What are Mining Pools?

Welcome to Soldex academy, your number one source for crypto and DeFi education.

Imagine you want to go into the gold mining business in a gold mine in Nevada. Now you can decide to buy every piece of equipment you need and go mine on your own or you can decide to pool your resources together with other gold miners to form a gold mining pool. Every gold bar you find will be yours if you choose to go mine in isolation. However, you will have fewer chances of finding gold because you are isolated.

But if you decide to pool with other miners, although you’d have to share any gold you find with others, there are more chances of mining gold, and you’d also partake in golds found by other miners. So long as you show proof that you were mining alongside them.

What mining is?

Cryptocurrency mining, in the context of bitcoin, is the competitive process where miners try to solve mathematical puzzles to verify and add new transactions to the bitcoin blockchain. The miner who successfully mines a block is awarded some bitcoins and the transaction fees of that transaction. However, because of the recent growth of the Bitcoin blockchain, it has become increasingly difficult to mine cryptocurrencies. This means that a single miner has very little chance of solving the mathematical puzzles independently. Here’s where the mining pool comes in. Instead of miners mining in isolation, they decided to form a pool of miners trying to solve the puzzles together. A mining pool is a group of miners acting as a team to find blocks in the blockchain. The miners pull their resources together, increasing their likelihood of solving a block. Mining pools increase the chances of solving blocks and earning rewards even though the pool members must share the rewards earned. A single miner may spend years trying to solve blocks in the blockchain successfully, but teaming up with other miners increases the success rate.

How do mining pools work?

Mining pools enable miners with low-performance hardware to team together and compete with mining farms with high-performance farms. Mining pools aggregate hashing capabilities of different miners, increasing the probability of solving blocks and being rewarded. Since a group of miners work together, all rewards must be distributed among everyone based on the pool’s sharing mechanism. Pool members are rewarded based on how many accepted shares they contributed to solving the next block. A share is defined as the amount of work a miner puts into solving a block. It can either be accepted or rejected by the pool. Share is accepted when a miner’s contribution positively impacts the pool’s chances of finding a new block. But a share is rejected when the miner’s work did not contribute to the pool’s chances of solving a new block or when their computational power is not submitted on time. Different mining pools have different sharing mechanisms.

The most common sharing mechanism is PPS. This stands for Pay Per Share. With PPS, miners are paid instantly based on the number of accepted shares submitted. They do not need to wait until a successful block is mined. Instead, they get paid based on their contribution to the average hash rate required to mine a block.

Advantages of a mining pool

Mining pools are popular for a reason. They offer huge advantages over solo mining. Some of these advantages are:

1. Pool mining generates a steady income. A miner who is part of a pool is sure of a steady income compared to a solo miner who may solve a block once in a long while.
2. Several mining pools offer miners the ability to mine more than one cryptocurrency.
3. Mining pools are more cost-effective than mining in isolation.
4. Pool mining is easier to set up as the admin of the pool may handle some of the work.

Cons of Mining pools

Despite the numerous pros, mining pools have some cons too.

1. Miners must pay fees for being part of a pool. This further reduces their income.
2. Miners in a mining pool must trust the pool owner not to swindle money from them.
3. Mining pools may be subject to attacks.
4. You give up some of your autonomy by joining a pool and must follow the terms of the pool.
5. Because mining pools dominate the mining process, this goes against the decentralized structure of bitcoin.