While thinking about transport options, you might find yourself wondering whether you like driving yourself or carpooling. The first option surely gives you more privacy and you won’t have to engage in social niceties, but carpooling does help reduce the effort and cost involved. Crypto mining pools are a lot like carpooling. Like carpooling, it too comes with its share of advantages.
Mining pools help miners looking to mine crypto in collaboration with others. They are pretty popular these days. But what are they exactly, and what makes them such an attractive option?
What is a mining pool?
Solo miners sometimes lack the computational power they need to successfully compete with other miners who are better off. Mining pools help such miners put their computational resources together to mine new blocks. They are, of course, given rewards to encourage them to keep their contribution to the pool going.
To sum it up, mining pools enable solo miners to get the best possible rewards for the effort they put into securing the network and increase their chances of mining new blocks.
The backstory of mining pools
Mining pools emerged as a solution to the problem of mining costs getting higher. The rising costs were the outcome of the crypto space evolving. As mining difficulty increased, the computational power needed for mining new blocks faster kept going higher. This meant that solo miners could no longer afford the costs of the mining as they used to. That’s where mining pools came in.
The idea of a mining pool first surfaced on an online forum called Bitcointalk on 27 November 2010. A user named Slush was the one to pitch it, so the first mining pool created in the Czech Republic was called SlushPool. The idea behind this pool was to bring all underpowered miners together. The mining pool would help miners who did not have enough computing power to be able to mine Bitcoin and reap rewards as a collective.
At present, mining pools dominate Bitcoin mining. Foundry USA contributes 25.8% of the network’s computing power, followed by AntPool (16.5%), F2Pool (16.3%), and Binance Pool (13.2%).
How do mining pools work?
A typical mining pool helps miners with various things. To name a few:
- Managing pool members’ hashes,
- Maximizing rewards from mining operations,
- Recording work performed by each pool member, and
- Assigning reward shares to each pool member according to the amount of work performed.
But for all of this to happen, three things need to be in place. A cooperative work protocol; a good mining service; and mining software.
1. Cooperative work protocol
Crypto mining would not be possible if the blockchain network doesn’t allow it. Therefore, to enable crypto mining through pools, a function known as Getwork was built into the base Bitcoin client. It is what allows miners from different parts of the world to mine a target block collectively.
2. Cooperative mining service (server)
In addition to pooling resources, miners also need to communicate with other miners. A central link or a server helps them do this. When a cooperative mining service software is installed, it opens up communication between different miners in the pool and enables them to participate in the pool mining process.
The server is designed to receive network transactions, communicate with other miners, control and monitor work, send correctly resolved blocks to the network, maintain a record of work done, and distribute profits to the miner in the pool.
3. Mining software (client)
Mining software helps miners connect to the pool mining server, receive information, and start the mining process. Miners need to ensure that the software used fits or meets the characteristics of the mining pool they join. The mining software depends on the type of mining hardware being used.
With the Bitcoin network, the most common mining software used is CGMiner.
A combination of the three elements discussed above is crucial for effective mining through pools.
Advantages and disadvantages of a mining pool
Mining pools come with their share of advantages and disadvantages. If you are considering using one, this list should help you decide whether mining pools are for you.
The advantages
1. Economies of scale: Crypto mining can be pretty expensive and complex. The pooling of computing power helps achieve economies of scale. It means reduced mining costs, including equipment costs, electricity costs, and better returns on investment, as the cost of mining a block is shared by all stakeholders in the pool.
2. Faster processing of blocks: In crypto mining, multiple nodes (which are basically computers) compete to solve a mathematical problem in order to earn the right to validate blocks of transactions and earn rewards. To be able to do this, a large amount of computing power is required to speed up the process. (The higher computing power helps reduce latency.) So with mining pools, if any miner experiences issues in network connectivity, other miners in the pool can bridge the gap and help speed up the block discovery process.
3. Stable income: As mining pools help increase the chances of mining blocks, it contributes to the creation of a consistent income flow. No efforts go to waste, and electricity and computing resources are put to optimal use. All effort, therefore, translates into money. The reward miners receive is proportionate to their contribution in terms of computing power.
The disadvantages
1. Centralization: Crypto mining pools create a centralized structure for mining crypto. This defeats the purpose of decentralization in the blockchain network and increases the risk of a 51% attack.
2. Lower rewards: In the mining pool, the rewards get distributed to miners after deducting the pool’s commission fee, contributing fees, and other charges. As a result, each miner receives a lower block reward than they would if they went solo.
3. Lack of transparency: Since mining pools have a centralized structure, there may not always be transparency around the distribution of rewards and operating structures. There is a good chance therefore that the pools may have some biases in favor of large miners. Also, at times, the mining pool may hide blocks that have been generated from the main blockchain, thus creating confusion among miners.
How to choose a cryptocurrency mining pool
While choosing a mining pool, you may want to keep the following factors in mind.
Mining pool stability
It is important to assess whether the pool you are choosing has experienced any downtime. A higher downtime adversely impacts the profitability of mining operations and lowers mining success. If it has happened in the past, find out what the reason for it was and whether it is something that might occur again. You should avoid a mining pool if there are frequent downtimes.
Reward payout scheme
It will also help to review the reward payout scheme and payout intervals of the crypto mining pool. For instance, if you have a low-end hardware mining device, avoiding mining pools with higher thresholds for making payments may be better.
Mining pool equipment
Before joining a pool, you will need to know what type of mining is supported by the pool. Some pools only support one or two of the three types of mining—CPU, GPU, or ASIC mining. Each type comes with a different profitability ratio, so you would need to factor that in if the mining pool does not support the one you want to go for.
Pool fees
All mining pools charge miners some kind of fee for access. For example, SlushPool charges a pool fee of 2% on your rewards, and there is a reward payout fee of 0.0001 BTC for payouts under 0.01 BTC. Compare the pool fees of different mining pools, and ensure the mining pool you choose is transparent about its charges.
Conclusion
Despite following a centralized operating structure, crypto mining pools play a crucial role in the development of the cryptosphere. They play a key role in securing Proof-of-Work blockchains and ensuring there is zero downtime. On the other hand, they have also enabled consistent payouts for miners and have simplified the mining process while also lowering costs. All of this has greatly benefitted the crypto-mining industry.
They have taken us a long way and looks like they are here to stay.
