Large mining companies can maintain relatively smooth revenue, and their reserved capital can compensate for unexpected drops in revenue. However, small, independent Bitcoin miners are exposed to extremely uneven and uncertain revenue. An individual miner may go months without finding a block, and thus receive zero revenue. If they do find a block though, the payout would be extraordinary, but maintaining a small operation with high costs and zero revenue for months at a time is extremely difficult.
In order to help smaller miners smooth out their revenue, miners can aggregate their resources and distribute the rewards they receive. This is the idea behind mining pools. In this article, we will be discussing what mining pools are, the reason behind their existence, and how do mining pools work.
What Are Mining Pools?
Mining pools are networks of distributed miners who cooperate to mine blocks togETHer and distribute the payments based on each entity’s contribution to the pool. This allows miners to smooth out their revenue at a slight discount in the form of fees paid to the pool coordinator.
Contribution to a mining pool is measured in terms of hash rate, which is a measure of the number of hashes – attempts to find a new block – performed per second.
Whenever any miner in the pool finds a block, they pay the block reward to the mining pool coordinator. After taking a small fee, the coordinator pays each member of the pool based on their hash rate contribution.
For a small miner who has impossibly low chances of finding a block on their own, joining a mining pool will provide a steady stream of revenue. This revenue will be proportional with the miner’s size, so it will still be small, but the consistency of revenue helps the miner continue to cover operating costs and profit.
Why Do Mining Pools Exist?
Mining pools exist because as an industry, Bitcoin mining has inherent economies of scale. However, energy, and cheap energy in particular, is geographically distributed, meaning that mining takes place across the globe. Thus, mining operations have incentive to operate in different physical locations but cooperatively share hash rate and block rewards.
How Do Mining Pools Work
Typically, a mining pool places a coordinator in charge of organizing the miners. They’ll make sure the miners are using different values for the nonce so that they’re not wasting hash power by trying to create the same blocks. These coordinators will also be responsible for splitting the rewards and paying them out to the participants. There are several different mETHods used to calculate the work done by each miner and to reward them accordingly.
Pay-Per-Share (PPS) mining pools
One of the more common payout schemes is Pay-Per-Share (PPS). In this system, you’ll receive a fixed amount for every “share” that you’ve submitted.
A share is a hash used to keep track of the work of each miner. The amount paid out for each share is nominal, but it adds up over time. Note that a share is not a valid hash within the network. It’s simply one that matches conditions set out by the mining pool.
In PPS, you’re rewarded whETHer or not your pool solves a block. The pool operator takes on the risk, so they’ll probably charge a sizable fee – either upfront from the users or from the eventual block reward.
Pay-Per-Last-N-Shares (PPLNS) mining pools
Another popular scheme is Pay-Per-Last-N-Shares (PPLNS). Unlike PPS, PPLNS only rewards miners when the pool successfully mines a block. When the pool finds a block, it checks the last N amount of shares submitted (N varies depending on the pool). To get your payout, it divides the number of shares you’ve submitted by N, then multiplies the result by the block reward (minus the operator’s cut).
Let’s give an example. If the current block reward is 12.5 BTC (assume no transaction fees) and the operator’s fee is 20%, the available reward for miners is 10 BTC. If N was 1,000,000 and you provided 50,000 shares, you’d receive 5% of the available reward (or 0.5 BTC).
You can find several variations of these two schemes, but they’re the ones you’ll hear of most often. Note that while we’re talking about Bitcoin, most popular PoW cryptocurrencies have mining pools as well. Some examples include Zcash, Monero, Grin, and Ravencoin.
Closing Thoughts
The cryptocurrency mining landscape was forever changed with the introduction of the first mining pool. Learning how do mining pools work has deemed them highly beneficial for miners that wish to get a more consistent payout. With many different schemes available, they’re bound to find one that best suits their needs.
In an ideal world, Bitcoin mining would be much more decentralized. For the time being, however, it’s what we might call “sufficiently decentralized.” In any case, nobody benefits from any single pool gaining the majority of the hash rate in the long run. Participants would likely prevent it from happening – after all, Bitcoin is not run by the miners, but the users.
