Individual crypto miners often find it challenging to compete in today’s mining sector, as the difficulty of mining new coins rises along with the growing popularity of cryptocurrencies. To stay relevant in this increasingly corporate-focused industry, crypto miners often resort to pool mining. This article discusses the concept of pool mining and how it can boost the output of miners.
Why Is Solo Mining a Less Profitable Venture?
Like actual mining, crypto mining is an energy-intensive venture. The difference is that crypto miners carry out their business digitally by using computational resources to solve complex mathematical puzzles.
The first miner to solve the puzzle gets to verify the latest transactions and add a new block to the blockchain. In turn, the miner receives a reward in the form of newly minted coins and the fees charged on each verified transaction. As such, the success of a miner depends on their ability to solve these puzzles before other miners do.
However, as mentioned earlier, this process is becoming increasingly capital- and energy-intensive. Blockchains that use the mining model to secure their networks and mint new coins often tend to update mining difficulty and reduce rewards over time. The mining difficulty increases when more miners are active on a blockchain.
Therefore, miners have to acquire expensive, specialized mining equipment to remain competitive. The need to install cooling systems incurs additional expenses. Ultimately, miners must pay exorbitant electricity bills to run and cool their equipment. With this in mind, a mining operation only remains profitable when the revenue generated is significantly higher than the money spent on electricity and mining rig maintenance.
To make matters worse, the influx of large, often corporate, miners makes it a lot more challenging for a solo miner to generate profit. These large miners have the capital to build mining farms (facilities designed to house many mining rigs) in regions with cheap electricity and a predominantly cold climate. By doing so, they effectively increase their mining power while reducing the overhead costs of running a farm.
As a result of these factors, solo mining is quickly becoming redundant since the chances of finding new blocks are slim, and the costs continue to increase. Because of that, mining pools are considered a more promising approach than solo mining.
What Are Mining Pools?
Due to the constraints of solo mining, the mining sector has devised a method of combining the hash power of individual miners to boost the probability of finding new blocks. This solution is what we call a mining pool. Think of it as a coordinated network of individual miners that have agreed to pool their computing power to generate output levels similar to those associated with large farms or even exceed them.
The rewards generated by these pools are shared between their participants, resulting in lower earnings for each miner. However, if we consider how unlikely it is for solo miners to mine even a single block, receiving a smaller but much more consistent profit does not seem to be a deal-breaker. The regularity of payouts makes pool mining more sustainable and appealing.
What Are the Functions of a Mining Pool?
A mining pool takes up the role of a coordinator by assigning individual work units to each of its members. It also analyzes and records the contributions of pool members, concentrates and directs the hash power of all participants toward finding new blocks, and rewards members according to their share of the contributed power.
How Does a Mining Pool Assign Work?
Mining pools assign unique work units to each pool member to avoid overlapping work. Each successfully computed work unit contributes to the overall chances of the pool mining a new block. Once a miner completes the assigned work unit, they can request more. The computing capacity of each member determines the volume of work assigned to them.
An alternative method is to allow pool members to choose the volume of work they want. With this approach, miners have the liberty to pick work units as long as they do not clash with other members’ range of tasks.
How Do Mining Pools Distribute Rewards?
Mining pools use several methods to share rewards. Regardless of the type of sharing formula in play, your projected reward boils down to your share of the output of the mining pool.
Note that the work shares can be accepted or rejected by the pool. Accepted shares indicate that the contribution of a pool member has positively impacted the pool’s chances of finding a new block.
On the other hand, rejected shares denote work that had no bearing on the success of the mining pool. Even if a miner completes assigned tasks successfully but cannot meet the submission deadline, their output fails to impact the pool’s coin discovery process, and so their shares are rejected.
Understandably, mining pools reward members based on their accepted shares. It is advisable to fully understand the sharing formula of a mining pool before joining it or connecting your rig.
Below are two of the sharing methods commonly used by mining pools.
- Pay-per-Share (PPS): This offers instant payouts as members can withdraw earnings based on their accepted shares. Hence, as long as the mining pool duly recognizes your contributions, you do not need to wait until a new block is mined before cashing out.
- Proportional (PROP): In this case, shares are disbursed at the end of each mining round. The amount you will receive depends on your share of the pool’s hashing power.
What Are the Pros and Cons of Mining Pools?
It is safe to say that mining pools offer individuals a more scalable method of participating in crypto mining. By combining computing power, the constituent miners can achieve higher success rates without acquiring more mining rigs or paying more for electricity.
On the downside, the rewards generated by mining pools are shared. Therefore, miners receive diminished rewards. However, in the long run, pool mining tends to be a more consistently profitable venture than solo mining.
Another concern about mining pools is that the rise of a handful of large pools has resulted in the potential centralization of the mining sector. Together, these mining pools can disproportionately influence the governance of crypto networks.
Ultimately, pool mining is an integral component of the crypto mining sector. It provides an enabling environment where individual miners can still compete with large operations and make a profit. The architecture of mining pools and the advantages offered to small miners are clear indications that pool mining will remain a relevant concept in the crypto industry.