What Is A Bitcoin Mining Pool?
Why did the miner go to the pool party?
Because it was overheating mining solo.
Bitcoin mining is a network. A distributed company of computers.
The main mission of these computers is to add transactions to a digital ledger in the form of blocks(transaction data).
In order for miners to “win” the privilege of adding a block, they need to find a mathematical “needle in a haystack”. This process involves using the SHA-256 hashing algorithm, a method for generating a unique, fixed-size string of letters and numbers from any input data.
SHA-256 is used in various security applications beyond Bitcoin, including banking, government, and commerce, to ensure data integrity.
In the context of Bitcoin, this means taking information from Bitcoin transactions and the previous block, then transforming it into a compact and unique hash(guess).
To “win” and add a block to the chain, miners must find a hash that is less than a certain target value defined by the network. This target adjusts over time to maintain an average block time of 10 minutes, regardless of how much computational power is directed at mining. Without getting too technical, it’s fundamentally a computer searching for a number below a set threshold.
Think of mining as trying to guess a combination to a lock where you don’t know the numbers or how long the combination is. Each guess is made by generating a guess with SHA-256, and you keep guessing as fast as you can until you find the right combination that opens the lock. This “lock” is the mathematical problem Bitcoin miners solve, and finding the solution proves they’ve done the work to secure the network, earning new bitcoins as a reward.
The incentive for miners to go through all this work is the block subsidy(currently 6.25btc) and tip offered on the transaction(TX fee).
Miners have 2 options when they are ready for some hash action:
- Pool approach
- Solo approach
A pool approach is the most common because it enables each miner to stay competitive and have a higher probability at profitable hashing.
Teamwork makes the dreamwork, and that is the strategy pools implement.
Miner hashrate’s(guesses/second) team up or “pool” together to win as a team.
The pool administrator gives each miner different assignments to work on in an attempt to collectively find the winning guess and be rewarded the block subsidy.
When a single pool miner wins a block, the reward gets distributed according the hash rate contributed. I.e. if miner A expends more hashes than miner B, miner A gets paid more.
This is great for remaining competitive as a freelance miner, as each member of the pool gets more consistent and frequent rewards than if they were mining alone.
This is where block templates come in. The block template’s are essentially packages of data that include information necessary for mining a block.
This data includes a reference to the previous block, a list of pending transactions that haven’t been added to the blockchain yet, and the required difficulty target for the new block. Miners use this template to create a new block by guessing a valid hash that meets the difficulty criteria.
The potential issue here is that pool admins have the liberty to make the call on which transactions are included in the template.
They can prioritize transactions with higher fees or exclude certain transactions, exercising a form of censorship.
“As for censorship, it is no longer a matter of actual resistance but merely if and when the pools choose to do it there are 11 entities who decide what transactions go in (or stay out) of almost every block, and simply the 2 largest can impose censorship on everyone else with 100% success. This is not some future risk but a present reality, and it’s not sustainable if Bitcoin is to remain a permissionless currency.” — Luke Dashjr
OCEAN mining pool is working to solve this by providing full visibility into block templates, generation payouts, miner stats, etc. so that miners know exactly what transactions they are contributing their hash to.
Now back to the Solo miner.
Lone miners are often referred to as “lottery miners” because they are a one man show hoping for a slice of the pie.
The lone miner may get lucky and solve a few blocks a year, but that is a very sparse payment schedule considering it’s chipping away at your power bill 24/7.
Now that’s not to say you can’t build your own pool of aggregate computing resources by drafting your lone miner some teammates, but that’s assuming you have space, access to sustainable energy, physical security, on site maintenance, etc.
For most Bitcoiners, it makes more sense to outsource all these maintenance and operational needs to a hosting site, unless you are doing it for education over profit, because you will not get far with $0.15/kWh residential electricity rates.
Some important information to consider when embarking on the investment journey of Bitcoin mining. It makes a lot of sense if you want to get a BTC cheaper than the going market rate of currently $61,000.
If you enjoyed this read, check out the Oklahoma Bitcoin Association, a Bitcoin company leading in mining advocacy, innovation, and policy.
For more of my content on X and LinkedIn.
Here are some resources to look into hosted mining solutions and pools:
Sources:
