As crypto mining becomes ever more difficult and competitive, solo miners cannot keep up with enterprise-level mining organizations. That is why they join efforts and share their computing power with other miners by connecting to mining pools.

Mining pools in a nutshell

A cryptocurrency mining pool is a group of miners who join their hashpower. They do this to enhance their chances of successfully solving a block. By combining and focusing their total computing power, miners can work faster and bump up their hashrate.

If you’re new to Bitcoin mining, don’t worry. You can refresh the basics on our article: What is Bitcoin mining and how does it work?

These mining pools are often corporate-run. Mining companies “buy” computing power from miners in exchange for a proportional share of their mining profits.

Why do miners need mining pools?

Because of the very nature of proof-of-work blockchains like Bitcoin, mining is an inherently competitive activity. Miners must solve a block faster than their colleagues in order to earn money. Only the first miner to find the next block earns the reward.

The more hashrate on the network, the more difficult it is to find a block. Blockchains automatically adjust the mining difficulty as more miners come online to ensure security and meet the block parameters.

Although necessary to stabilize the network, increasing mining difficulty makes mining ever more energy-intensive.

As a result, miners need to invest more capital —both to acquire better hardware and to afford the electricity bills— to have a chance to adequately mine a block.

This scenario benefits enterprise-level mining companies and enterprises, who have more capital to invest in boosting their hashrate. Solo miners, on the other hand, find it nearly impossible to run a profitable mining enterprise. This is where mining pools come in.

Mining pools offer these miners lower difficulty mining. This reduces variance and enables them to earn revenue for contributing hashpower, even if they don’t find a block.

How mining pools work

Miners can connect to a mining pool of their choosing through different mining agents or software.

Pools typically have operators who maintain them and charge a fee for their services.

The pool calculates each miner’s payout proportionally to the amount of work they contribute. The question that arises then is: how does the pool know how much work each miner has completed?

The pool sets different difficulty rates for the miners. According to these parameters, users find and submit hashes of a block header that may be block solutions —called shares.

Every valid result found by miners under the pool’s difficulty targets earns a reward.

In other words, mining pools create lower difficulty work, which increases the miners’ chance of solving a block. In other words, pools “raise” the target hash, making it easier to find valid hashes.

Let’s further explain that with an example: Imagine that a block’s solution is a number that ends in ten zeros. The pool sets a lower difficulty and tasks miners with finding a number that ends in five zeros. These second, easier-to-find numbers are considered shares. These may be the block solution —as numbers that end in ten zeros also end in five— but even if they’re not, the pool will reward miners for finding them.

How mining pools ditribute rewards

We’ve said that miners receive their payments according to their share submission. However, the calculation is a little more complicated.

Pools have different ways to reward miners for contributing hashpower. As an example, here are two of them:

• Proportional payments: The pool calculates payments as a percentage based on a miner’s number of shares vs. the total number of shares in that round. A “round” is the time between one block found by the pool and the next. At the end of every round, the operator keeps a fee and distributes payments among miners based on their share percentage.
• Pay-per-share: PPS provides a miner with an immediate, guaranteed compensation in exchange for their contribution to the pool’s likelihood of finding a block. According to the network difficulty, the mining pool operator buys shares from miners at a rate that represents the shares’ projected contribution to finding a block. The pool can then either find a block or not. If it does, on the other hand, the operator receives all of the reward for that block. In comparison to other reward systems, revenues tend to be more steady and predictable in the short term in PPS.

It’s important to remember that pools can either accept or reject shares. Accepted shares are those that meet the pool’s difficulty in a certain amount of time.

Rejected shares, on the other hand, indicate that a miner’s work was ineffective. This happens when a miner effectively fulfills the assigned task but submits its work after the pool’s time window —these are known as stale shares. Miners only earn rewards for accepted shares.

Final considerations

Mining pools have proven a valuable tool to enable small mining operations to turn a profit.

More importantly, they allow individuals from the community to contribute to the security of Bitcoin while simultaneously earning a reward.

Nevertheless, the top pools have come to concentrate ~50%, and this centralization trend is becoming stronger. It is crucial that we address this issue to keep Bitcoin as secure and robust as ever. We believe the Lumerin Protocol will be a great step in that direction.

Hashrate decentralization is one of the most fundamental aspects of Bitcoin’s security. If you want to learn why, read our article: Why hashrate decentralization matters (a lot)