Introduction
Mining is integral to the security of Proof of Work blockchains. By computing hashes with certain properties, participants are able to secure cryptocurrency networks without the need for a central authority.
When Bitcoin first launched in 2009, anyone with a regular PC could compete with other miners to guess a valid hash for the next block. Thatâs because the mining difficulty was low. There wasnât much hash rate on the network. As such, you didnât need specialized hardware to add new blocks to the blockchain.
It stands to reason that the computers that could compute the most hashes per second would find more blocks. And this caused a major shift in the ecosystem. Miners engaged in something of an arms race as they scrambled to gain a competitive edge.
After iterating through different kinds of hardware (CPUs, GPUs, FPGAs), Bitcoin miners settled on ASICs â Application-Specific Integrated Circuits. These mining devices wonât allow you to browse Binance Academy or to tweet out pictures of cats.Â
As the name suggests, ASICs are built to perform a single task: Â compute hashes. But since theyâre designed specifically for this purpose, they do it incredibly well. So well, in fact, that using other types of hardware for Bitcoin mining has become quite uncommon.
What is a mining pool?
Good hardware only takes you so far. You could be running several high-powered ASICs, and youâd still be just a drop in the Bitcoin mining ocean. The chances of you actually mining a block are pretty slim, even though youâve spent a lot of money on your hardware and the electricity required to run it.
You donât have a guarantee on when youâll get paid with a block reward, or even if youâll get paid at all. If consistent revenue is what youâre after, youâll have much greater luck in a mining pool.Â
Letâs say that you and nine other participants own 0.1% of the networkâs total hashing power each. That means that, on average, you would expect to find one in every thousand blocks. With an estimated 144 blocks mined a day, youâd probably find one block a week. Depending on your cash flow and investment into hardware and electricity, this âsolo miningâ approach could be a feasible strategy.
However, what if this revenue wonât be enough to turn a profit? Well, you could join forces with the other nine participants we mentioned. If all of you combine your hashing power, youâd have 1% of the networkâs hash rate. This means youâd find one in every hundred blocks on average, which works out at one to two blocks a day. Then, you could just split up the reward and share it amongst all the involved miners.
In a nutshell, weâve just described a mining pool. Theyâre widely used nowadays since they guarantee a more steady stream of revenue to members.
How do mining pools work?
Typically, a mining pool places a coordinator in charge of organizing the miners. Theyâll make sure the miners are using different values for the nonce so that theyâre 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, youâll receive a fixed amount for every âshareâ that youâve submitted.Â
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. Itâs simply one that matches conditions set out by the mining pool.
In PPS, youâre rewarded whether or not your pool solves a block. The pool operator takes on the risk, so theyâll probably charge a sizable fee â either upfront from the users or from the eventual block reward.
Full Pay-Per-Share (FPPS)
The FPPS model uses the PPS system, but pool participants also get a share of transaction fees. FPPS calculates this by taking an average for a standard network transaction over a recent period and distributing this based on shares submitted.
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 youâve submitted by N, then multiplies the result by the block reward (minus the operatorâs cut).
Letâs give an example. If the current block reward is 12.5 BTC (assume no transaction fees) and the operatorâs fee is 20%, the available reward for miners is 10 BTC. If N was 1,000,000 and you provided 50,000 shares, youâd receive 5% of the available reward (or 0.5 BTC).
You can find several variations of these two schemes, but theyâre the ones youâll hear of most often. Note that while weâre talking about Bitcoin, most popular PoW cryptocurrencies have mining pools as well. Some examples include Zcash, Monero, Grin, and Ravencoin.Â
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Are mining pools a threat to decentralization?
Alarm bells might be going off in your head as you read this article. Isnât the whole reason that Bitcoin is so powerful because no single entity controls the blockchain? What happens if someone gets the majority of the hashing power?
These are very valid questions. If a single entity can acquire 51% of the networkâs hash power, they can launch a 51% attack. That would allow them to censor transactions and to reverse old ones. Such an attack can cause massive damage to a cryptocurrency ecosystem.
Do mining pools increase the risk of a 51% attack? The answer is: maybe, but it isnât likely.
24-hour breakdown of hash rate by pool on April 16 2020. Source:Â coindance.com
In theory, the top four pools could collude to hijack the network. That wouldnât make much sense, though. Even if they did manage to pull off an attack, the price of Bitcoin would probably plummet as their actions would undermine the system. As a result, any coins theyâve acquired would lose value.Â
Whatâs more, pools donât necessarily own the mining equipment. Entities point their machines towards the coordinatorâs server, but theyâre free to migrate to other pools. Itâs in the best interest of both the participants and the pool operators to keep the ecosystem decentralized. After all, they only make money if mining remains profitable.
There have been a few occasions where pools have grown to what might be considered a worrying size. Generally, the pool (and its miners) take steps to reduce the hash rate.
Closing thoughts
The cryptocurrency mining landscape was forever changed with the introduction of the first mining pool. They can be highly beneficial for miners that wish to get a more consistent payout. With many different schemes available, theyâre 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, itâs what we might call âsufficiently decentralized.â 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 â after all, Bitcoin is not run by the miners, but the users.