What are mining pools?

As Bitcoin has increased in value and popularity over the years, mining has become increasingly popular to generate profit from BTC and other PoW cryptocurrencies. However, due to the mechanisms underlying the Bitcoin algorithm, the mining difficulty increased as more people began mining. This means more computing power is required to solve the hashing algorithm. In response, miners began using increasingly powerful equipment.

Whereas once it was possible to mine BTC using a home computing rig based on a GPU, today, mining is only possible using specialized hardware equipment known as application-specific integrated circuits (ASICs). Mining favors those who wield the most computing power, so large-scale mining farms run by companies that can afford the up-front investments in real estate and hardware have a substantial advantage.

Mining pools are one of the few ways in which such smaller operators can participate in mining rewards.

What is a mining pool?

Mining pools effectively pool the computing power from multiple sources to increase the chances of solving the proof of work hashing puzzle and winning the block rewards. By pooling resources in this way, miners believe they can generate more profit than by operating as a solo entity since limited computing power reduces the chances of mining the next block compared to larger competitors.

How do mining pools work?

Most mining pools operate a system based on shares, which allocates rewards proportional to the computational power a miner has contributed to any successfully mined block. Each share represents a hash, or a potential solution to the PoW puzzle. The pool will pay out rewards to those pool members who contributed hashes, or shares, proportional to each member's contribution.

Depending on the pool, there are different types of payment systems in operation.

Pay-per-share (PPS)

Pay-per-share (PPS) means that the miner gets paid for every share they contribute to the pool, regardless of the pool's overall success in mining blocks.

PPS represents a stable income for miners but with some downsides. Pools that operate PPS don't typically include transaction fees in the block reward, and often, the fees will be higher to compensate the pool operators for the risk of paying out during times of low mining success.

Pay-per-share-plus (PPS+)

PPS+ operates similarly to PPS, but the transaction fee revenue earned by the pool is also distributed along with the block rewards. This allows miners to take advantage of periods when transaction fees are high.

Full-pay-per-share (FPPS)

FPPS also includes transaction fee revenue but is calculated as a projection based on pool performance rather than the exact fees earned.

Pay-per-last-N-shares (PPLNS)

PPLNS operates a slightly different system, where the pool defines a number of shares (N) prior to the successfully mined block and pays out based on the proportional number of shares contributed by each miner to the total N shares.

PPLNS can result in less consistent income for miners since it depends on successfully mining blocks to earn a payout. However, for this risk, the pool fees are typically very low.

Benefits of joining a mining pool

Mining pools substantially lower the barriers to entry to mining, enabling individuals or small mining outfits to participate when they'd otherwise be unable to compete.

Participation in a mining pool greatly increases the chance that individual miners or smaller operations will receive any compensation in BTC for the computational work they expend trying to solve the PoW puzzle and can deliver more consistent returns than attempting to mine entire blocks without competitive amounts of hash power.

With a smaller initial outlay than setting up an entire mining farm, miners who participate in mining pools stand a better chance of being able to repay their overheads and turn a profit.

Risks and drawbacks of mining pools

Solo miners have full autonomy over any rewards, whereas participation in a pool invariably means compromises such as paying fees. Mining pool payment may not always reflect the exact contribution each miner made to mining a given block.

Mining pools are typically unregulated, and users have few ways to ensure that the operators are trustworthy, particularly for smaller pools.

Since mining favors those with the largest hashpower, most users tend to migrate towards the largest mining pools, such as Antpool and ViaBTC, which also have an established reputation. However, as a result, a small number of large mining pools usually hold the majority of the total network hash power.

Some critics argue that this creates centralization in Bitcoin mining, undermining the spirit of decentralization and potentially compromising network security.

Factors to consider when choosing a mining pool

There are several factors to consider when choosing a mining pool.

Type of currency and equipment needed

A key decision factor is the type of crypto to be mined, which governs the type of equipment needed since different currencies may use different hashing algorithms. For example, BTC ASIC miners are typically the most expensive, while ASICs for other currencies, such as Litecoin (LTC), may be cheaper. However, BTC tends to be less volatile than alt coins, meaning the initial outlay on BTC mining ASICs may have a greater chance of being paid back.

Type of payout scheme and pool fees

The payout scheme and pool fees will govern how much profit is left once the share of revenue has been calculated, along with the consistency of returns.

Pool size and hash power

Larger pools with the greatest hash power stand the best chance of mining more blocks and earning more revenue. However, they may not always operate with the most favorable payout conditions.

Reputation of pool operators

It's worth checking out reviews, such as user forums or blog posts, to ensure that the reputation of the chosen pool operator is sound. As an unregulated industry, mining pools can be prone to scams and unethical practices.

Mining pool essentials

• Mining pools are a way for miners to pool their hash power to stand a greater chance of mining a block.
• Participation in a pool can make mining more accessible to smaller operators and can deliver more stable returns than solo mining.
• When choosing a mining pool, it's important to consider several factors that could affect revenues, including the type of payout scheme, pool fees, and pool hashpower.