How Do Mining Pools Work?
Basics
Proof of Work blockchains rely on mining to ensure their security. Participants perform computations on hashes with specific characteristics, eliminating the need for a central authority to secure the cryptocurrency networks.
When Bitcoin was first launched in 2009, mining difficulty was low, and anyone with a standard computer could compete with other miners to solve a valid hash for the next block. However, as the network's hash rate increased, miners needed specialized hardware to add new blocks to the blockchain, leading to an arms race in the ecosystem.
Bitcoin miners experimented with different types of hardware such as CPUs, GPUs, and FPGAs before ultimately settling on Application-Specific Integrated Circuits (ASICs) that are exclusively designed for mining. ASICs are engineered to perform a single task, i.e., compute hashes, and they excel at it. They do it so well that it's become uncommon to use any other type of hardware for Bitcoin mining.
What Is a Mining Pool?
While high-quality hardware is important in Bitcoin mining, it's not enough on its own. Even with several powerful ASICs, the chances of mining a block are slim, and there's no guarantee of receiving payment for your work.
To increase your chances of consistent revenue, you can join a mining pool. For example, if you and nine other miners each have 0.1% of the network's total hashing power, on average, you can expect to find one block every thousand blocks, or roughly one block per week. Solo mining may be a viable strategy depending on your cash flow and investment into hardware and electricity.
However, if the revenue isn't enough to be profitable, joining forces with other miners can help. By pooling your hashing power, the ten of you would have 1% of the network's hash rate. On average, you would expect to find one block every hundred blocks, or about one to two blocks per day. The reward could then be split among all the involved miners.
How Are Mining Pools Structured?
While high-quality hardware is important in Bitcoin mining, it's not enough on its own. Even with several powerful ASICs, the chances of mining a block are slim, and there's no guarantee of receiving payment for your work.
To increase your chances of consistent revenue, you can join a mining pool. For example, if you and nine other miners each have 0.1% of the network's total hashing power, on average, you can expect to find one block every thousand blocks, or roughly one block per week. Solo mining may be a viable strategy depending on your cash flow and investment into hardware and electricity.
Pooling hashing power with other miners can be a solution to make mining profitable if the revenue generated from solo mining isn't enough. By pooling your hashing power, the ten of you would have 1% of the network's hash rate. On average, you would expect to find one block every hundred blocks, or about one to two blocks per day. The reward could then be split among all the involved miners.
How Do Mining Pools Work?
In a mining pool, a coordinator is responsible for organizing the miners to maximize their efficiency. One of their primary responsibilities is ensuring that the miners use different values for the nonce to avoid redundant work and wasted hash power.
The coordinator is also responsible for distributing the rewards among the participants. Different methods are used to calculate the work done by each miner and to distribute the rewards accordingly. The coordinator ensures that every miner receives a fair share of the rewards.
Pay-Per-Share (PPS)
Pay-Per-Share (PPS) is a popular payout scheme used in mining pools. Under this system, miners receive a fixed payout for every "share" they submit. Shares are used to track the work done by each miner and are not valid hashes within the network. They only need to match certain conditions set by the mining pool.
While the payout per share is nominal, it adds up over time. One advantage of the PPS scheme is that miners are rewarded regardless of whether or not their pool solves a block. The pool operator takes on the risk, so they typically charge a significant fee, either upfront from the users or the eventual block reward.
Full Pay-Per-Share (FPPS)
FPPS is a payout scheme that builds upon the PPS model. In FPPS, miners are rewarded for their work with a share of the transaction fees, in addition to the fixed amount they receive for every share submitted. The transaction fees are calculated based on the average for a standard network transaction over a recent period and are distributed among the miners based on their shares submitted.
Pay-Per-Last-N-Shares (PPLNS)
Pay-Per-Last-N-Shares (PPLNS) is another popular mining pool scheme, in contrast to Pay-Per-Share (PPS). In PPLNS, miners are only rewarded if the pool successfully mines a block. When a block is found, the pool checks the last N amount of shares submitted, which varies by the pool. To receive a payout, the pool divides the number of shares the miner submitted by N and then multiplies the result by the block reward, minus the operator’s cut.
For instance, suppose the block reward is 6.25 BTC (without transaction fees) and the operator's fee is 20%. The available reward for miners is 5 BTC. If N is 1,000,000 and a miner provided 50,000 shares, they would receive 5% of the available reward or 0.25 BTC.
Although there are several variations of these two schemes, they are the most common. In addition, mining pools are available for the most popular alternative PoW cryptocurrencies, such as Monero, Grin, and Ravencoin.
Are Mining Pools Harming Decentralization?
Bitcoin's decentralized nature is one of its key strengths. But what happens if a single entity controls the majority of the network's hash power?
This is an important question, as a 51% attack could allow an attacker to manipulate the blockchain and cause serious harm. While mining pools do create some risk of a 51% attack, it is unlikely that any single pool would be able to acquire enough hash power to carry out such an attack on its own. Nonetheless, it is still important to be aware of the potential risks and to take steps to mitigate them.
Although there are concerns that mining pools may increase the risk of a 51% attack, it is unlikely to happen. While a single entity controlling 51% of the network’s hash power would have the power to censor transactions and reverse old ones, such an attack would likely damage the entire cryptocurrency ecosystem. In theory, the top four mining pools could collude to hijack the network, but it would undermine the system and the value of the coins they’ve acquired would decrease.
Additionally, mining pools don’t own the mining equipment, and participants can freely migrate to other pools. Therefore, it’s in the best interest of both the participants and pool operators to keep the ecosystem decentralized to maintain profitability. Although there have been instances where pools have grown too large, the pool and its miners take steps to reduce the hash rate to avoid centralization.
Conclusion
The introduction of the first mining pool changed the cryptocurrency mining landscape forever, offering miners a more consistent payout. With various schemes available, miners can choose one that best suits their needs. While Bitcoin mining is currently "sufficiently decentralized," a more decentralized system would be ideal. In the long run, no single pool gaining the majority of the hash rate is beneficial for anyone. Participants, who understand that Bitcoin is run by users, would likely prevent it from happening.