What is a Crypto Mining Pool And How Does it Work?
When Bitcoin was introduced in 2008, its mining was way more profitable than it is today. It was much easier to mine bitcoins and get block rewards. However, with more people chasing the block rewards, bitcoin's mining process has become more difficult over time as it requires more computational power.
This same principle applies to other proof-of-work-based cryptocurrencies too. Furthermore, due to the Bitcoin halving concept, block rewards are reduced by half every four years. It makes the mining process less rewarding for individual miners. Miners also have to buy expensive computational resources such as GPUs or ASICs to get block rewards.
It is now becoming impossible for a single piece of personal computing equipment to successfully mine a block due to the evolving difficulty of the mining algorithm. Here comes the concept of a crypto mining pool. Individual miners are grouped to increase the chance of receiving a block reward. Let’s have a detailed look at the mining pool and how it works.
What is a Crypto Mining Pool?
A cryptocurrency mining pool is a group of miners who collaborate as one entity to increase their chances of mining a block and share rewards in proportion to the computing power they contribute toward mining a block. Members of the mining pool who present a valid partial proof-of-work receive a "share."
This idea came a long time ago, in 2010, when Slush Pool was established as the first Bitcoin mining pool. Since then, there have been many popular mining pools for cryptocurrencies like Ether (ETH), Bitcoin Cash (BCH), Litecoin (LTC), Monero (XMR), Zcash (ZEC), and many more.
The mining pools provide information on aspects such as the mining hardware's status, the current hash rate, estimated earnings, and other parameters that allow crypto users to consistently participate in the mining process of a specific cryptocurrency and earn rewards in proportion to the computing power contributed.
Mining in pools began when the difficulty of mining increased to the point where slower miners could take centuries to generate a block. Miners pool their resources to generate blocks faster and thus receive a portion of the block reward consistently, rather than once every few years.
How do Crypto Mining Pools work?
Not all cryptocurrency mining pools operate in the same manner. However, many of the most popular mining pools follow a set of common protocols.
Firstly, a user needs to download the software to a crypto mining pool. The downloaded software establishes a connection between the server and the computer of the investor. The investor's computer eventually becomes an extension of the mining pool's digital node.
The mining pool periodically pulls in the computer's unused processing space to assist with proof-of-work operations performed during mining. The operator oversees activities such as recording the work done by each pool member, managing their hashes, allocating reward shares to each member, and even assigning work to each member individually.
A protocol enables multiple miners to work on the same block at the same time. To track the progress of miners in the same block, the blockchain and its native cryptocurrency use a server linked to each miner in the same block.
When a block is validated, the incentives earned from successfully mining Bitcoin are stored in a common pool. These funds are distributed equitably to the investors based on the computing power provided by each of them.
How rewards are distributed in Crypto Mining Pool
The rewards could be redeemed in the cryptocurrency that was mined. Alternatively, before transferring the rewards to the investors, the rewards could be converted into a more acceptable cryptocurrency, such as Bitcoin, or even cash.
In exchange, a mining pool fee is deducted from the rewards distributed to each member, which are computed based on the pool-sharing mechanism, and these cryptocurrency mining pools can share rewards in proportional, pay-per-share, or completely decentralized peer-to-peer (P2P) models.
Proportional mining pools: In this type of pool, miners contribute computational power to the poor and receive shares until the pool successfully finds a block. Then, miners are rewarded in proportion to the number of shares they own. However, the area of concern is that the pool must find a block in order to receive rewards.
Pay-per-share pools: They differ from proportional pools in as each member can cash out their shares on a daily basis or at any time, regardless of whether the pool was successful in finding a block. A miner who contributes to this type of pool can exchange shares at any time for a proportional payout.
Peer-to-peer (P2P) mining pools: They are more advanced and decentralized versions of pools. The entire pool activity is integrated into a separate blockchain to prevent the operator or any single entity from defrauding pool members.
Advantages of Crypto Mining Pool
The existence of Bitcoin mining pools enables individuals and small businesses to mine profitably and consistently. This also prevents big corporations from controlling Bitcoin mining and preserves Bitcoin decentralization.
While the success of finding a block in individual mining gives complete ownership of the reward, the chances of success are extremely low due to the high power and resource requirements. Individuals are rarely profitable in the mining industry. In recent years, many cryptocurrencies have become increasingly difficult to mine as their popularity has grown, and the costs of the expensive hardware as well as electricity frequently outweigh the potential rewards.
Mining pools demand less hardware and electricity from each individual participant, increasing profitability. Whereas an individual miner may have little chance of successfully finding a block and receiving an incentive, collaborating with others significantly increases the success rate.
Additionally, there are so many mining pools on the market that they must constantly compete to offer their members higher profits than other mining pools. Members can easily join a different pool with better practices if a mining pool acts in bad faith, charges high fees, or begins censoring transactions and thus loses members and profits.
Drawbacks of a Crypto Mining Pool
Centralized: Most mining pools are centralized, thus they control the validation and creation of cryptocurrencies. The rewards distribution process also introduces a trust issue. Some mining pools can also be frauds who trick miners and stoles all of their profits. They may take advantage of system flaws to interfere with your points and rewards, so you should only join a mining pool you completely trust.
Profit-Sharing and Fees: One of the major drawbacks of joining a mining pool is that you'll have to pay fees and split any cryptocurrency that is successfully mined with the rest of the pool. Fees are typically paid on the basis of the share of the cryptocurrency awarded to the miner.
Dominance over other miners: Mining pools are frequently targeted due to their unfair conductive system. Larger miners and companies can sometimes establish dominance and take over entire roles. This creates a power imbalance, and small miners felt cornered and oppressed as a result.
Hiding Generated Blocks: Some crypto mining pools also carry out a chain reorganization attack by hiding the generated blocks from the main blockchain. This causes a lot of confusion for the other miners in the mine, and the mining pool has to generate additional blocks quickly in the meantime. They only reveal the hidden blocks after mining half of the blockchain.
Factors to consider in a Crypto Mining Pool
Regardless of the type of pool chosen, it is critical to determine whether the crypto mining pool is profitable after analyzing the computing power required, electricity costs involved, the mining pool fee, and how frequently the crypto mining pool pays out.
Different cryptocurrency mining pools typically charge between 2% and 4% of the earnings. Also, pay-per-share pools provide a daily payout mechanism at a predetermined time of day.
Individuals give up some of their rights in the mining process by joining a mining pool. They are typically bound by terms established by the pool, which may influence how the mining process is approached. They also divide the potential rewards, which means that the share of profit for an individual participating in a pool is lower.
Conclusion
Mining pools first came into existence to increase the profitability of mining for individuals. These organizations control a large portion of bitcoin and other crypto protocols. The presence of such big and powerful organizations contradicts the decentralized nature of cryptocurrencies.
Lastly, miners must carefully consider the cost of purchasing dedicated ASIC, the mining pool’s fee, as well as the regular cost of electricity required to power them, in order to determine whether crypto mining pools are profitable.
