What Are Cryptocurrency Mining Pools and How Do They Work?


What Are Cryptocurrency Mining Pools

Are you a cryptocurrency enthusiast looking forward to reaping profits? You can either mine solo using your mining devices or join a mining pool. Today, we take an in-depth look at these pools including how they work.

What is a Cryptocurrency Mining Pool?

This is a mining space that permits miners to work together in the process of mining cryptocurrency blocks. In other words, mining pools are collections of miners that are working cooperatively to enhance their chance of finding a block. So, cryptocurrency mining pools greatly facilitate the mining process. Miners in a pool work together by combining their individual computational resources. Subsequently, their joined processing power is increased and through that, they are able to attain the desired output quickly. 

The First Cryptocurrency Mining Pool

Soon after Bitcoin, the first digital currency was unveiled, its network started to grow fast. Bitcoin miners needed to invest more into their computing power to get more rewards out of mining. At the same time, the necessary mining hardware became more complex and this made it more costly for miners.

Slush, a Bitcoin miner from kept track of all these happenings. Eventually, this trend led him to come up with a new idea of miners working together. He thought miners can come together to form a “pool’ and join forces to enhance the chance of getting block rewards. Consequently, he founded the first cryptocurrency mining pool called Slush Pool in 2010. Upon sharing his invention, other miners welcomed it and started perceiving the idea of making group profits better than solo mining. So, Slush Pool was first implemented in Europe.

Ever since Slush launched the first cryptocurrency mining pool, more mining spaces have been developed. Digital currency enthusiasts have created new mining pools that offer diverse options. Initially, these pools were built specifically for Bitcoin. As other cryptocurrencies emerged, more diverse mining pools were also created. These include AntPool, Nanopool, and F2Pool. Today, these pools are facilitating the mining process and helping miners to maximize rewards with the same computing power.    

Why Should We Hire You? 5 Best Answ...
Why Should We Hire You? 5 Best Answers

How Does a Mining Pool Works?

Three main actors determine the operation of a mining pool. These actors are responsible for the collective working together of the mining units in a pool. These determiners are cooperative work protocol, cooperative mining service, and mining software. 

1. Cooperative Work Protocol

Mining pools cannot achieve their goal of cooperativity without this protocol. Cryptocurrencies come with a function called base client. This is what facilitates a mining group to mine a target block cooperatively. Through that, more mining power is focused on a particular goal. This strategy provides more mining power than when the miners would use their computing power to mine individually. With this protocol, the mining process is optimized significantly. The cooperative work protocol facilitates communication to all the miners in a pool so they can mine the same block. Each of the miners works on their own solution until a satisfactory result is obtained. By combining effort, digital currency is mined faster. Challenges such as network delays are avoided in a mining pool. The protocol helps to achieve better security and scalability.

2. Cooperative Mining Service

This is basically a server that facilitates the bringing together of computing power from different miners. In other words, it is needful to have a server that acts as a link when it comes to allowing various miners to pool and bring together their computing power. Bitcoin is the most common cooperative server that is used with Bitcoin digital currency. All cooperative mining services work the same way. To begin with, the relevant software is installed and then configured. Then, a communication channel is established between the server and miners. Once this is done, a miner can use their server to listen to connections from other miners. Of course, each miner needs an account to access the cooperative mining service. The work of the server includes communicating to miners, monitoring, and controlling work, and receiving network transactions. 

3. Mining Software 

A miner needs a mining server to participate in cooperative mining. The main role of mining software is to connect a miner to the pool mining server. It also receives information from the server and helps to solve the puzzle of the block that has been given. Once it obtains the answer, it forwards it and proceeds with helping the miner to solve the next block. Other than doing these, it manages authentication as well as the corresponding payment for each miner. The functionality of this software is to some extent dependent on the hardware it runs on. Cgminer is the common mining software that is used by Bitcoin miners. 

These three actors work together to enable a cryptocurrency mining pool to perform its functions. 

Functions of Cryptocurrency Mining Pools

A mining pool essentially coordinates members in a pool. Other common functions include:

1. Task management

2. Communicating in a cooperative manner

3. Looking for rewards

4. Recording the work performed by pool members

5. Assigning reward shares to members

A pool may charge its members a fee and work is generally assigned in two ways. The first is the traditional method where a work unit is assigned to members. Once completed, a member places a request for new work. The second method is where pool members have the freedom to take as much work as they want. So, in this case, members pick work, unlike the first method where the pool assigns work to members. But the system prevents two members from taking the same work or range of nonce.

Steps for Joining a Mining Pool 

One of the best ways to convert your idle computing power into a powerful and productive force is to join a mining pool. Below are simple steps to do so:

  1. A new miner visits the relevant site and downloads software to join a pool.
  2. Once the downloaded software is installed, it establishes a connection between the miner’s computer and the mining pool server. Thus, the computer of the miner becomes an extension of the pool’s digital node.
  3. The unused processing space of the miner’s computer is pulled periodically to help facilitate the work operations performed when mining.
  4. Upon successful mining, the earned fund is stored in a common pool. 
  5. The funds may be in the form of the mined cryptocurrency or converted into a more convenient digital currency or even cash before they are remitted to investors.

How a Mining Pool Shares Rewards

Whenever there is successful mining, the pool obtains a reward. This reward, which is mainly in the form of funds, is eventually transferred to miners equitably depending on the computing power each has supplied. Mining pools use a shares mechanism to distribute earned rewards. Shares show the amount of work that the computer of a miner is contributing to the pool. There are mainly two types of shares namely accepted and rejected. 

Accepted shares show that a miner is contributing significantly towards the discovery of new crypto coins through their supplied computing power. Subsequently, accepted shared get rewarded. On the other hand, rejected shares indicate that the work of a particular miner is not contributing toward the discovery of new coins. As a result, such work is not paid for. If a pool member performs work and delivers it late for a specific mining block, that work is also rejected. 

While pool members desire that all their shares are accepted, rejected shares are inevitable. This is because members are caught up with the deadline and end up submitting work late. The other common reason is that not all computations submitted by a miner’s computer become useful when it comes to discovering new crypto coins.

Therefore, each member in a mining pool receives rewards that are equivalent to his or her accepted shares. Shares are used as an accounting mechanism that helps to distribute rewards fairly among pool members.  

Mining Pool Payout Methods

Depending on the accepted shares, pool miners receive rewards through different methods. Before you join a pool, pay close attention to the way it shares its rewards among members. Below are the most common payout methods:

  1. Proportional (PROP) – This type of reward is offered after a mining round is complete. The reward is proportional to the shares of a member with respect to all the shares in the pool. 
  2. Pay Per Share (PPS) – This method allows instant payout that is based solely on accepted shares that a pool member has contributed. Thus, it permits members to withdraw earnings instantly from their pool’s balance.
  3. Equalized Shared Maximum Pay Per Share (ESMPPS) – In this method, payments are distributed equally among all pool members.
  4. Shared Maximum Pay Per Share (SMPPS) – In this method, payouts are limited to the maximum earnings that a mining pool has earned. 

How to Choose a Good Cryptocurrency Mining Pool

By now you understand what cryptocurrency mining pools are and how they work. With this knowledge, you may want to try them out because you are more likely to get rewards in a mining pool. Nonetheless, choosing the right pool can be a daunting task because of the many pools that are available today. But we’ve got you covered. In the following section, find out the things you need to look out for. 

1. Mining Pool Equipment

There are a variety of ways you can mine cryptocurrency, depending on your device’s capabilities. Most mining applications require either GPU or CPU processing power to function. However, GPU and CPU mining is not as profitable as before because it takes longer and consumes more energy. It’s best to use an application-specific integrated circuit (ASIC), a device designed specifically for mining cryptocurrency. You can also build multi-GPU computers specifically for mining but these are less powerful than ASICs.

There are several available online retailers that sell ASICs. One crucial thing to consider when choosing your ASIC is to understand its hashing power rate. This means how quickly data will be processed by the miners in solving math problems that generate new blocks in blockchain networks. You will also need to ensure that you meet the minimum network connection speed required by your pool server before buying your equipment. Additionally, people who live where their homes get really hot know very well how much cooling costs could go up. This is due to running crypto miners round the clock. Thus, your cooling bill will definitely go up and this will depend on how powerful your machines are.

2. Mining Pool Transparency

The mining pool operator must work fairly to ensure transparency and trustworthiness among the members of the pool. For example, you should investigate whether or not a total hash rate declared at a particular point in time is true. You should also look for any signs that may show if an operator may be using lower payout schemes. You want to be sure those fees are worth your time as well. 

3. Pool Payout Scheme

If pools don’t have real-time dashboards providing transparency, you might consider using another one instead. In case you use low-end hardware mining devices, avoid pools with higher thresholds for making payments. This will lead to a substantially less computational output. Ultimately, it will then result in decreased earnings per hour or day, depending on the amount of effort put into it. The majority of the pools use pay-per-last-n-shares (PPLNS) or pay-per-share (PPS) methods when determining payment schemes. If PPS is used then fixed amounts are paid per submitted share of work. On the other hand, PPNS includes both shares accepted during previous intervals and new shares. Generally, paid-outs are made once work is submitted. But some make partial payments before submission depending on how long they were last submitted.

4. Mining Pool Stability 

Multiple factors should be considered before joining a pool. One of these is the stability of the pool. Stability can be assessed by looking at the history of any downtime which may have affected mining ability and profitability. Many pools have support pages in place where you can find discussions, tips, and announcements that could give a clue into any past stability issues. You can also search other internet sources for reports on whether or not there were ever any downtimes with a specific cryptocurrency mining pool in the past. However, keep in mind they might not always be trustworthy because cryptocurrency itself is still new enough. Valid information can sometimes be hard to come by given how many people are investing in it at one time, which also makes scams more common.

5. Pool Fees

Nearly all pools require fees but some operate without them. For example, Slush charges a pool fee of 2 percent of your reward. On the other hand, P2Pool has no fees but probably won’t provide as much hashing power. So, be sure to review the fees charged by different pools to identify one with the better offer and functionality, considering their mining size and power.

That said, ensure to weigh the features and other aspects of various mining pools. This will enable you to reasonably pick the right pool that works perfectly for you and your budget. Any crypto trader with the necessary equipment can join a pool and begin mining digital currency. In fact, you can join a pool and use your personal computer, provided its GPU is capable. The only setback is that gains will come much slower. Maybe this can be a good place to start for beginners or people who just want to make a few dollars every month. A mining pool will help to increase your rewards, but you have to choose your pool reasonably.

Advantages of a Mining Pool

Mining pools are advantageous to those who participate in them in various ways. The main gains are:

  1. One of the main advantages is they allow the participants to make a profit that individually would take much longer. 
  2. Another advantage is that a pool maintains scalability by increasing mining power through concentration. 
  3. Pools are also beneficial in the sense that all miners participating in the pool receive a share of profits according to their contribution to mining power, whether large or small.

On the downside, there is reliance on a centralized organization. Some have been found to modify the earnings of members. Others keep all mined rewards until they reach a 100% satisfaction threshold at any given moment in time.

Conclusion

Mining gets increasingly popular because of the invention of high-speed devices that are compatible with home or personal computers. Many investors have realized that the possibility of making more profits by mining on their own is diminishing. Subsequently, many are turning to mining pools to earn more without investing a lot in their computing power. The earnings of a pool come with their cost as well. Profits made through combined mining are split equitably among pool miners. Nonetheless, mining pools are proving to be more profitable as they make it quicker to earn rewards that would have otherwise taken long to make individually. Therefore, choose your pool wisely and make a significant contribution to maximize profitability.

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