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How does a Bitcoin Mining Pool Work

By Andrey Costello on The Capital

Mining pools is the best option to choose when starting mining business. How do they work?

Don’t join a mining pool before reading a guide on how these pools work and how to choose the best pool to join. There are some hidden quirks you should know.

A pool is a platform with specialized software where miners combine the computational power of their equipment for more efficient mining of a certain cryptocurrency. There are different systems for calculating rewards in the pools, but the most used are only three (PROP, PPLNS, PPS). The most popular pools in 2019–2020 are Poolin, F2Pool, BTC.com, AntPool, ViaBTC.

In early 2009, after the launch of his Bitcoin project, Satoshi Nakamoto invited everyone to try a new technology — Bitcoin mining. The conditions were very simple — user had to have only three things: a computer, the Internet, and a client program installed on a PC.

However, over time, the requirements have changed, and now enthusiasts are not able to mine BTC not only on a personal computer but even on a special device, like ASICs. Solo-mining throughout Bitcoin evolution has become unprofitable, because a chance to find a single block, in this case, is zero. The reason for the collapse of solo mining of the most popular cryptocurrency was the emergence of pools for mining.

What is mining pool?

A pool for mining is an association of miners, who are seeking for best reward. The computing power of each participant’s device makes up the total hashrate of the pool. Such cooperation gives much more chances to find a block and get a reward, which is distributed among the participants according to the system accepted by the operator of the particular pool for mining.

There are pools, that work on algorithm Proof-of-Work (PoW), Proof-of-Stake (PoS) or hybrid scheme Proof-of-Work + Proof-of-Stake.

A pool for mining can be compared to a lottery pool. Your chances of winning the popular lottery are very low, but when you team up with a lot of other people and agree to share the money you win if you succeed, your chances are multiplied by the number of participants. However, the winning amount of each participant is much lower.

The first pool appeared in late 2010. It was called “Slush Pool” and was founded at that time by an ordinary programmer and now CEO of Trezor’s crypto wallets manufacturing company Marek Palatinus.

In 2010, the hashrate of Slush Pool was 10 GH/s. Now the computing power of the pool, according to the official website, is more than 5 EH/s. For the whole period of its existence, this mining pool has produced more than 1 million BTC.

How do cryptocurrency mining pools work?

The mining pool distributes rewards produced by the joint efforts between the nodes in proportion to their contribution. The contribution is called a share. The shares are “failed blocks”, i.e. attempts to find a valid block that the miner has made. For these attempts, the miner is rewarded. The mining pool operator just checks validity of blocks (i.e., the number of nonce + hash blocks) provided to it by the participants.

Once one of the participants finds a valid block, the pool compares it with the current difficulty of the whole network and sends it to the common Bitcoin network for verification where it is validated by other nodes. Once the validation is received, the pool counts each participant’s contribution (share) and distributes the reward based on its fees.

Reward distribution between miners

There are several systems of reward distribution among the participants of the mining pool. There are a total of 13 generally accepted schemes, but only a few of them are used most often.

PROP (Proportional)

It is a proportional model according to which each participant receives compensation proportional to the quantity of the sent shares. As soon as the block is found, the account is zeroed and the process of share crediting starts from the beginning.

Pros:

  • Very simple calculation.

Cons:

  • Instability of payouts: If a miner joins during the period when a block is found quickly, it will get much more than when he joins the mining when members are looking for a nonce block for a long enough period of time;
  • Losses from pool-hopping: it is a cheating method when a participant jumps from one pool to another to participate in the production of “short blocks”, while the production of “long blocks” is shifted to honest participants. In this case, the payment is higher than in the case of systematic permanent mining in one pool. This is especially harmful to small mining pools;
  • The PROP pool usually charges high fees in order to minimize its losses from bad actors.

Today, most mining pools do not work with the PROP system because of the “invasion” of pool hoppers. There are several small mining pools of Ethereum, which work with the PROP system: Coinmine, Mining.Sk, SoyMinero, Aurora_Pool, and others.

PPLNS (Pay Per Last N Shares)

PPLNS is also a proportional payout system, but it works with a slightly more complex algorithm than the previous one. The payment is calculated not for the number of shares that user has sent for the interval between the two found blocks, but for the number of time intervals, which are called shifts and are fixed.

The number and duration of shifts are chosen by each pool at its own discretion. For example, a pool may have a rule of 20 shifts, each of which lasts 2 hours.

The key thing about this system is how many hours the miner has worked.

If the rules described above apply in the pool, then in two hours the miner will receive 10% of the amount it would have received in PROP, 20% — in four hours, etc., i.e. 100% of the amount it will receive only after 20 hours of work. In this case, if the miner leaves the pool and then returns, its earnings account is not reset, but continues from the value at which the miner left the pool.

For example, if the miner left the pool after 4 hours and 45 minutes of work, the next session will start not from zero, but from 4 hours and 46 minutes and the miner will reach 30% after 1 hour and 15 minutes of work.

Pros:

  • Ideal for miners that only work in one pool all the time;
  • Stable payments;
  • Less random factor influence, which ensures a more stable operation of the pool;
  • Very low or even zero commissions, as the pool actually carries no risk and pays out to participants only what has actually been mined.

Cons:

  • Not suitable for miners that work with multiple pools at the same time.

The PPLNS payout system is used today by most large pools such as Antpool, SlushPool, and others.

PPS (Pay Per Share)

PPS — a system that implies a fixed payment for each share provided by a user. It is calculated using the following formula B/H*N, where:

  • B is the reward for the block;
  • H is the current complexity of the network;
  • N — number of shares with difficulty 1, which was sent by the user.

All the work done by the user, regardless of whether the valid blocks were found or not, is paid.

Cons:

  • High risks to the pool;

Fees are set high enough (3–7%) to minimize the risk to the pool.

PPS payout scheme is present on such pools as ViaBTC, BTCC Pool, F2Pool.

How to choose the best Bitcoin mining pool?

There are several very important details to consider when choosing a Bitcoin mining pool:

  • Hashrate — old and proven pools have more hashrate, which ensures more frequent block findings and therefore higher profits. However, leading-edge pools tend to set high demands on participants’ equipment;
  • Reward system — there are only two reward schemes in common use today — PPLNS and PPS. The PROP system is discredited by pool hoppers, and good pools no longer use it. PPS is considered the most fair, but the most stable payments are received from the pool that works with PPLNS;
  • Fees — pools have two types of fees: for the mining itself (it depends entirely on the chosen payment system) and for withdrawal. Usually, the lowest fees are paid by the pools that work with PPLNS, as in this case they are as protected from risks as possible. On such platforms, the fee is usually 0.5–1% or even zero. With PPS, commissions can sometimes reach 4–7%, because the pool must pay for all the actual work done to the miners. Some pools set hidden commissions, so you need to be very careful and carefully study the conditions of joining the pool;
  • Withdrawal — Mining pools offer a variety of ways to withdraw earned cryptocurrency, from crypto wallets to credit cards and e-money systems;
  • Equipment — if you have already purchased equipment, you need to select a pool based on the type and characteristics of your mining equipment. If you’re just going to start mining, first pick up the pool, and then buy the necessary equipment in accordance with its requirements. Bitcoin can be mined only on ASICs — video cards and CPUs for the main cryptocurrency mining will not fit;
  • Reputation — before joining the pool, study user feedback about the pool. Read feedbacks not on the pool site itself (as there will of course only be positive feedbacks), but on third-party subject resources such as bitcointalk.org.

If you decide to get involved in Bitcoin mining, you need to study a lot of information and spend a lot of money on equipment and its storage. You can avoid all these difficulties with one simple investment in Hashmart.io. Just buy cloud mining contract, enjoy Bitcoin evolution and earn cryptocurrency without any trouble!

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Andrey Costello

Andrey Costello

Bitcoin-maximalist. Optimistic family man and miner with six years of age. I write about complicated things from the future for people of our days.

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