we meet certain requirements. The main requirement is meet the minimum deposit to enable you as a validator on the network. At this point each blockchain has its own rules and minimum amount, but let's take Ethereum as an example.

In Ethereum, the minimum amount for staking is 32 ETH, that is, we need to have 32 ETH in our possession and place them in the "staking vault" to be able to participate in the network as validators. This “staking vault” on Ethereum is actually the union of several parts:

1. The node software that allows us to do the staking. In Ethereum, it is composed, in turn, of two parts: the Consensus node and the Execution node. The Consensus node is the one that interacts with the network and the rest of the validation nodes. It is in this node where we will perform the actual staking. To run this node we need software like prysm. The Execution node is the one that allows us to check that the validation tasks of the Consensus node are correct and serves to store the history of the Ethereum blockchain which we need for our work. For this last node we need software like Geth o Hyperledger Besu.. Both nodes must be fully synchronized to perform the process.
2. Have the 32 ETH and upload them to the consensus node through a smart contract interface. This in Ethereum is done using the Launchpad Staking, although other networks do not have this requirement.
3. When loading the 32 ETH, we must have our nodes synchronized and have our node registered. So we can say that our Ethereum staking is enabled. At this point, our Consensus and Execution nodes begin to receive operations from the Ethereum network, load them into the mempool and periodically make a random choice of who will be the next block validator. If we are chosen, then the network will give us permission to take the operations within the mempool, include them in a block, verify the information with the consensus node (what is known as check state on-chain) and if it is valid, issues the new block and we collect the corresponding rewards for our work.
4. At the end of our generation turn, the random selection process starts again and then another validator node will be chosen restarting the build and validation process of block.

This staking cycle that we explain is the cycle that happens when we perform “solo staking”, that is, staking for a single node. In the case of staking pools, the dynamics are the same, with only the way in which we access them and their volume changing.

For example, if we access LIDO, we can stake Ethereum without having to do all of the above, and even without having the 32 ETH that the network asks for. This is possible because the LIDO developers offer this alternative automatically, and the necessary nodes are created as the minimum is completed to enable those nodes in the network. Thus, together, LIDO is one of the largest Ethereum staking pools, concentrating thousands of nodes and staking power under the same platform.

Staking pools within the DeFi world

Now, the dynamics in the pools of Staking in DeFi it is quite different. In this case, the generated staking is not used to validate operations and generate blocks in a network, but to create services that in turn reward us for our participation. In a certain way, we can see DeFi staking pools as a savings account, one in which these decentralized finance (DeFi) protocols guarantee us a return according to our capital and global participation within the pool. The services at this point can be very varied, going through the exchange of cryptocurrencies, loans and any DeFi creation we can imagine.

Let's explain with a example the operation of a staking pool in DeFi, and for this we use the case of Uniswap. Uniswap is a DeFi protocol well known for its ability to perform decentralized cryptocurrency exchanges (a DEX). To do this, Uniswap developers have created a protocol that allows people to generate staking pools that work thanks to the accumulation of a couple of coins that will be the basis of the exchange. For example, we can go to Uniswap and create a pool with the B2M/BTC trading pair and Uniswap will allow us to do this as long as we put the same amount of B2M and BTC (ex: €1000 in B2M and €1000 in BTC) into said pool. pool.

With the creation of the pool, Uniswap guarantees us the following: every time a B2M/BTC exchange is made, those people who have liquidity in the pool will be able to earn a small percentage as a reward for their contribution of liquidity and the implementation of this new exchange option. Thus, each person who provides liquidity (a Liquidity Providers or LP) will be entitled to a reward according to their participation in the pool.

In this way, our money in Uniswap generates entry both for us and for Uniswap (in the form of platform fees) and a utility for whom you want to make the exchanges. Simply put, it's a win-win circle. For all this to work, Uniswap has generated a protocol based on smart contracts that works thanks to the possibilities of Ethereum and Solidity. Their staking has nothing to do with Ethereum staking and block validation, it is simply a means to achieve creating a service from which millions of people can benefit.

Another example of staking pools can be seen in Bit2Me Earn. Our Earn services allow users of our platform to enjoy a staking scheme in which they are rewarded for keeping their tokens in our pools. The rewards vary according to the staked currency, the regularity of the payments (daily or weekly) and the way in which the rewards are received (B2M or the native staked currency).

Pros and cons of staking pools

Now, staking pools have their pros and cons. Between his Bad points can include:

1. They generate centralization. Just like mining pools, staking pools generate centralization. It is enough to see how the distribution of Ethereum validation nodes has changed, to see that this is a problem for the resilience of the network, since currently most of the staking nodes of this network are in the United States and Germany.
2. Make more complex the input to the validation and generation of blocks in a blockchain. Staking model inclusion processes like the one seen in Ethereum are quite complex to follow correctly, especially for newcomers. Because of this, many turn to third-party services in order to participate in staking pools, further driving the point above.
3. In the case of DeFi, staking pools can drive malicious financial behavior. An example of this is what happened at Terra/Luna and their DeFi service, Anchor. The bad practices within the protocol took it to an unsustainable point in which staking, generation factors and financial equalization were insufficient to stop the catastrophe that occurred in the protocol. In fact, the algorithm that was supposed to protect the ecosystem from those events did not work as expected and ended up accelerating the event. Hence, every user must investigate and stay up to date on the decisions made in the staking pools and any service associated with it.
4. Depending on the implementation these They can be more or less safe. Staking pools are often highly desirable targets for hackers and it is up to the developers of the staking pool to protect against these threats.

In favor of staking pools it can be argued that:

1. They allow the creation and generation of New services beyond the sending-receiving of cryptocurrencies. The biggest example of this we see in DeFi, where staking pools are essential for the operation of these protocols.
2. Allow generate rewards at times when the markets are in the red. This is perfect for a person who uses cryptocurrencies as a form of long-term savings.
3. Finally the staking pools help democratize the reach of cryptocurrencies and its access allowing many more users to participate in the ecosystem. Participating in the pools does not force you to reach a minimum to be able to participate in the validation of a network or within a protocol. Not only that, but generally these services have very friendly interfaces so you can interact with them, hiding the difficulty of using them and at the same time opening the doors of the crypto world and its possibilities to more people around the world.

FAQ – What are staking pools?