Where do new cryptocurrency coins come from? They don’t grow on trees, and they aren’t minted by banks. Instead, new cryptocurrency coins are mined using a computer.
However, mining cryptocurrencies isn’t easy—if you’re on your own, anyway. Solo mining Bitcoin and other cryptocurrencies requires serious mining hardware and lots of cheaply available electricity.
That’s why most cryptocurrency miners now use mining pools instead. But what is a mining pool, exactly? How do they work? What are their benefits? Is it something YOU should consider? Here’s everything you need to know.
How Does Cryptocurrency Mining Work?
Critical to understanding how a cryptocurrency mining pool works is understanding how regular crypto-mining works. Cryptocurrency mining serves two vital purposes:
- Mining verifies transactions made on the network
- Mining releases new cryptocurrency coins into the network
Cryptocurrency mining involves solving heavy computational equations that involve matching 64-digit hexadecimal hashes. Comparing and matching hashes at the extremely high rate required by crypto networks is why mining requires expensive hardware: that much computing power isn’t cheap.
Hash rates are measured in megahashes per second (MH/s), gigahashes per second (GH/s), terahashes per second (TH/s), and most recently, exahashes per second (EH/s).
The below image shows the global hash rate distribution between mining pools for Bitcoin:
The Bitcoin network aims to release a new block every ten minutes. But as the number of miners on the network increases, it becomes more and more likely for someone to match the correct hash in a shorter timeframe. That’s where mining difficulty comes into play.
As the total hash rate power increases, so does the difficulty level of the mining process. After every 2016 blocks, the network difficulty changes. If the block discovery time is less than 10 minutes and the hash rate is high, the difficulty level increases. If the block discovery process takes longer than 10 minutes, the difficulty level decreases.
As soon as a miner (or mining pool) matches a hash and verifies 1MB of transactions, they become eligible for the block reward. The block reward is the Bitcoin network payout for verifying the transactions. Everyone wins!
What Is a Cryptocurrency Mining Pool?
A cryptocurrency mining pool is a collective of miners who pool their system resources together. Combining system resources allows the miners to generate a much higher hash rate than they could achieve mining solo. The higher hash rate gives the mining pool a greater chance of mining a whole Bitcoin, which is then shared between the miners in the mining pool.
The Pros and Cons of Crypto Mining Pools
The pros and cons of cryptocurrency mining pools aren’t too different from joining a lottery pool, albeit with a little more nuance.
The biggest positive of a cryptocurrency mining pool is the vastly increased chance of actually getting your hands on some freshly mined cryptocurrency (Bitcoin or otherwise). Cryptocurrency mining pools can withstand the changes in mining difficulty (although they are also responsible for pushing it higher, so it’s not quite equal) that make it almost impossible for solo-miners to make a profit on.
The lure of a steady Bitcoin income pulls most people into a mining pool. Also, mining pools keep the cost of Bitcoin mining relatively low, at least for part-time or enthusiast miners. You can work your mining schedule around your work schedule.
On the flipside, that steady stream of income will remain small. A mining pool is just like the lottery pool: the group wins a huge prize, but the individuals take home only a small portion.
At the time of writing, the Bitcoin mining block reward stands at 12.5 BTC. If there are ten people in your mining pool, everyone receives more than a whole Bitcoin as a reward. Scale up to 100 people and everyone receives just 0.125 BTC, and so on. Winning 0.125 BTC a few times would be a decent return, but what happens when a mining pool has thousands of miners? The reward certainly dwindles.
There are also a few other issues to consider: many mining pools have transaction fees when cashing out, you still need to pay for the electricity you use while mining, and mining pools can go permanently offline if their infrastructure breaks.
How Does a Mining Pool Calculate Payouts?
Mining pool reward calculations use the concept of shares. Your reward relates to the amount of computing power you submit to the pool. It is a system that works well, but there are some differences between pools.
The most common reward systems include:
Pay Per Share: Every share receives a fixed value. The fund pays out frequently and regularly, so long as there are funds. These funds usually have a large fee to cover payments for every miner. Some variants include:
- Maximum: Guarantees payment per share, even if the payment exceeds the amount in the pool payment wallet. If there isn’t enough in the account, the pool issues credit notes.
- Shared: The same as Maximum, but does not pay more than the pool earns.
- Equalized Shared: Equalizes the payments fairly between anyone the pool owes.
Proportional: Every time the pool mines a block, the shares are distributed by user participation.
Pay Per Last N Shares: Similar to proportional, but the pay-out values the last N shares of the pool (where N is the number decided by the pool operator).
Score: Similar to Proportional, but weighted for the time spent contributing to the pool (rather than computational power). Rewards relate to a score and have a chance to be higher than other forms of proportional reward.
If you want a steady flow of Bitcoin, Pay Per Share reward systems are best, especially for crypto mining beginners.
Mining Pool vs. Cloud Mining
Another mining technique you might hear about is cloud mining. Instead of buying loads of expensive hardware and hoping for a return, you pay someone else to use their expensive hardware and guarantee some form of return.
That’s how it works in theory.
But there are some major concerns regarding cloud mining operations. The biggest issues are fraudulent cloud mining operators with unverified hardware or output claims. Your return is likely to be very low, as you are paying for the cloud mining operators’ hardware, electricity, cooling, and maybe even their physical space, too.
However, the major benefit is the relatively low cost of entry. There is no expensive hardware to deal with. Someone else takes care of everything mining related and sends you a Bitcoin payout at the end. Some cloud mining contracts even pay out every day, allowing you to skim off the profit or immediately reinvest.
Should You Use a Cryptocurrency Mining Pool?
In this era where mining hardware is powerful and we measure mining rates in exahashes, buying your own mining hardware and being competitive is an expensive hobby. I say hobby because, unless you do have the money, that’s all it will be. Don’t forget that you’ll need a plentiful source of cheap electricity, too.
Mining pools are not perfect. They do, however, offer regular people with standard hardware a chance at grabbing some of that sweet, freshly mined cryptocurrency.
Not sure where to start? See our article on the best Bitcoin mining pools.