What is a Mining Pool?

A mining pool is a joint group of cryptocurrency miners who combine their computational resources over a network. 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 and is rewarded with cryptocurrency tokens as a result, the mining pool divides up these rewards to individuals who contributed according to the proportion of each individual's processing power or work relative to the whole group. In some cases, individual miners must show proof of work in order to receive their rewards.

Key Takeaways

  • Cryptocurrency mining pools are groups of miners who share their computational resources.
  • Mining pools utilize these combined resources to strengthen the probability of finding a block or otherwise successfully mining for cryptocurrency.
  • If the mining pool is successful and receives a reward, that reward is divided among participants in the pool.

Understanding a Mining Pool

Upon successful completion of the cryptocurrency mining procedure, miners receive a reward, typically in the form of the associated cryptocurrency. In the case of a mining pool, the reward is usually split among the miners based on the agreed terms and on their respective contributions to the mining activity through production of valid proof of work.

Anyone who wants to make a profit through cryptocurrency mining has the choice to either go solo with her own dedicated devices or to join a mining pool where multiple miners and their devices combine to enhance their hashing output. For example, attaching six mining devices that each offers 335 megahashes per second (MH/s) can generate a cumulative 2 gigahashes of mining power, thereby leading to faster processing of the hash function.

Mining Pool Methods

Not all cryptocurrency mining pools function in the same way. There are, however, a number of common protocols which 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 receive shares up until the point at which the pool succeeds in finding a block. After that, miners receive rewards proportional to the number of shares they hold.

Pay-per-share pools operate somewhat similarly in that each miner receives shares for his or her contribution. However, these pools provide instant payouts regardless of when the block is found. A miner contributing to this type of pool can exchange shares for proportional payout at any time.

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 designed to prevent the operators of the pool from cheating as well as the pool itself from failing due to a single central issue.

Benefits of a Mining Pool

While success in individual mining grants complete ownership of the reward, the odds of achieving success is very low because of high power and resource requirements. Additionally, because many popular cryptocurrencies have become increasingly difficult to mine in recent years as popularity of these digital currencies has grown, mining is often not a profitable venture for individuals. The costs associated with expensive hardware necessary to be a competitive miner as well as electricity oftentimes outweigh the potential rewards.

Mining pools require less of each individual participant in terms of hardware and electricity costs, thereby increasing the chances of profitability. Whereas an individual miner might stand little chance of successfully finding a block and receiving a mining reward, a mining pool dramatically improves the success rate as the cumulative effort leads to better chances of finding a block, though the joint effort comes at the cost of shared reward.

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 profit is lower for an individual taking part in a pool.

A small number of mining pools such as AntPool, Poolin and F2Pool dominate the bitcoin mining process, according to blockchain.com. Although many pools do make an effort to be decentralized, in this way these groups consolidate much of the authority to govern the Bitcoin protocol. For some cryptocurrency proponents, the presence of a small number of powerful mining pools goes against the decentralized structure inherent in bitcoin and other cryptocurrencies.