What Is Cryptocurrency Mining?

Cryptocurrency mining is the process through which transactions are verified and added to a blockchain public ledger. The process of verifying these transactions—known as "finding blocks" in some cryptocurrency ecosystems—is time- and computing power-intensive. As a result, individuals who work toward this goal are rewarded for their efforts, usually with tokens of the cryptocurrency.

Understanding Cryptocurrency Mining Pools

While the rewards of mining appear lucrative, the process is complex. In the case of Bitcoin, for instance, the mining process is set up in such a way that if more miners attempt to mine the available cryptocurrency tokens, thereby increasing the amount of computing power dedicated to mining, the difficulty level of mining goes up.

Add to this the prospect of having to spend hundreds or even thousands of dollars on an expensive and specialized mining rig, as well as the cost associated with electricity, and individual miners often do not find cryptocurrency mining to be a profitable venture.

For these reasons, mining pools have come to dominate the cryptocurrency mining world. They act as a group of miners who combine their resources over a network and jointly attempt to mine digital currency 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.

Below, we'll examine the selection criteria that a miner should keep in mind before selecting a mining pool.

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 of bitcoin.

Similarly, a pool may not support the use of any and all mining software packages, and a miner may need to specific 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. Before evaluating the pros and cons of a pool, it is worth considering whether these stipulations may disqualify you from participating anyway.

2. Task Assignment Mechanism

Mining 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 across those subgroups.

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 more difficult tasks to stronger individual miners and less difficult ones to weaker miners, thereby facilitating relatively even communication frequency. 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 obligations of the mining pool operator that must be performed fairly in order to ensure transparency and trustworthiness among the mining members. For instance, how would a miner know whether 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 this required transparency. Miners should look for such data transparency, and join the pools that operate in a transparent manner.

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 as a result of 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.

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, low-payout scheme may opt for a larger pool.

All this being said, a mining pool's size does reflect 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 suggests that 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 an important consideration in maintaining 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.

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.