When Bitcoin miners move forward, they form mining pools, but success doesn’t always take care of itself. In the blockchain realm, mining outcome doesn’t depend on luck or mining capabilities but on the amount of processing power miners can provide.
Regardless of the business domain, there is no doubt that teams have better chances of success than solo players. However, in the sphere of cryptocurrencies, mutual relationships work a bit differently. To understand why miners join forces to ensure a steady Bitcoin income, you must first understand some basic blockchain concepts: What is the purpose of crypto mining? Why is mining so expensive today?
Once you get a brief insight into the blockchain fundamentals, we can direct our focus on the best mining pool solutions available on the market today.
What Is Cryptocurrency Mining?
The most widespread definition of crypto mining is that it’s a method of earning free bitcoins by solving complex math equations. To a certain extent, this isn’t wrong, except for the fact that “free bitcoins” aren’t really free, and math equations aren’t solved but guessed at.
However, let’s take one step at a time. Bitcoin and other cryptocurrencies reside on a blockchain — an open, immutable ledger that facilitates transactions and tracks cryptocurrencies within the network. It’s distributed and replicated across all participating computers, called nodes. This means that miners are nodes too.
A very important thing to remember is that the main purpose of crypto mining isn’t to create new coins. In its very nature, mining is a process of validating transactions and recording the verified data on the ledger with impeccable security.
And that’s the core of decentralization toward which cryptocurrency strives. The blockchain doesn’t rely on a centralized institution to ensure a safe transaction. Instead, blockchains (at least Bitcoin and other first-gen altcoins) utilize an algorithmic mechanism called Proof-of-Work (PoW) that involves all nodes as active participants in the process. By doing so, the blockchain independently prevents double-spending, establishes ultimate transparency, and ensures that cryptocurrencies can’t be duplicated within the network.
How Does Crypto Mining Work?
The mining process itself varies from one blockchain to another. As Bitcoin is the original digital currency with unparalleled market dominance, we’ll use it as an example.
In a nutshell, when a Bitcoin user initiates a transfer to another user, their computer sends a request message to the network and waits for the blockchain to validate the transaction. The transaction data on the blockchain is organized in blocks, so miners must verify all pending data in the block, record the verified transaction, and add the newly-created block to the blockchain.
The very process of verifying is quite complex. Miners start competing for a chance to guess a code (metadata) that is assigned to the data on the newest block. Bitcoin uses SHA-256 hash cryptography for what we popularly call solving complex math equations, where miners are seeking the value of the original hash called the nonce.
As there is no way to predict the results of SHA-256 hashing, the only method for finding the desired result is to pick the nonce randomly and try a hash. If the attempt fails to give the correct answer, then miners must try again with a different nonce. Consider that Bitcoin nonces are 32 binary digits that can combine into 4 billion numbers, so all this hashing process is like looking for a needle in a haystack.
Eventually, the first miner that comes up with the golden nonce transmits the solution to other miners to confirm the legacy of their work. To acknowledge the “hard work” of the winning miner, the blockchain gives them incentives in the form of new bitcoins. Hence, newly-generated coins are a product rather than an objective of mining.
Why Is Solo Mining Unprofitable?
The Bitcoin software system requires miners to guess a hash that is a binary number under a given threshold size. In practice, this is a block hash that begins with predefined numbers of leading zeros.
As the surge for Bitcoin is rapidly growing and more and more nodes are joining together, the Bitcoin network automatically increases the difficulty level of equations by requiring a larger number of zeros. This increases the number of attempts or hashes necessary to achieve any viable result.
The point is that each attempt requires a certain amount of processing power. At the end of the day, the node that can provide a greater amount of hashing power can process a greater number of hashes per second (hash rate) and has greater chances of finding the desired nonce.
For illustration, the first bitcoins were mined through a home PC with a regular CPU. When Bitcoin got a minimal monetary value, tech-enthusiasts started upgrading their computers with more powerful GPU boards for better results.
From today’s perspective, this hardware equipment seems fully impractical for users to verify a block. The mining game has completely changed with the introduction of ASICs – Application-Specific Integrated Circuits as mining hardware, which are able to offer up to 100 billion times the capacity (hash rate) of personal computers.
So, if you decide to engage yourself in a Bitcoin mining quest, you’ll compete against hundreds of mining farms with tens of thousands of ASIC rigs that operate on the industry level — using special air conditioning to protect the equipment from overheating and other hardware resources. In other words, you’ll never get to validate a single block alone, even if you’re willing to invest in a few high-quality ASIC rigs.
For this reason, both new users and well-experienced individuals give up solo mining and join groups called mining pools.
What Are Mining Pools?
Mining pools are integrated networks of solo miners who’ve agreed to combine their processing power in order to generate outcomes shoulder-to-shoulder with giant mining farms. In pooled mining, all nodes simply combine the hash power of all participants and enhance the probability of discovering new blocks.
It’s simple math. Imagine that you and 4 other pool miners each hold 0.2% of the total hashing power. Provided that approximately 144 Bitcoin blocks are mined per day, you can expect to validate two– blocks per week. If you join your forces, the percentage will multiply by 5, together with your chances of finding a new block.
Pooled mining is a workable plan for every investor who wants to ensure a consistent source of profit. The frequency and transparency of payouts make pools even more attractive for users in the long run.
For a long time, China had been the moving force in the mining industry, with up to 75% of the overall Bitcoin mining taking place there. But after the Chinese government banned mining activities in May 2021, over 50% of the hash rate dropped on a global scale.
However, the mining industry didn’t take long to recover, with the USA taking over the lead as the largest hash-rate generator. The list of mining pools with the highest hash rate is changing very often, but these have been among the top performers for a considerable time: Foundry USA, AntPool, F2Pool, and Binance Pool.
How Do Cryptocurrency Mining Pools Work?
Mining pools operate in a centralized manner as coordinators of miners’ activities. This includes managing the participants’ hashes, recording the performance of each miner, and distributing shares to miners after each successful verification based on their contribution.
Some mining pools charge a participation fee — the pool manager deducts that amount from the miners’ rewards during the payout. Technically, pool fees are the same for all pool members regardless of the contributed hash rate. However, mining pools can differ in some other aspects, such as:
- The way they assign work to each participant — according to the original method, the pool assigns members a workload in a defined range of nonce, and once miners complete the assigned work, they send a request for new tasks. It’s also possible for the pool to give total freedom to the miner to choose the amount of work without a specific assignment.
- Transaction fees — apart from the newly-generated cryptocurrencies, miners also earn profit from transaction fees that the blockchain imposes on transaction participants. In most cases, pools do keep these rewards for themselves, but now that transaction fees have risen considerably, some pools offer a share of fees as well.
However, the most remarkable variation you can notice among different mining pools is the method they use to distribute rewards.
How Do Mining Pools Distribute Rewards?
In general, all applicable methods for reward distribution take into account the amount of mining power the miner has contributed to the network and the size of the block reward won by the mining pool in a single mining round. These are the most frequently used calculations among reputable mining pools:
The PPS method enables miners to earn a secured reward regardless of whether the pool will manage to validate a block in a single mining round or not. This means that regardless of whether the pool performance is excellent or poor, the miner will receive their share based on their contributed power in the process.
Full Pay-Per-Share (FPPS)
This method operates on the same principle as the previous one, but it leaves room for a higher income as it also includes a share of the transaction fees in the payment plan.
Pay-Per-Last N Shares (PPLNS)
According to this method, the mining pool distributes your reward based on the most recent number of shares you contributed at the end of the round. Bitcoin mining pools don’t usually employ this approach, but you can find it with other altcoins such as Monero (XMR) and ZCash (ZEC).
Shared Maximum Pay-Per-Share (RSMPPS)
RSMPPS delivers rewards relying on the total number of contributed power, focusing on the latest hash rate shares. Thus, the closer the contributed shares to finding a new block, the larger the reward you will receive.
Other Factors to Consider When Choosing a Mining Pools
Hopefully, understanding different mining pools will help you decide on the most suitable one based on your personal preferences. However, there are a few other factors to examine before joining a mining pool.
Mining Pool Fees
At first sight, it’ll be an ideal setup if you can avoid paying any fees to the pool. However, zero-fee mining pools can very often cost you more as they’re likely to be a scam or, at least, a signal for questionable service. Mining pools apply fees to protect themselves, especially if they use the PPS method and have to pay the share even if no block is generated during the mining round. Thus, free systems shouldn’t be the deciding factor when choosing a decent mining pool.
Bitcoin Mining Pool or Multi-Currency Mining Pool
As you can notice, our article focuses on Bitcoin mining, as BTC has been the first and the most desirable blockchain product. Its price has been subject to sharp and painful ups and downs but based on the overall attitude towards Bitcoin, its value is expected to reach new breath-taking heights in the years to come. Hence, Bitcoin remains the most attractive virtual currency in the crypto industry.
However, we can’t say that multi-cryptocurrency mining pools aren’t an attractive venue since all other minable cryptos require less mining power for generating new units. Certainly, the lower the mining difficulty, the lower the mining rewards, but now that Bitcoin mining has become a ridiculously expensive business, it won’t hurt to open some room for other promising PoW coins and join an altcoin mining pool. The best BTC mining alternatives include Ethereum (ETH), Litecoin (LTC), Monero (XMR), and ZCash (ZEC). The payout schemes are everywhere the same irrespective of the crypto being mined.
A Few Words Before You Go…
It is safe to say that mining pools offer individuals a more scalable method of participating in crypto mining. By combining computing power, the constituent miners can achieve higher success rates without acquiring more mining rigs or paying more for electricity.
On the downside, the rewards generated by mining pools are shared. Therefore, miners receive diminished rewards. However, pool mining tends to be a more consistently profitable venture than solo mining in the long run.
Another concern about mining pools is that the rise of a handful of large pools has resulted in the potential centralization of the mining sector. Together, these mining pools can disproportionately influence the governance of crypto networks.
Ultimately, pool mining is an integral component of the crypto mining sector. It provides an enabling environment where individual miners can still compete with large operations and make a profit.