What Is Cryptocurrency Mining?

Cryptocurrency mining is a process through which new virtual coins are discovered on the blockchain network, and through it, the transactions are verified and added to the blockchain public ledger.

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Crypto Mining Pools

While the rewards of mining appear lucrative, the process is complex and time- and resource-consuming. The mining process is set up in such a way that if more miners attempt to mine the available crypto coins, the difficulty level of mining goes up, and vice-versa.

Due to the soaring valuations of virtual currencies, more miners are attempting to mine coins using new-age hardware devices. This development has increased the difficulty levels to record highs. It makes the possibility of successfully finding a crypto coin very difficult for the individual miner, who may have limited resources.

(For more, see How Does Bitcoin Mining Work?

Therefore, mining pools are gaining in popularity. They act as a group of miners who combine their resources over a network and jointly attempt to mine crypto coins with increased cumulative computing power. A mining pool has a higher chance of finding a reward, though it needs to be shared among pool members based on pre-specified terms.

Investopedia examines the selection criteria that a miner should keep in mind before selecting a mining pool, along with examples of popular mining pools. 

1. Infrastructure Compatibility

With hundreds of mining devices already available on the market and with new-age advanced devices hitting stores every day, it is important to check whether the mining device you use is compatible with the pool requirements. For example, Slushpool, one of the oldest mining pools, clearly advises against the use of CPU, GPU, or smartphone-based mining.

Similarly, a pool may not support the use of any and all mining software packages, and one may need to use only the software that is compatible with the pool. Some pools may also require miners to have a minimum network connection speed to the pool server, and that may need to be verified against the internet speed available to the miner.

2. Task Assignment Mechanism

Various pools use different methodologies to assign work to miners. Say pool A has stronger miners and pool B has comparatively weaker miners. A pooling algorithm running on the pool server should be efficient enough to distribute the mining tasks evenly.

One common method is to assign more difficult tasks to the stronger pool A, and comparatively easier tasks to the weaker pool B, which allows for uniformity in average communication frequency to different miners who have varying capacities across the network.

For example, Slushpool uses a specially designed algorithm called VarDiff (Variable Difficulty Algorithm), which “assigns exactly so much work to each miner that allows it to send results back to the pool 16 to 20 times per minute.” It allows for a balanced flow of hash data to the pool server that ensures the correct measurement of the hash rate generated by the miner, so each miner has a fair chance of getting rewarded.

Before joining a mining pool, a miner should pay attention to uniformity in hash tasks that get assigned by the pool server irrespective of the mining power of a participant’s device. Imagine joining a pool that gives priority to high-speed devices. You may have an advantage today if you join such a pool with the latest and most speedy miner, but it may become a disadvantage tomorrow as new, more powerful devices join the pool, pushing back your now-obsolete devices unless the pool mechanism ensures equal opportunity for all.

3. Pool Transparency by Operator

There are certain tasks that are performed by the mining pool operator that needs to be performed fairly to ensure transparency and trustworthiness among the mining members. For instance, how would a miner know that the total hash rate that is being declared at the pool level is fair, or whether the pool operators are not taking the participant miners for a ride by quoting lower payouts? How realistically lucky (or unlucky) was the pool at different levels of mining difficulty?

Mining pools implement various measures, like offering a real-time dashboard view to miners, to bring in the required transparency. Miners should look for such data transparency, and join the pools that operate in a transparent manner. For instance, Slushpool offers a “Hash Rate Proof” that aims to collect and authenticate more data with unique features that can help miners get a fair answer to questions that relate to the pool operator’s working.

4. Payout Threshold and Frequency

If you have low-end hardware devices, you should avoid pools that have higher thresholds for making payments. Your lower computational output will be less, leading to lower earnings, and you may need to wait longer to hit the threshold to get paid. The same applies to the payment frequency of the mining pool.

5. Pool Stability and Robustness

Another important factor to consider before joining a pool is the assessment for its security. Does the pool offer a secure connection or an open connection? Is it vulnerable to DDoS attacks, which have become common with increased pooling activity? And if hit by hackers, can the mining pool withstand and repeal the attack? 

6. Pool Fee Structure

Along with pools that charge a nominal fee to participants for using the mining pool services, there are pools that charge no fee at all. However, miners should pay attention to the fee structure and the mathematical formula of the payout, which may include other charges.

Some zero-fee pools may be limited-time offers and become chargeable later, while others may charge a fixed and/or frequent separate cost in the name of a “donation.” Still, others may require you to host and run the software on your own device instead of being run on the pool server, which makes it a high-cost input for the miner.

Does Size Matter?

Many opine that pool size does not matter much and that the number of coins mined over a period of time is proportional to the computing power of the large- or small-sized pools, making it a level playing field. But there is a catch: time does matter!

Larger pools have a higher probability of finding blocks regularly owing to their larger computing power, while smaller ones may need to wait longer. Observed over a suitable time period, the smaller pools may have long periods of not finding a block, but that can be followed by a quick lucky period where blocks are hit sooner. Essentially, the size of the pool does not matter for finding a block over longer periods of time, and the success rate remains same across differently sized pools.

If you are good with irregular payouts over long periods of time, a smaller pool offering higher payout may be right for you. In contrast, someone who needs steady income with a high-probability, a low-payout scheme may opt for a larger pool.

However, pool size does indicate its trustworthiness to some extent. Despite all the positive and negative feedback posted online about a pool, a large number of active miners holding on to that pool indicates they continue to trust that pool. 

Supporting Decentralization

While it may be tempting to pick a popular mining pool by its large size, the underlying blockchain concept recommends that the network is better maintained in a truly decentralized manner if a large number of smaller pools are used for mining rather than a smaller number of large pools.

This is important to maintain a healthy state of the overall blockchain network and to avoid any risky concentration of hashing power through a few large-sized pool servers. Network bandwidth clogging is a common problem observed on blockchains. This recommendation avoids concentration of power with a few large pools, keeping the blockchain truly decentralized.

The Bottom Line

There's a popular joke in the cryptocurrency world that goes like this: “Q. Which pool gives the maximum rewards to the miners? A. The one with the maximum luck!

Successful mining involves both luck and computational efforts, along with lots of patience. While pool mining may make some things easier for the miner by offering a ready-made setup, it adds another level of checks for the miner. Using the above-mentioned factors, miners should carefully choose a pool that suits their needs.