Bitcoin resembles a lottery much more than you can imagine. You’ve probably never thought of this analogy because the lottery system juggles six plain balls to throw out the winning combination while the blockchain tweaks complex algorithms to handle its “hash mixture.”
However, both Bitcoin and the lottery have the power to keep awake our billionaire fantasies on a similar note — you make the required contribution and wait for the lucky stars. To make it clear, we’re not talking about Bitcoin trading but Bitcoin mining.
Just like the lottery, mining is a lot about guessing the right numbers. However, unlike any other game of luck, Bitcoin mining has changed beyond recognition due to the high demand in the past few years.
Today, we’ll discuss the fascinating transformation of Bitcoin mining and focus on mining pools as the only workable solution for casual investors on the modern mining scene.
What Is Bitcoin Mining?
Bitcoin has already entered the mainstream culture. It’s a widely recognized investment instrument, an attractive speculative asset, and an established payment method. Most of all, Bitcoin is a precious store of value or what we call digital gold. Buying and selling Bitcoin has been simplified to a minimum, and it takes no effort to execute a Bitcoin transaction, thanks to the number of user-friendly crypto services.
However, behind this very popular digital currency, there is a complex system that maintains the transaction flow and ensures high security. The entire Bitcoin machinery lies on the Bitcoin blockchain — an open, community-governed ledger that can be downloaded by anyone who wants to take part in the game.
All participants involved in the process or verifying transactions are called Bitcoin miners. As a reward for their contribution to the blockchain, they receive a certain amount of newly-minted bitcoins. Or, let’s put it this way: miners can earn Bitcoin by helping the blockchain transact with already existing coins. It’s simple, the blockchain doesn’t rely on financial institutions to confirm the transaction validity, so it needs a “working force,” but not in the form of a centralized corporation.
How Does Bitcoin Mining Work?
The process of verifying Bitcoin transactions or mining consists of a few stages. In end-user time, it starts at the very moment you click Send on your Bitcoin wallet interface.
- When you submit the Send request to the blockchain, your transaction travels to a mempool and stays there until there are enough transactions to form a block. On average, one block can accommodate around 500 transactions.
- Once the block is formed, it’s tagged with a unique piece of data. The Proof-of-Work (PoW) consensus mechanism of the Bitcoin network utilizes the SHA-256 underlying protocol, which fragments the block data into a 256-bit output. SHA-256 is a one-way function, and there is no logical approach to transforming the data into its original format.
- At this point, the guessing game kicks off. Miners use special hardware to make as many attempts as possible to increase the chances of finding the result, also known as a nonce. The blockchain adjusts the difficulty level of those functions depending on the number of miners involved in the mining process.
- The winning miner gets the chance to attach the newly-verified block to the blockchain and receives a particular amount of BTC in return.
Finally, note that the block reward is controlled through halving. This means that every 210,000 mined blocks (approximately 4 years) the mining rewards are divided into two.
For illustration, when Bitcoin appeared in 2009, miners could earn 50 BTC per block, but with the halving of 2020, this amount went down to 6.25 BTC. This is how Bitcoin sustains deflationary production on par with the total supply limit of 21 million BTC.
How Has BTC Mining Changed?
The rules of the mining game always remain the same. As implied in the previous section, what changes is the difficulty level of the SHA-256 equation. That’s because Bitcoin’s source code is set to complete a transaction in around 10 minutes. If, for example, the miner’s computer (node) manages to break the 10-min limit, the blockchain resets its mining difficulty. Such readjustment automatically happens every two weeks (2.016 blocks) — at which point the nodes recalculate their positions, resulting in a new difficulty level.
Now that Bitcoin’s popularity has reached unprecedented heights, can you imagine how many ambitious miners are trying their hands at cryptocurrency mining? The key point for success is the power a miner can provide during this 10-minute match since each attempt requires a certain amount of power. The measurement unit for calculating the amount of power your hardware can produce is called hash rate — the number of hashes (attempts) the machine can produce per second.
Now, let’s underline the word “machine.” The thing is that, in reality, the rise in the difficulty level is triggered by the development of mining hardware, which is continuously boosted so that miners can gain a better competitive edge. To give you a better insight into the drastic changes in hardware standards and requirements, we’ve listed the maximum capacity of hardware miners over time:
- Computers for home use with regular CPU — up to 23.9 kh/s
- GPU-upgraded computers — up to 125.7 MH/s
- Bitcoin ASIC (Application-Specific Integrated Circuit) rigs — up to 110 TH/s
The Need for Mining Pools
Even though there aren’t any technical obstacles for you to start mining on your pro-gaming computer, the chances of guessing the golden nonce are mathematically impossible. Bitcoin mining has become a giant corporate industry with mining plant systems that can generate over 1,000 TH /s and have an average production rate of nearly 500 BTC per month. Based on the current difficulty level and market demand, experts suggest that you need to have the capacity to produce over 2.5 quadrillion hashes to mine 1 BTC.
Before numbers scare you off, let us tell you about another approach to Bitcoin mining — mining pools. They’re a different type of mining establishments where individuals join their forces to enhance the odds for success in the mining field.
What Are Mining Pools?
Mining pools are crypto services that allow pool members to fuse their resources, enter the mining session as a team, and share the reward in proportion to the amount of computing power they provided. Pools operate as regulated companies, and for the most part, charge for their services. With respect to their performance, mining pools may “gather” even higher hash power compared to industry-level mining farms.
Pooled mining is an excellent opportunity for individuals and beginners who want to learn the ropers of mining mastery. With a proper trading strategy, it can be also a source of steady income in the long haul. Yes, it may sound that by grouping and sharing, each miner will sacrifice the minuscule chance of winning the “jackpot”, but on the other hand, each miner enhances the chance of winning something.
Interestingly, China used to be an unparalleled leader in the Bitcoin mining industry, occupying 75% of the mining force on a global scale. However, in May 2021, the government removed mining from the list of legal business activities. This shook the mining ground to a certain extent, resulting in a sharp drop in the overall hash rate.
Still, the mining industry promptly recovered from the Chinese crisis, with the USA taking the leading position. Today, there are a few legit services that provide high-quality pooling services, including SlushPool, AntPool, PoolIn, F2Pool, Foundry USA, and Binance Pool.
How to Choose a Mining Pool?
While all of them operate on the same “join-forces” model, mining pools differ in other parameters, such as reward distribution, membership, and commissions.
Reward Distribution
Overall, all mechanisms for distributing the reward are based on the amount of computing power you share in proportion to the size of the award you all get at the end of the mining session. More specifically, these are the most common distribution plans you can find used by popular mining pools.
Pay-Per-Share (PPS)
This method allows miners to receive a guaranteed reward regardless of whether the mining pool will “score” a block in the round or not. So, you won’t have to worry about the pool performance as your contribution will be rewarded anyway.
Full Pay-Per-Share (FPPS)
Apart from the block reward, miners also receive a portion of the transaction fees that users pay when transferring their coins. With the FPPS approach to reward distribution, you’ll also get a secured reward regardless of the outcome, plus a share of the transaction fee if your “team” verifies the block.
Pay-Per-Last N Shares (PPLNS)
As the name suggests, mining pools that apply this distribution method take into consideration the most recent “sequence” of shares at the end of the mining round. Not many Bitcoin mining pools apply PPLNS, but it’s rather popular among ZCash (ZEC) and Monero (XMR).
Shared Maximum Pay-Per-Share (RSMPPS)
According to this distribution technique, the reward counts the total amount of shared computing power, yet focuses on the final hash rate shares. For the miner, this means that the closer the shares are to hitting a new block, the higher the reward they’ll get.
Mining Pool Fees
It’s legit to base your selection on cheaper fees. You can even find pools that charge no fees at all. However, you should know that when it comes to such trading activities, no-fees usually translate into bad service or lack of transparency.
That is to say, mining pools that charge a penny more for their services are those that apply the PPS approach and settle your contribution regardless of the result. So, pool fees serve as a layer of protection for these types of regulated pools.
Finally, make a detailed research on the background and current rating of the mining pool. After all, such virtual packages open a large room for scams and other fraudulent means.
What Do You Need to Join a Mining Pool?
Once you find a trustworthy location for joining mining forces, this is the starter pack you need for mining Bitcoin:
- A Bitcoin wallet address — hardware wallets combined with a user-friendly software interface is always a good solution.
- Mining hardware — as mentioned, GPU upgrades are obsolete equipment when it comes to Bitcoin and other best-selling altcoins like Ethereum (ETH), Bitcoin Cash (BCH) and Litecoin (LTC). An energy-efficient ASIC miner will do a good job — there is a range of various brands like Whatsminer M30S, Antminer D3, Bitmain Antminer S7, Antminer S19, and AntMiner L3, each coming with its own price tag, hash rate, and power consumption rate.
- Mining software — regardless of the hardware power and amount you possess, you need a gateway software platform that establishes a connection with the blockchain.
- Electricity supply plan — make sure that the electricity costs in your area are lower than your estimated profit.
How to Join a Mining Pool?
Now that we considered all factors for a prolific mining experience as part of a group, we can say that joining a mining pool is a pretty straightforward process. Just go through the stages below to become part of a mining pool:
- Visit the official website of the mining pool platform you’d like to join.
- Insert the pool’s stratum address into the specified field of the mining software.
- Link your cryptocurrency wallet to the pool server to receive regular payouts.
- Set up the mining rigs as instructed by the pool.
If for some reason, you’ve decided to switch mining pools, you can do so without hassle only by changing the pool address in your software. The important thing is not to initiate the switch in the middle of the mining session, as you risk missing the upcoming payout. Finally, if you need any help with the hardware configuration, you can reach out to the support team of your mining pool.
A Few Words Before You Go…
Using the opening lottery reference, mining pools can’t bring you the jackpot in this field. Crypto mining has gone too far in industrial-level development, excluding all solo-mining enthusiasts from the dream of finding a new Bitcoin block.
However, joining a mining pool is the best decision you can make as a single miner. Apart from the real potential of stable income, it can be the best teacher of blockchain tips and tricks.