Content
Introduction
What is a mining pool?
How does a mining pool work?
Mining pools of the Pay-Per-Share (PPS) system
Mining pools of the Pay-Per-Last-N-Shares (PPLNS) system
Do mining pools threaten decentralization?
Summary
Introduction
Mining is an important factor in ensuring the security of Proof of Work blockchains. By computing hashes with specific properties, participants can secure cryptocurrency networks without the need for a central authority.
In 2009, when Bitcoin was first launched, any PC user could compete with other miners to calculate the hash for the next block. This was due to the low mining difficulty and low hashrate. Thus, users did not require specialized hardware to add new blocks to the blockchain.
Obviously, computers that can compute more hashes per second will find more blocks. This is causing a huge shift in the ecosystem. Miners began to increase their computing power in an effort to gain a competitive advantage.
Having tested various types of equipment (CPU, GPU, FPGA), Bitcoin miners chose ASICs - special-purpose integrated circuits. ASICs are designed specifically for mining, and not for watching, for example, Binance Academy or posting photos of cats on Twitter.
As the name suggests, ASICs were created to perform a single task: computing hashes. And because they are designed specifically for this purpose, their performance is extremely high. So large that the use of other types of hardware for Bitcoin mining has become quite rare.
What is a mining pool?
Having good equipment is important, but it won't do all the work for you. You can run several powerful ASICs, but you will still be just one of millions of Bitcoin miners. The chances that you will actually mine a block are very slim, even if you have invested a lot of money in equipment and electricity.
You will not know for sure when you will receive a block reward or if you will receive it at all. If a stable income is important to you, then it would be wisest to join a mining pool.
Let's say you and nine other participants each own 0.1% of the network's total hash power. This means that on average your probability of finding a block is 1:1000. With a projected production of 144 blocks per day, you will most likely find one block per week. Depending on monetary resources, hardware and electricity investments, this solo mining approach may be an acceptable strategy.
However, the income from mining may not be enough for such work with cryptocurrency to pay for itself and begin to bring a decent profit. In this case, as we have already said, you can join forces with the other nine participants. By combining your hashing power, you and your team would account for 1% of the hashing rate on the network. That is, you will find on average one block every hundred, which is one to two blocks per day. The reward for the received block is divided among all pool participants.
This is how you can describe the mining pool in a nutshell. Nowadays, mining pools are widespread because they guarantee a more sustainable income for their participants.
How does a mining pool work?
Typically, a mining pool appoints a coordinator who is responsible for organizing the miners. It makes sure miners use different nonce values and don't waste hashing power trying to create the same blocks. The coordinator is also responsible for dividing the rewards and disbursing them to the participants. To assign an appropriate reward to a particular miner, several different schemes are used to calculate the amount of work done by each participant.
Mining pools of the Pay-Per-Share (PPS) system
One of the most common payment schemes is Pay-Per-Share (PPS). With this scheme, the participant receives a fixed amount for each “share” sent.
A share is a hash used to track the work of each miner. The amount paid for each share is nominal but increases over time. Please note: the share is not a valid network hash. This is just a hash that meets the conditions of a specific mining pool.
Under the PPS scheme, you receive a reward regardless of whether you find a block. The pool manager assumes the risk, so he will most likely charge additional fees, either from users or from the block reward.
Mining pools of the Pay-Per-Last-N-Shares (PPLNS) system
Another popular scheme is Pay-Per-Last-N-Shares (PPLNS). Unlike PPS, PPLNS rewards miners only when the pool successfully mines a block. When a pool finds a block, it checks the number of the last N shares sent (N depends on the pool). To calculate your payout, it divides the number of shares sent by N and then multiplies the result by the block reward (less the operator's share).
Let's look at an example. If the current block reward is 12.5 BTC (assuming there is no transaction fee) and the operator fee is 20%, then all miners will receive 10 BTC. If N is 1,000,000 and you sent 50,000 shares, you will receive 5% of the miners' reward (or 0.5 BTC).
You can find various variations of these schemes, but most often you will hear about these two. Please note that although we are talking about Bitcoin here, most popular Proof of Work cryptocurrencies also have mining pools, such as Zcash, Monero, Grin and Ravencoin.
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Do mining pools threaten decentralization?
As you read this article, you may be wondering: Isn't the strength of Bitcoin that this blockchain is not controlled by a single authority? What happens if someone gets the majority of the hashing power?
These are good questions. If someone gets 51% of the network's hash power, they can launch a 51% attack. It will give an attacker the ability to censor transactions and cancel old payments. Such an attack could cause enormous damage to the entire cryptocurrency ecosystem.
Do mining pools increase the risk of a 51% attack? Possible, but unlikely.
24-hour hashrate breakdown by pool as of April 16, 2020 Source: coindance.com
In theory, the top four pools could collude to take over the network, although this doesn't make much sense. Even if they succeed in carrying out an attack, the price of Bitcoin will likely fall as their actions undermine the system. As a result, all coins they received will lose value.
Moreover, pools do not necessarily own mining equipment. Miners provide information about their equipment to the coordinator server, but are free to move to other pools. It is in the interests of pool participants and operators to maintain a decentralized ecosystem. After all, they only make money if mining remains profitable.
There are known cases where pools grew to sizes that could be considered threatening. Typically, the pool (and its miners) will take steps to reduce the hashrate.
Summary
The appearance of the first pool changed the situation with cryptocurrency mining forever. Pools are especially useful for those miners who strive to receive stable payouts. From a variety of different schemes, they can find the one that best suits their needs.
Of course, miners would prefer Bitcoin mining to be as decentralized as possible. However, for now it can only be called “sufficiently decentralized.” In any case, the concentration of a large part of the hashrate in one hand will not be beneficial to anyone in the long term. The participants themselves will most likely not allow such a development of events. After all, Bitcoin is not controlled by miners, but by users.