List of contents

  • Introduction

  • What is a mining pool?

  • How do mining pools work?

  • Mining pool Pay-Per-Share (PPS)

  • Mining pool Pay-Per-Last-N-Shares (PPLNS)

  • Do mining pools hinder decentralization?

  • Closing


Introduction

Mining, or often also called mining, is an inseparable part of the Proof of Work blockchain. By calculating a hash using specific properties, participants can secure a cryptocurrency network without the need for a central authority.

When Bitcoin first launched in 2009, anyone with an average PC could compete with other miners to guess the valid hash in the next block. It's relatively easy, because the mining difficulty level is still low. There aren't many hash rates on the network, so you don't need special hardware to add new blocks to the blockchain.

It makes sense that the computer that can calculate the most hashes per second will find more blocks. This causes major changes in the ecosystem. Miners are involved in great competition as they fight to gain a competitive advantage.

After moving through various types of hardware (CPU, GPU, FPGA), Bitcoin miners are finally comfortable with ASICs – Application-Specific Integrated Circuits. This mining device does not allow you to open Binance Academy or tweet pictures of cats.

As the name suggests, ASICs are built to do one task: compute hashes. However, because they are specifically designed for this purpose, ASICs perform very well. So, since then, using other types of hardware to mine Bitcoin has become unpopular.


What is a mining pool?

This is all good hardware can do. You can run some high-powered ASICs, but you're just a drop in the ocean of Bitcoin mining. The chances of actually mining a block are pretty slim, even if you've spent a lot of money on hardware and electricity to run it.

You have no guarantee when you will be paid with block rewards, or perhaps you won't even be paid at all. If you're looking for a steady income, it seems you'll have better luck with a mining pool.

Let's say you and nine other participants each own 0.1% of the network's total hashing power. Meaning, on average, you would expect to find one in a thousand blocks. With an estimated 144 blocks mined a day, you'll probably find one a week. Depending on your cash flow and investment into hardware and electricity, this “solo mining” approach could be a viable strategy.

However, what if this income is not enough to generate a profit? Well, you can join the nine other participants we discussed above. If they all combined their hashing power, you would have 1% of the network hash rate. Meaning you'll find an average of one in a hundred blocks, which also means one or two blocks a day. After that, you just have to divide the reward between all the miners involved.

We have just described mining pools briefly. This method is widely used today because it guarantees a more stable income flow to its members.


How do mining pools work?

Generally, mining pools have coordinators who are tasked with managing miners. Ensuring miners use different nonce values, so they don't waste hash power trying to create the same block. This coordinator will also be responsible for distributing rewards to the participants. There are different methods used to calculate the work done by each miner and reward them accordingly.


Mining pool Pay-Per-Share (PPS)

A more common payment scheme is Pay-Per-Share (PPS). In this system, you will receive a fixed amount for each “share” you give.

Contribution or share is a hash used to mark the work of each miner. The payment amount for each share is nominal, but will increase over time. Please note that a share is not a valid hash within the network, it is only used to match the conditions set by the mining pool.

In PPS, rewards will be given to you regardless of whether the pool finds blocks or not. The pool operator assumes this risk, so they will probably charge a fairly high fee, which you will have to pay upfront, or later deduct from the block reward.


Mining pool Pay-Per-Last-N-Shares (PPLNS)

Another popular scheme, Pay-Per-Last-N-Shares (PPLNS). Unlike PPS, PPLNS only rewards miners if the pool successfully mines a block. When the pool finds a block, the last N number of shares sent will be checked (N varies depending on the pool). To get paid, the number of shares you send is divided by N, then the result is multiplied by the block reward (minus operator fees).

For example, if the block reward is currently 12.5 BTC (assuming no transaction fees) and operator fees are 20%, then the reward available to miners is 10 BTC. If N: 1,000,000 and you give away 50,000 shares, then you will receive 5% of the available reward (or 0.5 BTC).

These are the two schemes you will hear most often, although you can find several variations of both. While we're talking about Bitcoin, it's worth noting that most of the other popular PoW cryptocurrencies also have mining pools. For example Zcash, Monero, Grin, and Ravencoin.


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Do mining pools hinder decentralization?

Danger alarms probably went off in your head when you read this article. Wasn't Bitcoin so powerful all along because no single entity controlled the blockchain? What happens if one party gets the majority of hashing power?

Good question. If one party obtains 51% of the network's hash power, a 51% attack can be launched. If this happens, they can censor transactions and reverse old transactions. Attacks like these can cause major damage to the cryptocurrency ecosystem.

Do mining pools pose a risk of 51% attack? The answer: maybe, but most likely not.


Rincian hash rate 24 jam berdasarkan pool

Details of 24-hour hash rate by pool as of April 16, 2020. Source: coindance.com


In theory, the top four pools could collude to hijack the network. But this really doesn't make sense. Even if they were successful in carrying out the attack, the price of Bitcoin would probably plummet because the action would damage the system. As a result, the coins they earn will lose their value.

What's more, the pool has no mining equipment. Participants direct the machines to the coordinator's server, but they are free to move to other pools. It is in the best interest of the participants and pool operators to keep the ecosystem decentralized. After all, they can only make money if mining remains profitable.

There have been cases where a pool has grown to an alarming size. Typically, the pool (and its miners) will take steps to reduce the hash rate.


Closing

The cryptocurrency mining environment changed forever with the introduction of the first mining pool. This mining method can be very beneficial for miners who want to earn more consistent payouts. With the types of schemes available, they are sure to find one that best suits their needs.

Ideally, Bitcoin mining is highly decentralized. But for now, perhaps the appropriate word is “moderately decentralized”. Under no circumstances does anyone benefit from the pool gaining the majority of the hash rate in the long run. Instead, participants will likely prevent it from happening – after all, Bitcoin is not run by miners, but users.