How to choose a stake pool

In a proof of stake (PoS) network, participants with larger token holdings have a higher chance of being selected to validate transactions. Staking pools allow holders of smaller stakes to participate in staking and increase their chances of earning rewards.

While private pools generate profits only for their operators, delegators can delegate their coins to public nodes managed by staking pool operators.

Staking pool operators are responsible for supporting the functionality of the network and managing their pool with accountability to the token holders who delegate their assets.

When choosing a staking pool, there are several important factors to consider.

How to choose a staking pool

In a proof of stake (PoS) network, participants with a large share of coins or tokens have a higher chance of being selected as validators for transactions. In addition to direct staking, for example, through crypto exchanges, investors can use staking pools to participate in transaction validation with smaller stakes. This increases their chances of earning rewards for staking their cryptocurrencies. Our guide explains what you need to know before joining a staking pool and the criteria to consider before starting your crypto staking journey.

What is a staking pool?

Holders of coins or tokens in a proof of stake network can contribute to securing the blockchain by joining a staking pool and earning rewards by validating transactions. The larger, combined amount of staked cryptocurrency in a pool increases the likelihood that the pool will be selected as a validator for a transaction, which leads to staking rewards.

Individual stakers typically contribute smaller amounts, limiting their chances of earning rewards as a validator on blockchains like Ethereum (ETH). A staking pool is comparable to a carpool that reduces costs and emissions, or to miners collaborating in a mining pool. However, before selecting a suitable pool, you should be familiar with certain criteria related to this staking option.

What should I look for in a staking pool?

As a delegator (investor), you should ensure that you choose a professional pool with a detailed and transparent online presence. The staking pool should provide all the necessary information about the operator for delegators.

This includes security measures, team details, and social media presence. However, the most important information is about the fees, which can vary depending on the operator's geographical location and should be regularly updated, especially in relation to token price fluctuations.

Two types of staking pools

There are private and public staking pools for participation in transaction validation within proof of stake networks. While private pools generate profits only for their operators, delegators can assign their coins to public nodes to help secure the blockchain and generate additional income for themselves. A node is a key point in proof of stake networks.

Here are some criteria you should consider before delegating your coins to a staking pool.

Staking pool fees

Delegators must pay fees to participate in a staking pool. Setting up and maintaining a pool requires time and expertise. Operators are responsible for ensuring the network functions properly, providing resources and energy for their pool 24/7, and taking responsibility for the coin or token holders who delegate to them. For this reason, most staking pool operators charge delegators a service fee, which is deducted from their share of the rewards.

Some networks also charge participants other types of fees. For example, depending on the staking pool, there may be fees for delegating coins or fees on the margin of the rewards themselves. Pool operators also regularly receive a share of transaction fees and newly minted tokens if their nodes operate in full compliance with the consensus. Minting refers to the process of creating new coins or tokens as staking rewards.

Minimum stake requirement

Another consideration when selecting a suitable staking pool is the minimum stake required. Most staking pools require a relatively small amount to participate as a delegator. Low minimum stakes provide access to staking for smaller investors. This means you can participate with smaller amounts, benefit from rewards, and gain experience in cryptocurrency staking without taking on significant risks.

Pool size

A large number of delegators contributes to the security of a blockchain network. However, as a pool grows larger, more delegators are drawn in until a saturation point is reached. After this saturation point, the rewards offered decrease, along with the return for investors.

This limit prevents individual pools from becoming too large and encourages decentralisation of the network by incentivising the creation of alternative pools. Some pools also have a delegation cap, setting the maximum number of tokens they can accept. After reaching the cap, no further coins can be delegated.

Pool pledge

To ensure functionality and security, the pledge is a mechanism that helps attract delegators to staking pools while also promoting a high degree of decentralisation. A pool pledge refers to the fixed contribution of a pool operator to the overall liquidity of the pool. The purpose of the pledge is to build trust among potential pool participants. By committing their own funds, the operator signals their dedication to the pool.

There is generally no minimum amount required for a staking pool pledge. However, if a pool operator commits only a small amount, the pool might validate transactions and produce new blocks but may not generate rewards. Validators with higher stakes are more likely to be selected to validate the next block and receive significant rewards in return.

A pool operator can deposit a chosen amount as a pledge to attract coin holders who want to delegate. Validators with higher stakes are expected to be selected more frequently for block validation and therefore earn higher rewards.

Live stake

Always check the current live stake of a pool before joining. The live stake represents the total amount of cryptocurrency currently staked in the pool. This figure is calculated by adding the operator’s pledged stake to the current delegated stake and then dividing it by the total stake in the system.

Understanding the live stake is crucial for evaluating the size and influence of a pool within the network. This value impacts the pool's chances of validating transactions and earning rewards. The live stake shows how active and large a pool is, as well as its potential for generating returns.

Pool ranking

Pool rankings are based on key factors such as:

• Overall performance in block creation (assigned vs. validated blocks)

• Total number of blocks produced

• Expected return

• Total amount of staked coins or tokens

• Pool operating costs per epoch

• Live stake

• Minted blocks per epoch

• Pool saturation level

A pool’s appeal is often reflected in its position at the top of the rankings. An epoch refers to the period during which certain actions and processes occur in a proof of stake network.

Additional factors

In addition to the mentioned criteria for selecting a suitable staking pool, you should also consider external factors related to the protocol. For example, some pools use green energy or are operated by non-governmental organisations (NGOs).

If you find this selection process too complicated, Bitpanda Staking offers a straightforward way to stake your coins and tokens to secure the blockchain and earn attractive rewards.

What are the risks of staking pools?

The potential risks of staking pools include:

• Market fluctuations

• Lock-in periods for staked cryptocurrency

• Misconduct by pool operators

• Slashing penalties

• Variability of returns depending on staking participation

• Effects of staking on the supply and price of a cryptocurrency

Market fluctuations risk

As a cryptocurrency investor, you’re probably aware that volatility is always a fundamental risk. Cryptocurrencies are subject to significant market fluctuations, meaning that the risk is also high with pool staking. If the price of a coin you’ve staked drops sharply, even high payouts may not be able to offset your losses.

Lock-in periods for staked cryptocurrencies

Some staking pools also require you to lock in your coins and tokens, such as Ethereum (ETH), for a set period. This means you cannot withdraw them from the pool and sell them, even if the price drops significantly. For this reason, it’s essential to only participate in projects with sufficient demand and a solid business model. Make sure to research the protocol thoroughly before staking.

Misconduct by pool operators

Node operators regularly receive rewards if their node operates according to network consensus. This provides incentives to create an environment that makes staking in a pool attractive and safe. Depending on the protocol, misconduct by the operator during pool staking may be penalised by the network.

Slashing as a security measure

Many protocols include a mechanism known as “slashing” to promote proper participation and security. This automatically deducts a percentage of the validator’s tokens if they break the rules. This penalty also affects delegators and their rewards.

Examples of violations include:

• Prematurely withdrawing coins

• Downtime - not participating in consensus and not validating blocks

• Double-signing -  validating a block more than once

Impact of staking participation

The higher the stake delegated to a staking pool, the greater the chances of being selected as a slot leader to validate a block for the blockchain. Only then are rewards generated, which are shared between the operator and delegators. At the same time, the fewer the stakers, the higher the potential return for each delegator.

Effects on supply and price

When a large proportion of a token’s total supply is staked, it supports the token's price. However, this reduces the circulating supply of tokens available for trading, which can lead to price distortions.

Generating returns with staking pools

In addition to direct staking, for example on crypto exchanges, staking pools offer an attractive option for earning staking returns even with small amounts. By pooling resources, staking pools increase their chances of being selected as validators in the network and earning rewards. When choosing a pool, you should consider factors such as security, fees, and pool size. Despite potential risks, staking pools offer a way to generate passive income while contributing to network security.

Further topics on staking

Do you want to dive deeper into staking? Check out our additional articles on staking and learn what really matters.

• What is staking?

• What you should know before staking

• How to start staking cryptocurrencies