Staking Pools allows users to combine their resources in order to increase their chances of earning rewards. This mechanism offers more staking power to the network to verify and validate new
What Is A Staking Pool?
When used in reference to the participation mechanism in a Proof-of-Stake (PoS) consensus network, a staking pool is simply the combination of all the assets contributed by multiple stakeholders to unify their staking power. In PoS networks, decision-making or computational power is directly linked to the number of assets held. Staking power is proportional to the percentage of total assets that have been staked.
Since most network participants rarely have significant resources to stake on their own, individually, many prefer to contribute their power to a staking pool. These pools typically have their own administrator or pool operators, who are the ones responsible for keeping the nodes/validators operating.
Participants in a staking pool lock (stake) their assets into the pool, and are not able to use them until they redeem them or the expiry of the staking term arrives (in case of locked savings). Such a process increases the security of the network and verifies and validates new blocks. Stakers are rewarded with a share of earnings from block rewards.
Naturally, the more you stake, the higher chance you have of being rewarded. Most staking pools also incentivize more frequent and longer staking periods: the longer you keep your assets in the pool, the higher your likelihood of earning rewards or the more your share of any eventual rewards will be. These rewards are typically estimated and expressed in APY.
DeFi Staking Pools
In decentralized finance (DeFi) protocols, staking pools (sometimes called savings) work in a similar manner, however, these pools are project-specific and use native tokens for their protocols. For example, PancakeSwap (a Binance Smart Chain (BSC) protocol) features CAKE (its native token) staking pools. However, it also hosts multiple staking pools for projects available on BSC.
A secondary purpose of these staking pools is to lock liquidity into the protocols, ensuring that there are enough resources in terms of assets to meet the DeFi needs.
Rewards in these DeFi pools also include a share of revenue generated from the different protocols (like fees and commissions). This is part of the reason why APY percentages in DeFi staking pools can be much higher than regular PoS staking pools.
In both cases, staking pool investors do face certain risks. The most significant is adverse price movement in the staked assets possibly negating the APY earned. For example, earning 40% APY but experiencing a 50% price drop over the period of one year puts you at a net loss.
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