How do Mining Pools work?

Cryptocurrency mining is a crucial part of the security of Proof-of-Work consensus-based networks. Miners play a key role in calculating hashes to secure blockchains without the intervention of a central authority.

At the start of the launch of Bitcoin Genesis in 2009, it was possible to mine with a simple personal computer. However, over time, the arms race to find blocks faster has forced miners to use specialized mining devices like ASICs. As for other cryptocurrencies, The graphics cards are also becoming more and more efficient. Likewise, miners now use collective mini pools to share their computing power.

It is precisely on this point that we devote this article. We will study how mining pools work. You better understand how they can help miners optimize their mining strategy.

Why do miners choose “Mining Pools”?

A "mining pool" is a group of cryptocurrency miners who come together to share their mining power. calculation and distribute block rewards more equitably.

This is a common option for solo miners who do not have hashing power necessary to find blocks competitively.

By joining a pool, miners are then more likely to receive rewards. This means that the pool as a group has greater hashing power and, therefore, a higher probability of discovering a block.

In addition to an increased chance of discovering blocks, mining pools allow miners to obtain rewards more regularly and more reliably than individual mining.

Instead of having to wait to find a block to receive a reward, miners can receive a smaller, but more frequent portion of the block rewards discovered by the pool.

In pool mining, a coordinator is in charge of ensuring efficient use of resources and distributing rewards to miners based on their contribution. This allows individual miners to benefit from the collective strength of the pool and receive a more regular and stable reward than if they were mining alone.

Let's now see the different types of mining pool rewards.

One of the remuneration models for mining pools is the Pay Per Share (PPS). This is a system where the mining pool takes care of all mining-related expenses, such as electricity costs and transaction fees. In return, it charges miners a fixed cost for each share of hash they provide to the pool.

The mining pool then guarantees a regular payment to miners based on the number of hash shares they have provided, regardless of how quickly they find blocks.

Indeed, the mining pool takes care of all the uncertainties related to finding blocks and distributing rewards, thus offering financial certainty for minors. This model may be more attractive to miners looking for stable and predictable remuneration.

The model Full Pay-Per-Share (FPPS) takes into account not only the activities of miners, but also the transaction fees inherent to the blocks they have mined.

This allows miners to have a more reliable and predictable source of income.

In addition to the regular lump sum payment, minors will also receive a share of transaction fees. This has the potential to increase miners' revenue, since transaction fees can sometimes exceed the entire reward offered.

➡️ Pay-Per-Last-N-Shares (PPLNS) Mining Pools

Unlike PPS or FPPS, where miners receive rewards based on the number of valid shares they sent to the pool, the Pay-Per-Last-N-Shares (PPLNS) focuses on the number of valid shares sent in the last N blocks.

Indeed, miners receive rewards based on the hashing power they contributed to the pool in the last N blocks.

It seems more fair and equitable than other methods. However, the risk for miners is also higher, because if the pool does not find blocks, miners will not be rewarded for their work.

For example, if the block reward is currently 6,25 BTC and the operator fee is 20%, the total reward for miners is 5 BTC. If N was 1 and you provided 000 shares, you would receive 000% of the available reward, or 50 BTC.

The PPLNS system is one of the two most commonly used methods for mining pools. It applies to many popular PoW cryptocurrencies, such as Zcash, Monero, Grin and Ravencoin.

What are the risks of mining pools?

Mining pools are often seen as a threat to blockchain decentralization.

By centralizing hashing power to find blocks, it can compromise blockchain security. However, some advocates of pool mining argue that it can actually improve security by allowing miners to work together to solve so-called "complex" math problems more quickly.

However, mining pools may carry a risk of a “51%” attack. If a mining pool controls more than 51% of the total hashing power of a blockchain, it has the power to alter transactions. This means that the mining pool could potentially spend funds on double spending for example or even cancel transactions at will.

This would drastically threaten the security and reliability of the blockchain in question. Even if in theory, a 51% attack is possible, it nevertheless remains low in probability.

Hash rate breakdown by pool over 24 hours on February 2, 2023. Source: coin.dance.com

Looking at the graph above, there is a theoretical possibility that AntPool and Foundry USA Pool are coordinating to hijack the network. However, even if they were to launch an attack, their activities would lead to nothing, as the price of bitcoin would collapse. In "game theory", we understand that miners are motivated by rational decisions. This would then be an action that would prove harmful to them. They would be the first victims. They would then have no interest in doing so.

Additionally, pools do not necessarily have the required mining equipment. Entities direct their machines to the coordinator's server, but they can migrate to other pools. Both participants and pool operators benefit from a thriving decentralized ecosystem. They can only make money if mining remains profitable.

What are the most popular Mining Pools?

When it comes to bitcoin mining, here are the mining pools that have the most market share:

Poolin,
F2Pool,
BTC.com,
AntPool,
ViaBTC.

poolin mining pool — Source: https://www.poolin.com/

Final thoughts on mining pools

After the creation of the first mining pool, the landscape of cryptocurrency mining was changed forever. Since they help miners get more regular payments, they can be very useful.

In a perfect world, the bitcoin mining would be much less centralized. For now, however, it is sufficiently decentralized. However, there is no reason for a single pool to control the majority of the hash rate in the long term, unless it is a government that decides for its own cause. This would be a dramatic but highly improbable scenario. However, this would likely open up competition between different governments, just as it happens with individuals.

Furthermore, Bitcoin is not only managed by miners, there are also other players who come into play in theBitcoin ecosystem, a whole which ensures its sustainability.

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Note: No financial advice is given in this or any other article on zonebitcoin. This is information of which you are the sole judge and master. Be responsible with your investments and only invest as much as you are willing to lose.

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