A Mining Pool is simply a collection of miners working together trying to increase the profitability of their returns.
There are other categories of mining available, but for the purpose of this guide, we’ll be narrowing it down to the pool mining, how they operate and also the profitability of this category of mining.
So, relax and let’s proceed.
1 Getting Started
Cryptocurrency mining in its basic terms is the process of verifying and adding transactions to the blockchain public ledger and at the same time, releasing new cryptocurrency into the system. The process involves calculation-intensive, puzzle-solving-like computation process that requires high processing power along with high electricity consumption. The miner who first solves the puzzle gets to place the next block on the blockchain and claim the rewards. Rewards include the miner becoming the owner of the newly released bitcoin, or getting fees linked to the transactions performed in the block.
As the difficulty in mining cryptocurrencies increased due to the high level of computational power required, investors overtime have conglomerated together to pool resources in order to benefit from the reduced rate of resource consumption, and at the same time, increase their chances of earning the rewards. The increase in computational power can often be too expensive for a solo miner to handle as it could result in higher energy costs or the requirement of more specialized hardware which most often are too expensive for solo miners. Miners therefore form collectives’ in-order to better limit the cost of their mining activity.
Pool mining allows you to work together with other people interested in mining. In a pool mining, all participants that are mining within that single pool agree that if one of them find the cracks to the block in form of mathematical equations that allows them to earn reward, they’ll share rewards with everyone.
HOW MINING POOLS WORK
Mining pools work similarly to the diversification of an investment portfolio, where they spread out the risk of volatility. In a mining pool, groups of miners team up to share processing power to solve these algorithms, while also splitting the block reward profits accordingly. While this mechanism may not be as profitable as doing it yourself, it does spread the risk and reduce the energy requirements for your mining rigs.
A mining pool essentially works as a coordinator for the pool members. The functions involve managing the pool members’ hashes, looking for rewards through pooled efforts of available processing power, recording work performed by each pool member, and assigning reward shares to each pool member in proportion to the work performed after suitable verification.
The pool may also charge a fee from each member miner.
Work for each pool member can be assigned in two ways. The traditional method which involves assigning members a work unit. it comprises of a particular range of nonce, the number that blockchain miners are computing for. Once the pool member completes the work on the assigned range, he places a request for a new work unit to be assigned.
A second mining method allows pool members the liberty to pick and choose as much work as they like without any assignment coming from the pool. The methodology ensures that no two members take the same range, just like no two gold diggers should explore the same piece of land.
Block rewards for miners vary from currency to currency. Each cryptocurrency may have a different method of mining that either requires more processing power (and hence more energy requirements) to verify a block. The two main mining strategies that have been used, called proof of work and proof of stake.
Mining pools are essentially set-up to mine cryptocurrencies that uses the proof of work algorithm, as this method of validating transactions comes with excess energy consumption and also complex mathematical puzzles as compared to other algorithms like the proof of stake.
There are multiple mechanisms for dividing up the block rewards given when a block is successfully verified. The main two that are exercised are Pay-Per-Share and Full Pay-Per-Share (PPS and FPPS). The PPS model rewards miners based on each piece of the cryptographic algorithm that is solved. In other words, based on how much of the algorithm your CPU’s were able to solve, the more block reward you will receive. This model is more consistent with PoW protocols.
The other option, FPPS, is more in line with PoS mining organizations. This structure acts how it sounds, giving miners a full portion of the block reward as well as the transaction fee that is associated. The transaction fee is calculated over the amount of time it takes to solve and then added to the block rewards as normally calculated by the PPS structure. Many experts argue this is the best way to keep miners honestly incentivized and to keep profits among the community rather than the elite.
In the next page of this guide, we'll be reviewing the most prominent mining pools, and also the pros & cons of participating in a mining pool. Read on