Mining Pool: Definition, How It Works, Methods, and Benefits

What Is a Mining Pool?

A mining pool is a group of cryptocurrency miners who connect their mining machines over a network to boost their chances of earning the reward for opening a new block.

New blocks are opened when a miner discovers the solution to the problem the entire blockchain network is trying to solve. This process is time-consuming, energy-intensive, and requires a computer that can generate and check trillions of hexadecimal numbers per second.

Because it can take years to become profitable after purchasing, running, cooling, and maintaining mining machines capable of this, joining a mining pool is the most affordable way to increase the odds of receiving a cryptocurrency reward.

How a Mining Pool Works

Individually, participants in a mining pool contribute their processing power toward the effort of finding a block. If the pool is successful in these efforts, they receive a reward, typically in the form of the associated cryptocurrency.

Rewards are usually divided between the individuals who contributed according to the proportion of each individual's processing power or work relative to the whole group, usually called shares. In most cases, the pool's software takes care of calculating share payouts and sending them to the users' wallets.

Mining Pool Methods

Not all cryptocurrency mining pools function in the same way. However, there are a few common protocols that govern many of the most popular mining pools.

Proportional mining pools are among the most common. In this type of pool, miners contributing to the pool's processing power send shares of work to the pool until the point at which the pool succeeds in finding a block. Miners then receive rewards proportional to the number of shares they submitted for that block.

Peer-to-peer mining pools aim to prevent the pool structure from becoming centralized. As such, they integrate a separate blockchain related to the pool itself and are designed to prevent the pool operators from cheating and the pool itself from failing due to a single central issue.

Payout Schemes

There have been many different types of payout schemes tried by many pools in the past, but the majority of pools now use one of four:

• Pay-Per-Share (PPS)
• Full-Pay-Per-Share (FPPS)
• Pay-Per-Share-Plus (PPS+)
• Pay-Per-Last-N-Shares (PPLNS)

PPS is a fairly simple payout method—you're paid for the shares or blocks you contribute to the pool.

PPS+ and FPPS are generally the same thing—you receive a proportional amount of the reward based on the quality of the shares you provided, and the pool pays a transaction fee reward.

PPLNS might be slightly more confusing—when a block is "found," the pool software locates the last blocks you contributed after the last and new winning blocks were found. The number of trial blocks (or shares) you contributed between that time dictates your payout. This usually means you'll need to stay connected to the pool until a block is found. If you disconnect between blocks, you'll likely lose your contributions and payout.

Benefits of a Mining Pool

While success in individual mining grants complete ownership of the reward, the odds of achieving success are very low because of high computational power and resource requirements.

Many cryptocurrencies have become increasingly difficult to mine, and the competition for mineable cryptocurrencies has increased tremendously. Mining pools give everyone a fighting chance against (or a chance to work with) those who have built vast, ultra-expensive mining farms.

Mining also pools require less of each participant in terms of hardware and electricity costs, thus increasing the chances of paying any associated expenses and profiting.

Disadvantages of a Mining Pool

By taking part in a mining pool, individuals give up some of their autonomy in the mining process. They are typically bound by terms set by the pool itself, which may dictate how the mining process is approached. They are also required to divide up any potential rewards, meaning that the share of earnings is lower for an individual participating in a pool.

A small number of mining pools—AntPool, Foundry, ViaBTC, F2Pool, and Binance Pool—dominate the Bitcoin mining process, according to Blockchain.com. Although many pools try to be decentralized, these groups consolidate much of the Bitcoin blockchain.

For some cryptocurrency proponents, this centralization goes against the intended decentralized structure Bitcoin and other cryptocurrencies are supposed to represent. However, it has become necessary for users to participate in pools if they want to receive rewards and help the blockchain function.

The Bottom Line

Because cryptocurrency mining and rewards are based on who finds the solution first, the network has become dominated by a few large groups. These mining pools are generally the only way a solo or smaller hash-rate miner can earn crypto because they hash at a significantly higher rate.

If you're looking into crypto mining to supplement your income or earn some as an investment, it is worth joining a pool to reduce your overall costs and increase your chances. Be sure to investigate and understand their payout schemes and requirements before jumping into the pool.

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