Staking pools enable holders of a cryptocurrency to pool their assets together to increase the chances of being chosen to verify the next block of transactions on a blockchain network.

Similar to mining pools used in the Proof of Work (PoW) consensus algorithm, network participants contribute computational resources to garner adequate hash rate (or hash power), allowing them to gain a competitive advantage over other network participants.

Both models issue staking rewards, which are then distributed amongst each participant of the pool (either mining or staking)

Staking pools and how they work

Staking pools are used on Proof of Stake (PoS) blockchain networks only. Proof of Stake (PoS) is a consensus algorithm that selects a node operator at random to verify the next batch of transactions based on their stake in the network. This simply means that the system tends to select a network participant with higher stakes in the network as they have more to lose, hence ensuring the security of the entire blockchain network.

Staking pools are typically run by a pool operator, requiring pool participants to lock their stake (coins) in a specific blockchain address. This collective staking improves the validators staking power on the network, thereby increasing their chances of being selected by the consensus algorithm. When the network issues staking rewards, they are distributed to stake pool delegators based on their contributions to the pool.

Many blockchain networks are gradually adopting the Proof of Stake (PoS) consensus algorithm. It is considered more energy-efficient, scalable, has less barrier to entry, and offers faster transaction speeds than the PoW model employed by the biggest cryptocurrency blockchains ( Bitcoin and Ethereum 1.0).

However, Ethereum is developing a new blockchain infrastructure known as Ethereum 2.0, which leverages the PoS consensus algorithm with plans to transition fully by 2022.