Gareth Johnson
Gareth Johnson
Updated on August 13, 2021

Cryptocurrency mining is a crucial part of the cryptocurrency ecosystem. For most cryptocurrencies, mining ensures the security of transactions and allows new cryptocurrency units to be generated. These new units are rewarded to successful miners, creating the incentive to mine new blocks.

A mining pool is a protocol that helps multiple miners combine their computing power in order to successfully mine cryptocurrency. Mining pools have become popular over the years as mining difficulty increased for cryptocurrencies like Bitcoin. Now, successful mining operations are mostly done by mining pools.

If you are interested in cryptocurrency mining and want to learn more about how mining pools enhance cryptocurrency mining, we prepared a guide for you. Read on to discover how mining pools work and what they have to offer for cryptocurrency miners.

What Is Cryptocurrency Mining?

Cryptocurrency mining is the process through which cryptocurrency transactions are added to cryptocurrency’s blockchain ledger. Thanks to Satoshi Nakamoto, inventor of Bitcoin and blockchain technology, mining is now an essential element of most cryptocurrencies. 

Chalkboard illustration of bitcoins in mining carts and inside a mining tunnel

Most people think of cryptocurrency mining simply as a way of generating and receiving cryptocurrency. While this is partially true, mining rewards are actually secondary to the mining process as they are meant to be incentives for people to continue mining. The real function of mining is to keep cryptocurrency blockchains secure against malicious attacks by making sure new blocks of transactions on the blockchain are valid. 

Through the mining process, validators are able to prove they are not including false transactions along with legit transactions. The fastest individual or group who can prove their block of transactions is valid gets to add the next block to the blockchain, earning cryptocurrency and transaction fees as block rewards.

How Does Cryptocurrency Mining Work?

Let’s use Bitcoin mining as an example to explain how cryptocurrency mining works. The Bitcoin blockchain consists of blocks of validated transactions. These are chronologically ordered blocks bound together with cryptography. Technically, anyone on the Bitcoin network can validate transactions and add them to the Bitcoin blockchain, but how do you know someone is not going to validate a false transaction to send millions of BTC to themselves? 

This is where cryptography comes in. Bitcoin’s proof-of-work mining protocol uses a specific algorithm to assign each transaction a cryptographic value that is called a hash. Every block also gets a unique hash.

The Bitcoin blockchain calculates a new target hash for each new block based on all the previous transactions on the blockchain. In order to validate a block, a Bitcoin miner has to calculate this target hash by hashing the previous block’s hash with random numbers. These random numbers are known as a “number used only once” or a nonce. If a nonce doesn’t deliver a value less or equal than that of the block’s target hash, it is discarded and another nonce gets hashed until the lucky nonce is found.

Finding the lucky nonce sounds easier than it is. While the process itself is quite basic, Bitcoin miners often need to calculate several numbers to find the target hash in a race of who does it first. This means that a miner’s success depends on how many calculations they can do in a limited amount of time. The process gets harder when a new miner joins the race because hash difficulty adjusts according to the total computing power of the network.

This is why miners began to collaborate using mining pools. In a mining pool, groups of miners try to calculate the target hash using different nonces, eliminating useless nonces faster than individual miners have the capacity to do.

Why Do People Join Mining Pools?

Cryptocurrency mining was largely a solo endeavor for the first few years after its conception. You could mine Bitcoin using your computer’s central processing unit (CPU) during the first years of Bitcoin. Later on, people began to use laptops with graphics processing units (GPUs) to mine cryptocurrencies, as these performed much better than CPUs. 

Person using laptop inside a crypto mining farm

As cryptocurrency mining gained popularity, specially designed mining hardware for cryptocurrency mining entered the market. These ASIC (Application-Specific Integrated Circuit) miners shortly became the industry standard for mining Bitcoin and altcoins. 

Cryptocurrency entrepreneurs quickly discovered that they could outperform other miners by pooling the mining power of several ASIC rigs together. This led to the creation of mining farms where the computing powers of several ASIC rigs are pooled together in order to find the right block hash as fast as possible.

The emergence of mining farms made a huge dent in the profitability of solo mining efforts. As the total processing power of the network increased, the hash difficulty quickly escalated. The processing power of individual miners, also known as hash rate or hash power, couldn’t keep up with the hash rate of mining farms.

The first mining pool “Bitcoin Pooled Mining Server” (later renamed as Slush Pool) was established back in 2010. As the popularity of mining increased, individual miners began to come together in pools like Slush Pool to increase their hash power and to be able to compete with large mining farms.

What Is a Mining Pool?

A mining pool is essentially a network that combines the processing power of several miners in order to mine as many cryptocurrency blocks as possible. Mining pools have higher hash rates than solo miners, increasing the odds of finding the lucky nonce that is necessary to validate a block.

Mining pool members receive rewards in return for increasing the mining power of the mining pools. Allocation of rewards changes from mining pool to mining pool, but there are a couple of commonly used reward schemes for calculating how rewards are distributed among the members.

Most mining pools in the past operated out of China, that is, up until the country began a crackdown on cryptocurrency mining in May 2021. Mining pools have begun to migrate to other countries following the crackdown. China-based ASIC miner producer Bitmain, the company behind popular mining pools like Antpool, BTC.com, and ViaBTC, temporarily suspended sales of mining equipment in order to boost second-hand miner markets after the ban.

Some of the most successful mining pools, such as Poolin, P2Pool, F2Pool, Antpool, and of course, the world’s first Bitcoin mining pool Slush Pool, are still active, although the crackdown decreased the hash rates considerably, at least for a while. 

How Do Mining Pools Work?

A mining pool runs protocols to manage the work of pool members and assign rewards in exchange for their work. Pool operators organize miners so that each miner will attempt to calculate hashes with a different range of nonces. This can be done either by assigning a range of values to each miner or by letting miners pick their own ranges.

Man wearing glasses in front of computer investing in crypto

Pool operators are responsible for handling payouts to pool members. Pool members agree to the pool’s method of dividing rewards when they join a pool. There are several reward distribution systems employed by different pools. It is important to understand a mining pool’s distribution system before joining one since different payout methods can benefit miners depending on their specific circumstances.

How Do Mining Pools Share Rewards?

When a pool successfully finds the right block hash, the rewards are divided between the pool members according to their shares. Shares represent the amount of work each pool member contributed to finding the block hash. Usually, if a miner’s work contributes to mining efforts they receive payouts based on their shares.

Some of the most commonly used rewards sharing systems are Proportional (PROP), Pay Per Share (PPS), and Pay Per Last N Shares (PPLNS). Each method has unique advantages and disadvantages.

The Proportional Method (PROP)

With this method, a member receives a reward that is proportional to the ratio of their shares with respect to total shares in the pool at the end of each block mining round. It is easy to calculate the rewards with PROP, and the ease of implementation makes it a useful method for smaller mining pools.

However, since some pool members strategically mine at the start of each round and then switch over to other pools (known as pool hopping) they receive unfair shares over continuous miners.

The Pay Per Last N Shares Method (PPLNS)

Pay Per Last N Shares is a more complicated proportional payout method that solves some of the problems inherent in the PROP method. Unlike PROP, Pay Per Last N Shares calculates rewards according to an activity period randomly assigned by the network, preventing pool hoppers from taking advantage of block rounds. Each miner gets a reward proportional to their shares in the share pool during the selected time period of mining.

Man wearing blue shirt holding bitcoin on blue background

PPLNS is a good method for miners who continuously work in the same pool. The payouts are more balanced than the PROP method.

Both Antpool and Slush Pool use the PPLNS payout method.

The Pay Per Share Method (PPS)

With the PPS method, the mining operator pays fixed rewards to miners depending on their shares, regardless of whether a block hash is successfully found. While PPS guarantees payouts to the members regardless of the mining success, mining pools that use this method charge higher fees due to the risk that the pool operator takes.

F2Pool, BTCC, and ViaBTC are some of the mining pools that use the PPS method.

How to Choose a Cryptocurrency Mining Pool

There are a few factors to consider if you are thinking of joining a mining pool.

Pool Requirements

Some mining pools have hardware and software requirements participants should take into consideration. You should check before joining a mining pool to see whether the pool stipulates using a certain mining device, specific software, and a minimum network speed. Make sure you have the resources to participate in the pool before joining it.

Task Assignment Schemes

It is important to join a pool that assigns mining tasks uniformly between miners.  If miners with stronger mining equipment keep receiving tasks while the others are left waiting, payouts will be quite unfair. A good mining pool will assign tasks uniformly across different miners, though the difficulty of the tasks can change relative to the mining power of each device.  

Reward Schemes 

Reward schemes are an important factor when choosing a mining pool. PPS is generally considered a safe alternative for miners who want stable payments, but PPLNS can be more rewarding long-term. Some other reward schemes used by mining pools are Bitcoin Pooled Mining (BPM), Recent Shared Maximum Pay Per Share (RSMPPS), Double Geometric Method (DGM), Shared Maximum Pay Per Share (SMPPS), Capped Pay Per Share with Recent Backpay (CPPSRB), Equalized Shared Maximum Pay Per Share (ESMPPS). 

Bitcoin on top of man's palm

Make sure to check the payout threshold and frequency before joining a pool. If the payout threshold is too high, you might have to mine for a long time before you are able to withdraw your funds from the pool.

Pool Reputation and Stability

It is important that a pool is secure enough to repeal hacker attacks and provide data transparency to pool members. Make sure to pick a pool with good reviews, active miners, and transparent pool operators.

Pool Fees

Some mining pools offer limited-time zero-fee payment schemes, while others can charge monthly and annually. There are also mining pools that don’t charge any fees, though you should do your research to see whether there are hidden costs to pool membership.

Decentralization

Bitcoin mining pools allow users to combine their hash rate to validate blocks and can be profitable for solo miners. However, solo miners transfer their governance rights to Bitcoin Protocol over to pool operators in exchange for mining rewards, something that can hurt the currency’s decentralized governance in the long run.

A Few Words Before You Go…

As the popularity of cryptocurrency mining grew, mining pools became an attractive option for solo miners looking for a way to increase their profits from mining. Although mining pools initially sought to mine Bitcoin (BTC), you can mine several altcoins including Ethereum (ETH) and Litecoin (LTC) on most mining pools.

If you want to explore mining, you should definitely consider joining a mining pool. It is important to pick a mining pool with a good reputation and one that is a good fit for you in terms of your resources and expectations.