What are crypto mining pools, and how do they work?
When Bitcoin was first created, mining was a relatively straightforward process as it only required a personal computer and an internet connection. However, mining became increasingly costly and competitive as Bitcoin's popularity grew and more people sought to earn block rewards. Ultimately, it came to a point where there needed to be another system in place that would allow smaller miners to participate in the mining process.
Crypto mining pools aim to be that system by dispelling long-existing problems, thus offering a seemingly profitable way to earn via mining. This piece will discuss what crypto mining pools are, how they work, their benefits, and the most popular mining pools.
Understanding cryptocurrency mining
Crypto mining is the process through which new coins or tokens enter global circulation on a blockchain network. It is done through the completion of complex mathematical equations that validate transactions. When a cryptocurrency is mined successfully, the miner receives a specific amount of the crypto as a reward.
As the crypto industry experienced tremendous growth, interest in mining activities also heightened. However, smaller miners struggled to participate in the process due to the expensive nature of mining tools and the cost of electricity. Hence the need for crypto mining pools.
What are crypto mining pools?
A crypto mining pool is a group of miners that work collectively to generate new blocks. They achieve this by contributing computing power and sharing rewards in proportion to their contribution. The pool is made up of several bodies, such as pool managers. The manager is tasked with managing mining-related activities — recording work done by each miner, assigning reward shares, and managing hashes. In return for their labor, miners must pay a small fee to the pool manager.
Mining pools are of immense benefit to small-scale investors. It allows them to join a collection of like-minded individuals that combine resources to attempt to mine blocks successfully. The more computing power, the higher a pool's chances of mining new blocks.
How do mining pools work?
Generally, mining pools run on three core factors — cooperative work protocol, mining software, and cooperative mining services.
- Cooperative Work Protocol: this algorithm permits multiple miners or participants to work on a block simultaneously. A server is linked directly to each participant in the block to track progress.
- Mining Software: the mining software creates a connection between the pool and server, garners data for mathematical equations, and immediately starts solving them. And when a solution is found, it sends the answer to the miner and works on the next block. Each software is distinct in feature and functionality.
- Cooperative Mining Software: a cooperative mining server connects and permits multiple miners to pool resources collectively in real-time.
Mining pools reward/payment models
Crypto mining pools also use an array of reward systems. Some of these include:
Pay-per-share (PPS) mining
The pay-per-share mining reward system is a straightforward model. And as the name implies, participants receive mining rewards based solely on each share contributed to a new block. This reward system always rewards miners, even if no new block is found collectively.
Full Pay-per-share (FPPS) mining
Also known as a pay-per-share plus, FPPS is similar to the popular PPS reward model. However, this model rewards miners with a transaction fee if a new block is added. In the standard PPS system, participants only receive a mining reward based on their contribution. The FPPS, on the other hand, offers a mining reward and a transaction fee reward.
Pay-per-last N Share (PPLNS)
The Pay-per-last N Share model only pays participants when a new block is found and added. The mining pool goes back to look for deposited shares before discovering each winning block. Only shares provided within the timeframe are tallied and rewarded.
Double Geometric Method (DGM) mining
The double geometric method is a hybrid of PPLNS and Geometric reward that permits an operator to take on variance risks. Since miners do not know when a new block would be found, rewards for shares pooled may vary based on certain factors. DGM is designed to ensure the average reward to be received is equal to what they get in a PPS model.
In this mining reward model, miners earn shares until a new block is added. Expressly, proportional mining means that all shares contributed by pool members are equal, but the value is only calculated at the end of each block discovering round.
Benefits of crypto mining pools
Crypto mining pools augment pooled resources and guarantee a higher chance of completing new blocks and earning rewards. There are other benefits of this collective mining process, which include:
Better chances of earning rewards
Mining pools enable participants to compete with large-scale mining companies, thus increasing their chance of mining a block. With more computing power, manpower, and an additional efficiency level, mining pools can record faster block completion rates.
One standout benefit of crypto mining pools is that small-scale miners do not need to acquire expensive mining rigs to attempt blocks. Most application-specific integrated circuit (ASIC) mining rigs, like the AntMiner S19 Pro cost over $2,800, a steep price for a rig. Mining pools dispel the need to undertake a mining activity alone, allowing miners to earn from collective effort.
Disadvantages of crypto mining pools
Heightened energy usage
Electricity accounts for 75% of the operational cost of running large mining pools. And while electricity price depends on the host country, miners pay an estimated average of $0.046 per Kwh. In addition to cost, the environmental effects of crypto mining cannot be overlooked. According to reports, Bitcoin mining alone accounts for 0.1% of global greenhouse gas emissions.
Establishes a centralized structure
Pooled mining transforms the crypto transaction validation process into a centralized setting. It gives control to the largest mining pools with more resource-replete participants. This type of system contradicts the decentralized structure that the crypto industry tries to promote.
While cryptocurrency mining pools are considered cheaper, these pools require you to pay recurring fees. As mentioned previously, fees are paid from your share of the reward, eating deep into your supposed profit.
The largest crypto mining pools
Slush Pool, currently known as Braiins, is the world's first crypto mining pool. It was launched in 2010. The crypto mining space has grown exponentially since then, giving birth to dozens of crypto mining pools. Although mining was exclusively for Bitcoin, other cryptocurrencies emerged, creating opportunities for Zcash mining, Monero mining, Ethereum mining, etc. Some of the largest mining pools are:
- Foundry (U.S.): 17.99%
- Antpool: 14.34%
- F2Pool: 14.05%
- Poolin: 12%
- BinancePool: 11.33%
How to start mining with a crypto mining pools
Step 1: Pick a piece of equipment
During the early days of mining, you could conveniently mine cryptocurrencies with your computer's CPU and an internet connection. Unfortunately, they may not be as efficient for today's mining. Hence the need for advanced mining rigs like the ASICs.
Step 2: Choose a mining pool
Before joining a mining pool, doing your due diligence is essential. Check whether the pool operator is transparent, and the hash rate is accurate. Additionally, analyze the reward scheme. If the reward system isn't one you are comfortable with, it may be a sign to look elsewhere. The pool size and computing power are other core factors when choosing a mining pool.
Step 3: Start mining
Once you are satisfied with a mining pool's offering, then you may join and begin contributing to adding new blocks.
Solo mining vs pooled mining
As the name implies, solo mining entails mining cryptocurrencies on your own, which means you handle all the processes and own all rewards earned. Pooled mining, however, entails the collective mining of cryptocurrency. Mining pools share rewards based on a sharing model adopted by the operator. While solo mining guarantees 100% rewards, it is expensive and time-consuming, unlike pooled mining.
How do mining pools payout?
Mining pools adopt several payment systems: pay-per-share, full pay-per-share, proportional mining, etc. Each has pros and cons, which is why you must pick the correct scheme for you.
Do mining pools generate revenue?
Mining pools generate revenue by completing complex mathematical equations to mine a block. The rewards earned from completing blocks are shared amongst members.
What are the risks of mining pools?
The main risks come in the form of trust. As mining pools are centralized and run by pool operators, participants must follow their rules and policies. There is also a risk that the pool operator may be acting maliciously toward its mining pool participants.