What is a mining pool and how does it work?

What is a mining pool?

A mining pool is a collaboration between multiple crypto miners in which they combine their computing power to find new blocks faster in the mining process and earn rewards together. Mining pools were created because over the years it became increasingly difficult for individuals to successfully mine a block. The rewards earned by mining pools are distributed based on the hashrate contributed by miners.

Mining pools are used with cryptocurrencies that use the Proof-of-Work consensus algorithm, such as Bitcoin and Litecoin. Every 10 minutes on the Bitcoin blockchain, thousands of computers around the world search for the correct hash to solve a cryptographic puzzle. The first miner with the correct solution gets to validate transactions on the blockchain and receives a block reward. By joining a mining pool, miners increase their chances of receiving consistent rewards.

Key Takeaways

• A mining pool is a collaboration of miners who combine their computing power to find blocks faster and earn rewards.
• Mining pools were created because mining individually became nearly impossible due to increasing difficulty and higher costs.
• Miners submit “shares” as proof of their computational work and receive rewards based on their contribution.
• Total hashrate and mining difficulty determine how often a pool finds a block and how profitable mining is.
• There are various pool structures and payout schemes such as PPS, FPPS, and PPLNS, each with their own advantages and disadvantages.

How did mining pools originate?

In Bitcoin’s early years, anyone with a normal computer could participate in the Bitcoin network and mine Bitcoin relatively easily. But as the blockchain grew, the difficulty of finding the correct solution for a block also increased. A normal computer was no longer enough. Miners had to invest in specialized hardware such as ASICs and pay higher energy costs. The bigger the blockchain grew and the more people started mining Bitcoin, the smaller the chance became for individual miners to mine Bitcoin successfully.

This led to the creation of the first mining pool in 2010: Slush Pool. The idea was simple: by letting computers work together, they could combine more computational power and find blocks faster. As a result, rewards came in regularly instead of occasionally or not at all.

How does a mining pool work?

A mining pool distributes work among all connected miners. Each miner sends their “shares” to the pool, which prove how many computational attempts they have performed. The shares represent how much work each miner completed while searching for a correct hash.

If a mining pool finds a valid block, the reward is distributed to each miner based on the number of shares they submitted. Counting shares and distributing rewards to the miners’ crypto wallets is fully automated by the pool software. Additionally, the mining pool usually charges a small fee between 1% and 2% for maintenance.

Hashrate and mining difficulty

Hashrate is the speed at which a miner performs cryptographic calculations to find the correct hash. Hashrate is an important characteristic of a mining pool: the higher the total hashrate, the greater the chance of finding a block and receiving rewards.

Mining difficulty shows how hard it is to find the correct hash on the Bitcoin network. Satoshi Nakamoto defined in the Bitcoin whitepaper that one block should be added to the blockchain approximately every 10 minutes. Therefore, the mining difficulty is adjusted about every 2016 blocks (roughly every two weeks). This ensures that as the total hashrate changes, the blockchain automatically increases or decreases the mining difficulty. This makes mining more intensive and more expensive, making mining pools even more relevant.

How does mining work technically?

In Proof-of-Work networks like Bitcoin, miners attempt to find the correct hash for the block header. This block header contains, among other things, the hash of the previous block, the Merkle root of all transactions, a timestamp, the difficulty, and a nonce. Miners constantly adjust this nonce to generate a new unique outcome and run the block header through the SHA-256 algorithm until the hash meets the difficulty target. Since SHA-256 is a one-way function, it is impossible to predict which input will generate the correct hash. Mining therefore consists of enormous numbers of random hash attempts. As difficulty increases, more attempts are needed to find a block. Individual miners can rarely keep up, making mining pools necessary.

What different types of mining pools are there?

Mining pools can differ in structure and may also use different methods to distribute rewards. A common type of mining pool is the proportional pool, where miners receive a reward based on the number of shares they contributed while searching for a new block. There are also peer-to-peer pools designed to limit centralization. They do this by adding an extra layer in the pool that prevents a pool operator from cheating and ensures the pool is not dependent on a single central party.

In addition to a mining pool’s structure, payout methods, also known as payout schemes, are important. These determine how and when miners get paid.

• Pay-Per-Share (PPS): Participants receive a fixed reward per submitted share.
• Full-Pay-Per-Share (FPPS or PPS+): Works similarly to PPS but miners also receive a portion of the block’s transaction fees.
• Pay-Per-Last-N-Shares (PPLNS): Participants receive a reward depending on the number of shares contributed since the last found block. Because of this, miners tend to stay connected longer, otherwise they lose part of their potential reward.

Advantages of mining pools

• Accessible: Many more miners can participate and do not need massive amounts of hardware to have a chance at rewards.
• Regular rewards: By working together, miners create stable and predictable income.
• Cost savings: Distributed effort helps hardware and energy costs be recovered more effectively.
• Network security: A higher total hashrate makes the network more secure against attacks and manipulation.

Disadvantages of mining pools

• Centralization: Today, the Bitcoin network is dominated by a small number of mining pools. This goes against the original idea of full decentralization.
• Lower individual rewards: Earnings from a mining pool are lower than mining a block yourself, but the chance of doing so individually is extremely small today.
• Dependent on a pool: Miners must trust the rules, reliability, and transparency of the pool operator.
• High energy consumption: Proof-of-Work mining still requires enormous amounts of energy, whether done individually or in a pool.

How to choose a suitable mining pool?

When looking for a mining pool, consider the following:

• Size and hashrate: The larger the mining pool, the more often it can find a block. However, a pool that is too large can contribute to centralization.
• Payout scheme: Check the way you get paid, as this depends on your equipment and strategy.
• Costs: Although most mining pools charge 1% to 2%, some pools may temporarily apply 0% fees to attract new miners.
• Reputation and transparency: Always pay attention to the statistics, payouts and technical information that a pool shares.

What are well-known Bitcoin mining pools?

Bitcoin has major mining pools such as Foundry USA, AntPool, F2Pool, ViaBTC, and Binance Pool.

Final thoughts

Mining pools are an essential solution within Proof-of-Work systems because they help miners earn consistent and predictable income together, despite rising mining difficulty and costs. While they increase accessibility and make the network more secure, they also introduce risks such as centralization and dependence on pool operators. Choosing the right mining pool therefore depends on factors such as hashrate, payout scheme, fees, and the pool’s reliability.