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What are crypto mining pools?

As cryptocurrency mining becomes ever more competitive, small, solo miners cannot keep up with enterprise-level mining organizations. That is why, instead of mining on their own, they join efforts and share their computing power with other miners by connecting to a mining pool.

Mining pools in a nutshell

A cryptocurrency mining pool is a group of miners who join their hashpower to enhance their chances of successfully solving a block and earning the reward.

By combining and focusing their total computing power, miners can work faster and bump up their hashrate by performing more calculations per second.

These mining pools are often corporate-run: Mining companies “buy” computing power from miners in exchange for a proportional share of their mining profits.

Why do miners need mining pools?

Because of the very nature of proof-of-work blockchains like Bitcoin, mining is an inherently competitive activity. Miners must solve a block faster than their colleagues in order to earn money.

The more hashrate on the network, the more difficult it is to generate a nonce. Blockchains automatically adjust the mining difficulty as more miners come online to ensure security and meet the block parameters.

If you want to learn how Bitcoin mining works, be sure to check our article below.

Although necessary to stabilize the network, increasing mining difficulty makes mining ever more energy-intensive.

In turn, miners need to invest more capital — both to acquire better hardware and to afford the electricity bills (or find cheaper sources) — if they want to have a chance at adequately mining a block.

This scenario benefits enterprise-level mining companies and enterprises, who have more capital to invest in boosting their processing capacity.

Solo or “retail” miners, on the other hand, lag behind and find it nearly impossible to run a profitable mining enterprise.

Fortunately, mining pools offer these miners lower difficulty mining, reducing variance and enabling them to earn revenue for contributing computing power.

How mining pools work

Miners can connect to a mining pool of their choosing through different mining agents or software.

The pool will typically have an operator who maintains it and charges a fee for their services — usually, a fixed percentage cut of the block reward.

Each miner’s payout is calculated proportionally to the amount of work they contribute to the pool. The question that arises then is: how does the pool know how much work each miner has completed?

The pool sets different difficulty rates for the miners. According to these parameters, users find and submit hashes of a block header that may be block solutions — called shares.

Every valid result found by miners under the pool’s difficulty targets earns a reward, even if they’re not the actual block solution.

In other words, mining pools create lower difficulty work (in jobs) than the network’s difficulty, which enables miners to combine their work and increases the collective’s chance of solving a block.

Let’s further explain that with an example: Imagine that a block’s solution is a number that ends in ten zeros. The pool sets a lower difficulty and tasks miners with finding a number that ends in five zeros. These second, easier-to-find numbers are considered shares.

Additionally, they may be the block solution — as all numbers that end in ten zeros also end in five — but even if they’re not, the pool will also reward miners for finding them.

ASIC miners are one of the indicators of crypto mining professionalization.

Distributing the rewards

So we’ve got a functioning mining pool. We’ve got several miners properly connected and contributing their computing power to it. And the pool has recently mined a block successfully. What now?

We’ve said that miners receive their payments according to their share submission. However, the calculation is a little more complicated.

There are different ways to reward miners for the work they’ve done for the pool. As an example, here are two of them:

  • Proportional payments: Here, a pool will define a “round” as the time between one block found by the pool and the next. Payments are calculated as a percentage, based on a miners number of shares vs. the total number of shares in that round. At the end of every round, when the pool finds a block and receives the reward, the operator keeps a fee and payments are distributed among the miners based on their share percentage.
  • Pay-per-share: PPS provides a miner with an immediate, guaranteed compensation in exchange for their contribution to the pool’s likelihood of finding a block. According to the network difficulty, the mining pool operator buys shares from miners at a rate that represents the share’s projected contribution to finding a block, even if a block is not found. If one is found, then the operator receives all of the reward for the solved block. Variations in earnings by a miner are reduced to the overall chance of obtaining shares. In comparison to other reward systems, revenues for miners tend to be far more steady and predictable over short periods of time.

It’s important to remember that shares can be accepted or rejected. Accepted shares are those that meet the pool’s difficulty in a certain amount of time.

Rejected shares, on the other hand, indicate that a miner’s work was ineffective. This can happen when a miner effectively fulfills the assigned task but submits its work after the pool’s time window — these are known as stale shares — or when it works on an invalid difficulty rang, for example. Only accepted shares are entitled to earn rewards.

Pros and cons of mining pools

With the increased competitiveness and difficulty in the mining scene, mining pools represent an excellent opportunity for small miners to earn a profit that would otherwise be hard to achieve.

On the other hand, rewards earned from mining pools are lower than individual mining. Mainly because they’re divided among all the contributors and because pool operators take out their profits.

However, at the end of the day, the difference isn’t much. It’s mostly a question of having a high-chance, small reward through a pool, or a low-chance, high reward by mining solo. In the long term, they eventually lead to similar results.

Another negative aspect of mining pools is hashrate centralization. The concentration of hashrate is never a good thing for the network. And although many pools have adopted measures to become more decentralized, it’s still a point of concern for the community.

Final considerations

Mining pools have proven a valuable tool to enable individuals from the crypto community to participate and contribute to providing security to these blockchains.

We’re confident that the Lumerin Protocol will significantly improve the mining ecosystem, mitigating the risks of mining pools not only without resigning profitability nor performance, but actually improving them.

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