Contents
introduction
What is a mining pool?
How do mining pools work?
Pay-Per-Share (PPS) mining pools
Pay-Per-Last-N-Shares (PPLNS) mining pools
Do mining pools pose a threat to decentralization?
Concluding thoughts
introduction
Mining is an integral part of blockchain security. By calculating hashes with certain characteristics, participants can secure cryptocurrency networks without the need for a central authority.
When Bitcoin was first launched in 2009, any traditional computer could compete with other miners to guess the correct hash of the upcoming block. The reason behind this was the low mining difficulty level. The hash rate was not high on the network at that time. As such, you did not need specialized hardware to add new blocks to the blockchain.
It stands to reason that computers that can calculate the most hashes per second will find more blocks. This caused a major shift in the ecosystem. Miners have engaged in an arms race as they scramble to gain a competitive advantage.
After iterating through different types of hardware (CPUs, GPUs, FPGAs) Bitcoin miners settled on ASICs, application-specific integrated circuits. These mining rigs will not allow you to browse Binance Academy or tweet pictures of cats.
As the name suggests, ASICs are designed to perform one task: computing hashes. But because they are purpose-built they do it incredibly well. Well, actually using other types of hardware to mine Bitcoin has become quite uncommon.
What is a mining pool?
Good hardware is still limited. It can run multiple high-capacity ASICs and still remains a drop in the bucket for Bitcoin mining. Your chances of actually mining a block are very slim, even though you spent a lot of money on your hardware and the electricity needed to run it.
You have no guarantee as to when you will receive your block reward or even if you will get paid for the mining you have done at all. If consistent revenue is what you are looking for, you will have more luck with a mining pool.
Let's say you are among 10 participants and each of you owns 0.1% of the total hashing power of the network. This means that on average, you will find one block in every thousand blocks. With an estimated 144 blocks mined per day, you will probably find one block per week. Depending on your cash flow and investment in hardware and electricity, this “solo mining” approach can be a feasible strategy.
However, what if these revenues are not enough to make a profit? Well, you can join forces with the other nine participants we mentioned. If you all combine your hash power, you will have 1% of the network hash rate. This means that you will find one block in every hundred blocks on average which means one to two blocks per day. Then, you can split the reward and share it among all miners involved.
In short, we have just described the mining complex. It is widely used nowadays because it ensures a more stable profit flow to members.
How do mining pools work?
Usually, a mining pool puts a coordinator in charge of organizing miners. They will make sure that miners use different values for the current time so that they do not waste hashing power by trying to create the same blocks. These coordinators will also be responsible for dividing and paying rewards to participants. There are many different methods used to calculate the work done by each miner and reward them accordingly.
Pay-Per-Share (PPS) mining pools
One of the most popular payment systems is Pay Per Post (PPS). In this system, you will receive a fixed amount for each “contribution” you make.
A stake is a hash used to track the work of each miner. The amount paid per post is small but increases over time. Note that the share is not a valid hash within the network. They simply match the conditions set by the mining pool.
In the PPS system, you are rewarded whether your pool solves a block or not. The pool coordinator bears the risk of loss, so they may charge a large fee – either upfront from users or from the final block reward.
Pay-Per-Last-N-Shares (PPLNS) Mining Pools
Another popular system is Pay for Last N Posts (PPLNS). Unlike PPS, PPLNS only rewards miners when a pool successfully mines a block. When the pool finds a block, it checks the last N amount of shares (N varies depending on the pool). To get your payout, divide the number of stakes you submitted by the value N, then multiply the result by the block reward (minus the coordinator's share).
Let's take an example. If the current block reward is 12.5 BTC (assuming no transaction fees) and the coordinator fee is 20%, then the reward available to miners is 10 BTC. If N is 1,000,000 and you submit 50,000 entries, you will receive 5% of the available reward (or equivalent to 0.5 BTC).
You can find many differences between these two systems, but these are the ones you will hear most often. Note that while talking about Bitcoin, most of the popular PoW cryptocurrencies have mining pools as well, including Zcash, Monero, Grin, and Ravencoin.
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Do mining pools pose a threat to decentralization?
Alarm bells may be going off in your head while reading this article. Isn't it all because Bitcoin is so powerful because there is no single entity controlling the blockchain? What happens if someone gets the majority of the hash power?
These are absolutely valid questions. If a single entity can gain 51% of a network's hashing power, it can launch a 51% attack. This will allow them to censor transactions and reverse old transactions. Such an attack could cause significant damage to the cryptocurrency ecosystem.
Do mining pools increase the risk of a 51% attack? The answer is: maybe, but not likely.
24-hour hash rate distribution by pool on April 16, 2020. Source: coindance.com
In theory, the four largest aggregators could collude to take control of the network. But this doesn't make much sense. Even if they manage to launch an attack, the price of Bitcoin will likely fall because their actions will weaken the system. As a result, any coins they acquired would lose value.
What's more, pools do not necessarily own mining equipment. Entities direct their machines toward the orchestrator server, but are free to migrate to other pools. It is in the interest of both participants and pool coordinators to maintain the decentralization of the ecosystem. After all, they only make money if mining remains profitable.
There have been a few occasions where synagogues have grown to what might be considered an alarming size. In general, the pool (and miners) take steps to reduce the hash rate.
Concluding thoughts
The cryptocurrency mining landscape was changed forever with the introduction of the first mining pool. It can be very useful for miners who want a more consistent return. With so many different systems available, they are bound to find the one that best suits their needs.
In an ideal world, Bitcoin mining would be more decentralized. At present, we are experiencing what we might call “sufficient decentralization.” In any case, no one benefits from one pool having the majority of the hashrate in the long run. Participants are likely to prevent this from happening – after all, Bitcoin is not run by miners but by users.