Table of contents

• Introduction

• What is a mining pool?

• How mining pools work

• Pay-Per-Share (PPS) Mining Pool

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

• Do mining pools pose a threat to decentralization?

• Summarize

Introduction

Mining is an important part of the security measures of proof-of-work blockchains. Without the intervention of a central authority, participants can calculate the hash value of specific attributes to ensure the security of the cryptocurrency network.

When Bitcoin was first introduced in 2009, anyone could use a regular computer to compete with miners to calculate the valid hash value of the next block. At that time, the mining difficulty was low, and the hash rate in the network was not high, so no specialized hardware was needed to add new blocks to the blockchain.

As a result, computers that could calculate the highest number of hashes per second were able to mine more blocks, which led to a major shift in the ecosystem. Miners began to try every possible means to gain a competitive advantage.

After traversing various hardware such as CPU, GPU, FPGA, etc., Bitcoin miners finally chose application-specific integrated circuits (ASICs). On these mining rigs, you can’t browse Binance Academy or log in to Twitter to post cat photos.

As the name implies, an application-specific integrated circuit (ASIC) can only perform a single task: calculating hash values. These devices are built for a specific purpose and are extremely powerful, and they have gradually replaced other types of Bitcoin mining hardware.

What is a mining pool?

However, no matter how good the hardware performance is, it cannot solve all problems. Even if you run multiple high-performance application-specific integrated circuits (ASICs), it is just a drop in the ocean of Bitcoin mining. Even if you spend a lot of money to build hardware equipment and consume huge amounts of electricity, the probability of mining a new block is still very slim.

There is no guarantee of when you will receive block rewards, or you may not receive any at all. If you want to continue to receive income, you may have better luck in joining a mining pool.

Assuming that you and nine other participants each have 0.1% of the total hashing power of the network, this means that you can expect to mine 1 block out of every 1,000 blocks on average. It is estimated that 144 blocks are mined per day, so you can mine about 1 block per week. Depending on your own financial capabilities and investment in hardware and electricity, this "independent mining" approach may be a viable strategy.

However, what if the income is not enough to make a profit? Then you can work together with the 9 miners mentioned above. The hash power of everyone added together will have 1% of the hash rate of the entire network. In this way, the chance is increased to "one in a hundred", and 1 to 2 new blocks can be mined every day. Then, the cooperative miners share the rewards equally.

In short, what we have just described is a kind of "mining pool". Mining pools bring relatively stable income to miners and are now widely used.

How mining pools work

Mining pools usually organize miners to mine through coordinators. Coordinators supervise miners to use different values ​​to find random numbers to ensure that they do not waste hash power on creating the same block. Coordinators are also responsible for distributing rewards and paying fees to participating miners. Currently, there are many different ways to calculate the workload of each miner and the corresponding reward.

Pay-Per-Share (PPS) Mining Pool

Pay-Per-Share (PPS) is the most common reward distribution mechanism, in which each "share" submitted by a miner corresponds to a fixed amount of reward.

"Shares" are used to record the hash power contributed by miners. The reward corresponding to each "share" is relatively low, but will gradually increase over time. Please note that the "share" here is not the effective hash value in the network, but only the hash value that meets the matching conditions set by the mining pool.

In the PPS mechanism, miners can get rewards regardless of whether the mining pool produces blocks. However, the mining pool operator needs to bear the risk, so a certain fee will be charged. This fee can be collected from the miners in advance or deducted from the subsequent block rewards.

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

Pay-Per-Last-N-Shares (PPLNS) is another popular distribution mechanism. Unlike PPS, PPLNS only rewards miners when the mining pool mines a new block. After the mining pool mines a new block, the mechanism will verify the N value of the previously submitted "shares" (the N value varies depending on the mining pool). The "shares" submitted by the miner are divided by N, multiplied by the block reward, and finally the share of the mining pool operator is deducted to get the miner's reward.

Let's take an example: if the current block reward is 12.5 bitcoins (assuming there are no transaction fees), the operator charges a 20% service fee, and the miner ultimately receives a reward of 10 bitcoins. If N is 1 million, and the miner contributes 50,000 "shares", the miner's reward is 5% of the block reward (that is, 0.5 bitcoins).

Although similar mechanisms are emerging in the market, the above two are the most common. Please note that although we have been discussing Bitcoin, the most popular Pow cryptocurrencies have mining pools, typical examples include: Zcash, Monero, Grin, Ravencoin, etc.

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Do mining pools pose a threat to decentralization?

Reading this article may sound some alarm bells in your head. Isn’t the reason why Bitcoin is so powerful because a single entity cannot easily take over the blockchain? What if someone controls the majority of hash power?

These are questions worth exploring. If a single entity controls 51% of the hashing power in the network, it can launch a 51% attack. If successful, the attacker can delete transactions and reverse completed transactions. This attack will devastate the cryptocurrency ecosystem.

Do mining pools increase the risk of a 51% attack? The answer is: Maybe, but the probability is very low.

24-hour hash rate breakdown by mining pool on April 16, 2020. Source: coindance.com

Theoretically, it is possible that the top four mining pools could collude and hijack the network. However, this operation does not make much sense. Assuming the attack is successful, the price of Bitcoin will plummet due to the damage to the system. The end result is that the tokens mined by the mining pools will depreciate.

Furthermore, mining pools are not necessarily equipped with mining equipment. Entities point their equipment to the coordinator's server, but the server is free to migrate to other pools. For miners and pool operators, keeping the ecosystem decentralized is a top priority. Only when mining remains profitable can everyone share a piece of the pie.

In some cases, the size of a mining pool’s growth is indeed a cause for concern, and mining pools (and the miners who participate in them) will generally take steps to reduce their hash rate.

Summarize

With the introduction of the first mining pool, the cryptocurrency mining market has been completely overturned. Miners who want to obtain long-term stable income have become the beneficiaries. As various new mechanisms continue to emerge, everyone will find the way that suits them best.

Ideally, Bitcoin mining will become more decentralized. At the current level, it can only be called "sufficiently decentralized". In any case, no one person can obtain the majority of hash rate from a single mining pool for a long time. Participants should prevent this threat. After all, Bitcoin is operated by users, not miners.