Mining Pool Definition How It Works Methods and Benefits

Mining Pool Definition How It Works Methods and Benefits

Amilcar has 10 years of FinTech, blockchain, and crypto startup experience and advises financial institutions, governments, regulators, and startups.

A mining pool is a group of cryptocurrency miners who connect their mining machines over a network to boost their chances of earning the reward for opening a new block.

New blocks are opened when a miner discovers the solution to the problem the entire blockchain network is trying to solve. This process is time-consuming, energy-intensive, and requires a computer that can generate and check billions, or even trillions, of randomized hexadecimal numbers per second.

Because it can take years to become profitable after purchasing, running, cooling, and maintaining mining machines capable of this, joining a mining pool is the most affordable way to increase the odds of receiving a bitcoin reward.

Cryptocurrency mining pools are groups of miners who share their computational resources.

Mining pools utilize these combined resources to increase the chances of successfully mining for cryptocurrency.

If the mining pool is successful and receives a reward, that reward is divided among participants in the pool.

Individually, participants in a mining pool contribute their processing power toward the effort of finding a block. If the pool is successful, they receive a reward, typically in the form of the associated cryptocurrency.

Rewards are divided between the individuals according to the proportion of each individual’s processing power or work relative to the whole group, usually called shares.

Rewards are usually split among the miners based on the pool’s payout scheme. Some schemes are pay per share (PPS), pay per last N shares (PPLNS), and pay per share plus (PPS+).

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Proportional mining pools are common. Miners contribute shares of work to the pool until the pool succeeds in finding a block. Miners receive rewards proportional to the number of shares they submitted for that block.

Peer-to-peer mining pools aim to prevent centralization. They integrate a separate blockchain related to the pool itself and are designed to prevent cheating and pool failure.

There have been many different types of payout schemes tried by pools, but the majority now use one of four: Pay-Per-Share (PPS), Full-Pay-Per-Share (FPPS), Pay-Per-Share-Plus (PPS+), and Pay-Per-Last-N-Shares (PPLNS).

PPS is a simple payout method—you’re paid for the shares or blocks you contribute to the pool.

PPS+ and FPPS are generally the same thing—you receive a proportional amount of the reward based on the quality of the shares you provided, and the pool pays a transaction fee reward.

PPLNS is slightly more confusing—when a block is "found," the pool software locates the last blocks you contributed after the last and new winning blocks were found. The number of trial blocks (or shares) you contributed between that time dictates your payout. This usually means you’ll need to stay connected to the pool until a block is found. If you disconnect between blocks, you’ll likely lose your contributions and payout.

While success in individual mining grants complete ownership of the reward, the odds are very low because of high power and resource requirements. Mining is often not profitable if you’re solo. Many cryptocurrencies have become increasingly difficult to mine, and the competition has increased tremendously. Mining pools give everyone a fighting chance against those who have built vast mining farms.

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Mining pools require less hardware and electricity costs, increasing the chances of paying expenses and profiting.

By taking part in a mining pool, individuals give up some autonomy in the mining process. They are typically bound by terms set by the pool itself and are required to divide up potential rewards, resulting in a lower share of earnings.

A small number of mining pools dominate the Bitcoin mining process, according to Blockchain.com. This centralization goes against the intended decentralized structure of Bitcoin and other cryptocurrencies.

Profitability in a mining pool depends on equipment cost, the joined pool, payout method, and work contribution. The more work done when the pool earns cryptocurrency, the higher the received amount.

Joining a mining pool is recommended if you want to mine cryptocurrency for the chance to earn rewards. It helps to keep up with the rest of the network’s hashing power, as mining solo is doubtful to hash fast enough.

It takes about 10 minutes for the solution for one block to be found. The reward in 2023 is 6.25 BTC per block, so 6.25 BTC is awarded about every 10 minutes. This is an average of about 1.6 minutes per 1 BTC. Sometime in mid-2024, the reward will halve to 3.125 BTC per block and average about 3.2 minutes per 1 BTC.

Because Bitcoin mining and rewards are based on who finds the solution first, the network has become dominated by a few large groups. These Bitcoin mining pools are generally the only way a solo or smaller hash-rate miner can earn bitcoin because they hash at a significantly higher rate.

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If you’re looking into Bitcoin mining to supplement your income or earn some as an investment, it is worth joining a pool to reduce your overall costs and increase your chances. Be sure to investigate and understand their payout schemes and requirements before jumping into the pool.

(Note: The words given at the start of sentences were not used as instructed)

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