How Do Mining Pools Work?

The process of mining cryptocurrencies was first presented in 2010 by Satoshi Nakamoto, the developer of Bitcoin, in order to offer a way for users to get BTC.

At first, in order to use this method, the user only needed a strong internet connection, a computer, and the right software. However, over time, it became extremely difficult to mine Bitcoin on personal computers because of the enormous computing power it requires. Nowadays, miners need special mining hardware such as GPU and ASIC.

Unfortunately, this type of solo mining has become unprofitable in recent years due to the quick evolution of cryptocurrencies and the emergence of mining pools. A mining pool is a platform that contains special software where a large group of miners merge their computing power for more effective cryptocurrency mining.

Now, the main question is: how do mining pools work? In this article, we’ll give a brief explanation of the mining process, discuss how mining pools work, and then go over how miners share the rewards. Finally, we’ll give you some tips on how to choose the perfect mining pool based on your needs.

How Does Cryptocurrency Mining Work?

The mining process consists of two functions: creating new digital currencies and confirming and attaching block transactions on the blockchain. Blockchain is a publicly shared ledger where the block transactions are chronologically recorded. You can mine by using specific mining hardware and software to maintain and control the process.

Simply put, mining involves solving cryptographic puzzles, and this process requires a lot of computing power.

When the Bitcoin miner solves the puzzle and the rest of the network miners accept the solution, the miner attaches the new block to the blockchain and receives a block reward. The reward consists of a few bitcoins (or parts of a Bitcoin, i.e. satoshis) awarded by the network itself and a small mining fee paid by the sender of the transaction.

What you should know is that the difficulty of mining increases as more and more miners join the network. Even though the reward is the main incentive for miners to keep doing their job, creating a new block still requires a lot of processing power which is the main reason why solo mining is so expensive. This, in turn, makes using a mining pool more cost-efficient.

What’s a Mining Pool?

A mining pool is a group of miners who have joined their forces to have better chances at earning the highest blockchain reward and mining the next block. In these pools, the processing power of every member’s device forms the total mining pool hash rate.

The hash rate measures the total processing power of the blockchain network needed to mine the next block. 

This method offers much better chances to create a block and claim the block reward, which is then divided between the pool members according to the hierarchy structure devised by the mining pool operator.

The first-ever Bitcoin mining pool was called Slush Pool and was introduced in 2010. Some of the most popular cryptocurrency mining pools today include F2Pool, Antpool, P2Pool, and Poolin. The majority of the mining pools are located in China, including the best ones. 

How Do Mining Pools Work?

The mining pool basically manages the work of the pool participants. It coordinates their hashes, looks for block rewards, records the work fulfilled by each pool participant, and assigns the reward proportionally to the participants. 

The work of a member of the mining pool can be assigned using two methods.

The first method is assigning participants a work unit that contains a specific range of the nonce. A nonce is a number added to the hashed block in the blockchain and it represents the number that the miners have to solve. Once the miner is done with their work, they put in a request for another work unit.

The second method gives the pool participants the freedom to choose and pick the amount of work they want to do without any tasks being assigned by the pool itself. This methodology guarantees that no two participants choose the same range, because every miner will go for the nonce that no other miner has picked yet in order to have better chances at solving the block and winning the reward.

How Do Mining Pools Share Rewards?

Mining pools use various distribution systems for sharing the rewards between the mining pool members. The following are some of the most common among them.

The Proportional Method (PROP)

Mining pools using this method allocate a certain share to the pool members for the hash power contributions until the pool finds a block. Once it finds a block, the miners receive a block reward which is proportional to the number of shares they hold.

Advantages of PROP:

• The calculation of the rewards is quite easy.
• More useful for the small mining pools

Disadvantages of PROP:

• The payouts are unsatisfactory (and unfair) –  The miners get much more if they join shortly before the block is found than if they join the pool right from the start of the search for a nonce block.
• Pool-hopping losses – Simply put, this is cheating because the member goes from one pool to another in order to participate in the creation of blocks. This way, the payout is bigger in comparison to systematically consistent mining in one pool.
• The proportional mining pool charges higher fees from the transaction sender to decrease potential losses from malicious participants.

The Pay Per Last N Shares Method (PPLNS)

Pay Per Last N Shares is a proportional payout method too, but it uses a more complicated algorithm than PROP. In this method, the payment is calculated based on the number of time intervals that miners spend working in the pool between two blocks. This is recorded in terms of time slots known as shifts, and they are permanent. So, the most important thing in this method of reward distribution is the number of hours that the miners spent working.

Advantages of PPLNS:

• It’s perfect for pool miners which work only in one mining pool;
• Unlike the PROP method, here the payments are stable;
• There are fewer random features that affect the stability of the mining pool operations;
• The fees are very low or even zero, because this pool has no risk and pays out to miners only for the blocks that they have actually worked on.

Disadvantages of PPLNS:

• If you want to mine in several pools at the same time, this method isn’t suitable for you.

Note: The largest pools, like Antpool and SlushPool, are using the PPLNS payout method.

The Pay Per Share Method (PPS)

This method gives you a fixed mining reward for each share that you’ll submit. A share is a hash that is used to follow what each miner is working on. This method will reward you whether or not the pool finds a block. In this case, the pool operator is taking all the risk, but for that, they’ll charge you a higher fee.

The PPS payout system is used by pools such as ViaBTC, F2Pool, and BTCC.

How to Choose the Best Mining Pool

When choosing a mining pool for you, below are some important features you need to take into consideration first:

• Hash rate. The older and already established mining pools have a higher hash rate, which guarantees you’ll mine blocks more frequently and leverage higher profits in the long run. However,  in order to mine in the leading-edge pools, you need to obtain better mining hardware equipment.
• Reward schemes. As we said before, there are three rewarding schemes that are in common use: PPS, PPLNS, and PROP. The PROP scheme isn’t used by the most popular pools, due to the pool hoppers, i.e. miners that leave the mining pool when the rewards are low, and join back when the rewards get higher. PPLS has the most stable payments, but the PPS scheme is recognized as the fair one.
• Transaction Fees. Mining pools have two main kinds of fees: a fee for withdrawing coins and for the mining itself (depending on the payment system that is chosen). The PPLNS payment system has the lowest fees, but the fees for the PPS one are on the higher end of the scale due to the fact that the pool has to pay the miners for all their work regardless of the actual blocks mined. There are mining pools that set hidden fees, therefore you have to be extremely careful and do some research on the conditions before joining a pool.
• Withdrawal. Different mining pools offer different ways for withdrawing the earned digital currencies such as credit cards, crypto wallets, and e-money systems.
• Reputation. This is maybe the most important criteria for choosing the right mining pool. Before choosing a pool you need to do some research on the internet, start asking questions in the crypto and mining communities, and look at the personal experience of actual miners.

A Few Words Before You Go…

Mining pools have changed the whole crypto mining landscape forever.

They can be very rewarding for miners if they want to receive a more consistent payout, but in order to get their rewards in the form of fees, they have to mine a new block.

As we said, there are several different mining pool ways for sharing the rewards so that everyone can find the one that will be suitable for their needs.

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