As the name suggests, a mining pool is a group of miners working together to solve blocks and split the block rewards. Mining pools have become popular since GPU and ASICs started centralizing the hashrate onto the hands of fewer and larger mining organizations. The original Bitcoin vision was to have fully decentralized mining, with each full node performing CPU mining as long as they ran the Bitcoin Core client on users’ PC’s. This, unfortunately, is no longer feasible, since total network hashrate has increased exponentially over the years, increasing network difficulty with it, leading to high concentration of mining power in the hands of fewer network participants.
Although mining pools are not the fully decentralized concept Satoshi Nakamoto envisioned when he developed Bitcoin, they are the main instrument through which millions of small scale and amateur miners are able to participate in the mining process. Therefore mining pools have become crucial to the success of cryptocurrencies.
Do you need to join a pool? The answer is most likely yes, you do. Unless you have the computing power of large mining operation like Genesis Mining, Jihan Wu and others who own millions of ASIC machines, you likely won’t be able to solve a Bitcoin block in a lifetime doing solo mining.
What you need to know to join a pool is that there are several reward systems that are used. A reward system is a system that takes your contributions in consideration and pays you proportionally to your shares. If your shares demonstrate a high hashrate, it means you’ve invested money and time into mining, and your reward is proportional.
Here is a summary of the main rewards systems:
Score Based Rewards
When you submit a share to the mining pool, its software calculates the value of your share based on some preset criteria. Some pools consider the difficulty of your shares (number of zeroes in front of the submitted hashes), others consider the timing of the share, the better timing, the more hashing power you’ve invested. When a block is solved, the pool will split the rewards proportionally to the sum of the scores for each miner for that block.
By Number of Shares
Every time your mining software sends a share to the pool, it is either accepted or rejected. When accepted, it counts towards how many shares you’ve contributed to solving a block. If the pool solves a block, you get paid proportionally to the number of shares submitted.
Pay Per Share
The pool pays for each accepted share no matter if it solves the block or not. For this to work, the mining pool must have funds to cover the payouts even when blocks aren’t solved by it, even if it takes a very long time. For this reason, pools must hedge against running out of funds and usually pay lower rewards per share in this system than what you’d make in a performance-based system. If you’re just starting out with cryptocurrency mining, you may appreciate the fact that you get a bit of crypto with every share, but keep in mind that this reward is not optimal.
There are variations on these methods, like a Pay Per Share with additional guarantees such as the mining pool assuring its members that it’ll pay out 100% of its earnings per block no matter what happens, which is usually called “maximum per share”. It is in the mining pool’s interest to pay out fairly, since users can quickly shift their mining power to a competing pool at the click of a button.
The mining pool must be trustworthy. As you can probably imagine, most of these rewards systems can be gamed in favor of the pool. Users normally notice these kinds of manipulation rather quickly and the mining pool will suffer mass exodus if it is proven to be scamming members, thus if a mining pool plans to stay in the game in the long run they must be fair, transparent and honest with its members.
In order to mine at home or in a small installation, you must join a mining pool. Make sure to join only pools with good online reviews and a history of honest operation. When a mining pool concentrates too much hash power, avoid it and join a competing pool. Even though more powerful pools solve more blocks on average, the rewards are split by more people and in the end there isn’t much advantage in joining a very popular pool. Sometimes a smaller pool will be more profitable than a big one. As Warren Buffett once said “you pay a high price for a cheery consensus”. Also, if one mining pool accumulates too much computing power, it may cheat the blockchain consensus system in several ways, which is an undesirable collateral effect from too much centralization. Thus it is wise to choose smaller pools, just make sure they have good reputation and honest operation.
We hope this short article has given you ideas for your mining journey and that you are able to put together a profitable mining rig for fun and profit!
Image credit: Victorgrigas via Wikipedia by CC