How Do Bitcoin Mining Pools Work?
What is a Mining Pool?
Nowadays most Bitcoin miners are part of a mining pool, which is a community where people pool together their resources in an attempt to solve blocks faster.
They are then rewarded according to how much work they put in respectively.
At the moment Bitcoin mining is so mathematically complex that it is not profitable for a person to mine without joining a pool unless they have a huge amount of ASIC miners being kept in extremely cold conditions.
The whole is greater than the sum of its parts – Aristotle
How it Works
A mining pool is typically controlled by a private company. The company organizes and administers the pool from marketing and payment collection to buying, installing and managing the mining equipment.
Individuals looking to mine then join the pool by buying hashing power. Participants get rewarded proportionately to their hashing power. For example, if you own 10% of the pool’s hashing power, you will earn 10% of all mining rewards (less the mining pool fees).
Why Join a Mining Pool?
Joining a mining pool means that you will never receive the full reward for solving a block, but this is because you don’t solve the block on your own.
Instead, you will get rewarded for how much you help in solving the block. This can be off-putting to some newer miners as it means that payment is significantly lower, but one perk of a mining pool is that you get rewarded more frequently.
This is because mining pools are more efficient and can mine several blocks faster. Also, as you are rewarded for how much you help with solving the block, the more powerful your mining setup is, the more money you will make.
One factor to note is that the Bitcoin community decided that no mining pool is allowed to control more than 51% of all transactions.
If that was to happen then the mining pool could start ‘counterfeiting’ Bitcoins through a double spending technique known as a 51% attack.
A pool which has the majority of the mining power could start facilitating their own transactions and therefore damage the reputation of the blockchain.
Mining for Bitcoin and Other Currencies
It is possible to use your Bitcoin mining equipment to mine for other coins too. For instance, you can use an AntMiner s9 (a high-end Bitcoin ASIC miner) to also mine for Bitcoin Cash and PeerCoin.
Not all coins can use the same miners that Bitcoin does as many do not use the same ‘Hash Algorithm’. Bitcoin, Bitcoin Cash, and PeerCoin all use the SHA-256 algorithm meaning that they are all compatible.
You can find out which SHA-256 coins are most profitable to mine here. Coins which use the SHA-256 algorithm are inherently too difficult for most hardware.
As a result, any newcomers to the mining world may want to look into coins which can be efficiently mined with a GPU, such as Monero and Z-Cash. Y
You can also use the Multipool network to switch between the most profitable cryptocurrencies at different times, meaning that you are not tied down to one currency.
Many people in the crypto industry dislike automatic mining switchers like Multipool as they can raise mining difficulty for extended periods of time.
Choosing a Pool and Receiving Your Rewards
When choosing which Bitcoin pool you want to join, there are two things you should look out for.
First is to make sure that the pool adheres to Bitcoin’s philosophy and is not causing harm to it.
The second (and arguably most important) is to look into how they compensate their miners.
Most of the popular mining payment methods utilize a ‘share’ based system. They work by having miners prove how much work they perform on a block, by using the ‘proof of work’ system and then paying them accordingly.
Miners will also sometimes receive a higher share of the reward for the more work they can prove, but there is a little more to it than that. The solution to each block is set at a specific difficulty.
Entire currencies (including Bitcoin) also have their own independent level of difficulty too. If the level of difficulty for the solution is higher than the level of difficulty for the currency, then the block is placed on the blockchain and the reward is distributed.
Mining pools also set their own difficulty parameters, and if a miner helps to solve a block which is matched within the mining pool’s difficulty as well as the coin’s own difficulty, then the block is noted as a ‘share’.
It is these shares in the form of blocks which a miner can use as their ‘proof-of-work’. The mining pool will acknowledge these shares and payout to the miner as recognition for how much power they are adding to the pool.
There are several methods that pools use to pay miners, a common system is Pay-Per-Share (PPS), but some pools also use Equalised-Shared-Maximum-Pay-Per-Share (ESMPPS) or many other methods.
You should also consider how much certain pools take from your reward. It generally ranges from nothing to 10% of the profits.