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Bitcoin mining is the process of solving complex cryptographic problems to verify transactions and add blocks to the Bitcoin blockchain. The growth of the Bitcoin network since its inception in early 2010 has increased the mining difficulty and made mining pretty demanding in terms of cost, energy needs, and computational power. The advancement of Bitcoin mining technology in terms of specified mining equipment such as ASIC Miners has increased competition among Bitcoin miners, especially among solo miners.
Bitcoin Mining and Its Characteristics
To have the upper hand in solving complex cryptographic problems in an increasingly competitive environment, Bitcoin miners can pool their computational power to form a mining pool. A Bitcoin mining pool has a greater chance of solving a block and winning the reward, which is split between all the pool members. Read on to learn more about Bitcoin mining pools and how they work.
Bitcoin Mining Pools Explained
Bitcoin mining pools are networks of distributed Bitcoin miners who agree to pull computational power, mine blocks unanimously, and distribute the rewards based on each entity’s contribution to the pool. Bitcoin miners in a mining pool who offer a valid partial proof-of-work are rewarded based on the hash rate they contribute to the mining pool. Hash rate is essentially a measure of the computational power in terms of the number of attempts to find a new block (hashes) and hashes performed per second.
The idea behind a Bitcoin mining pool is to create a platform where different miners can pool their computational resources such that they can generate blocks more quickly and consistently. Each time any miner in the pool finds a block, a block reward is paid to the mining coordinator, who then takes a small fee and pays every member of the pool depending on their hash rate contribution.
Joining a Bitcoin mining pool is highly beneficial, especially for small-scale miners with low chances of finding a block using their computational power. Besides, a mining pool guarantees a consistent stream of income since the generation of blocks by a mining pool is done consistently rather than randomly every few years. The revenue offered to an individual miner is proportional to the miner’s hash rate. While the payments may be modest compared to the full block reward, which currently stands at 6.25BTC, it’s consistent and sufficient to attain some profit margin after covering the operating costs.
Bitcoin Mining Economies of Scale- The Reason Why Mining Pools Exist
Bitcoin mining characteristic economies of scale are the main reason for the existence of mining pools. Bitcoin mining takes place globally, especially in locations with cheap energy. While the cost of Bitcoin mining differs based on the costs of power influenced by the geographical location, mining operations receive block rewards based on their hash rate.
Bitcoin mining pools benefit from economies of scale and can receive revenue more consistently than solo miners. Running Bitcoin mining equipment is a cost-intensive venture owing to the enormous amounts of electricity, machine maintenance, and the need for sophisticated cooling systems to maximize the efficiency and longevity of these machines. Large mining pools achieve economies of scale with regards to these operations costs and, therefore can increase their revenue.
Unlike solo miners, mining pools can negotiate large purchases of energy from utility companies and acquire discounted energy rates by guaranteeing a consistent and large amount of energy consumption. By achieving economies of scale, Bitcoin mining pools can cut costs and increase profit margins to considerable levels.
How Do Bitcoin Mining Pool Work?
Bitcoin mining pool operations are guided by three main components i.e., Cooperative work protocol, cooperative mining service (Server), and mining software (client). Below are the functions of these components, which are responsible for running the mining units.
Cooperative Work Protocol
The cooperative work protocol is integrated into the base Bitcoin client and is responsible for dispersing mining groups in the pool to target a particular block to mine Bitcoin cooperatively. This way, the mining power is concentrated on a specific objective rather than a comprehensive one, optimizing the mining process to achieve greater success.
The Cooperative work protocol, also called Getwork, essentially communicates with miners in the mining pool to direct the hash rates to the same block to increase the outcomes. Each miner is assigned a specific cryptographic problem until they can solve it successfully. The final point is that the block can be mined more quickly with a decreased network difficulty, which often delays the mining process.
Cooperative Mining Service (Server)
The Cooperative Mining Service is the primary server in the mining pool that serves as a link between individual miners who pool their computing power to form the mining pool. The cooperative mining server runs on software such as Bitcoin-Bitcoin’s official service. Other commonly used software in the Cooperative mining service includes p2pool, BFG Miner, Stratum, and Ecoinpool.
The service software is installed in the server and configured in such a manner that it creates a communication link between the miners in the pool and the cooperative mining server. The server grants miners access to the service via their registered accounts and also serves to distribute the mining profits among members of the pool.
Some roles of the server include: receiving network transactions, controlling and monitoring the network, channeling communication to miners in the pool, accounting for solved blocks with hash rate contributed by the miners, and corresponding profit to the miners in the pool based on their contributions among other roles.
Mining Software (Client Side)
There are tons of mining software for Bitcoin miners to use while in the mining pool. Bitcoin mining software for clients comes with different features and supports different functionalities. As such, miners ought to correctly choose an ideal mining software that matches the needs of the mining pool they want to join.
The primary role of the mining software is to connect to the mining pool server, relay information, and also take part in solving blocks. The mining software also manages the authentication and the corresponding payment to the miner based on the hash rate they contribute. To undertake this, the mining software informs the mining server of the miner’s username, password, and address for the payment via an IP address and a specific port.
The type of software is also largely dependent on the mining hardware. Most Bitcoin miners in pools use CGMiner-a software developed by an Australian called Kolivas. This software is compatible with plenty of mining equipment including ASIC, AMD GPU, and FPGA Miners, works on different OS including Linux, Windows, and macOS plus can work with virtually any Bitcoin mining pool.
Common Methods for Sharing Rewards (Profits) In Bitcoin Mining Pools
Mining pools harbor hundreds or thousands of miners who pool their computational resources to enhance the chances of solving a block and earn consistent rewards. The rewards are then shared among all miners in the pool based on different methods as outlined below:
The Pay-per-Share (PPS) model offers miners an instant, guaranteed payout based on their contribution to the probability that a particular pool finds a block. Miners are paid from their pool’s existing balance and can take out their payout immediately after payments. PPS creates fairness in the payments and transfers much risk to the pool’s operators. PPS uses the method below:
R=B. p. where R=Reward
B=Block rewards less pool fee
In this payment method, miners earn shares until the end of the mining round when a block is found and solved. The reward is shared using the formulae below:
Where n is the number of their own shares while N is the amount of all shares in the current round.
Pooled mining is also referred to as the slush’s system owing to its first use on a Bitcoin mining pool called Slash. In a pooled mining method, newer shares are given more weight compared to older shares from the start of the block round. A new mining round starts immediately after a block is solved and miners are offered rewards based on the shares they submitted. As such, miners are unable to cheat the system by switching mining pools during each round to maximize profit margins.
Pay-per-last-N-shares (PPLNS) is similar to the Proportional method only that the miner’s rewards are calculated based on N’s last shares rather than the last round of mining. In other words, the rewards of the miner are calculated based on the miner’s contribution to the last N pool shares.
Solo Mining Pool
As the name implies, in solo mining pools, the entire reward is given to the miner who finds and solves a block rather than all miners in the pool as it’s with other mining pools.
Joining a Bitcoin Mining Pool
There are plenty of Bitcoin mining pools you can consider joining with the common ones being Slush Pool, AntPool, and BTC.com. When looking to join a mining pool, there are several things you’ll want to consider including pool fees (range from 1% to 10%) which are deducted from the payments, rewards sharing method, and user reviews among other factors.
Joining a Bitcoin mining pool is pretty straightforward. Simply access your chosen pool’s website and create an account. Once you’ve created an account, the next step is to create a ‘worker’ using compatible software. Most pools allow you to create multiple workers for each mining hardware you’re offering to the pool. Most of the tasks are automated by the software but you’ll still have to monitor the mining hardware ensuring they are always connected to the server, do not overheat, and are in the right physical state.
The costs of mining Bitcoin have gone so high that it’s barely possible to make considerable profits when mining solo. Bitcoin mining pools offer solo miners and beginners an opportunity to reap consistent profits from BTC mining over a short period.
While there have been claims that the mining software creates centralization in the Bitcoin network, no mining pool can accumulate more than 51% of the total Bitcoin network hash rate. Besides, these pools are made up of numerous small decentralized entities, making it harder to control the Bitcoin network. All in all, decentralized Bitcoin mining pools are increasingly coming up, allowing miners to have more control in their hands.
What is Bitcoin mining?
Bitcoin Mining is where users provide computing power to verify transactions and secure the network. This process is called “mining” because the reward for validating transactions has been described as a ‘block’. The term comes from the practice of miners finding new blocks of data and adding them to the blockchain. Transactions are recorded chronologically in each block, forming a chain, which enables the system to function as a distributed ledger.
What is a crypto mining pool?
A cryptocurrency mining pool is an internet service where users share resources and power to mine cryptocurrencies. The biggest advantage of using a pool is that you only need one machine instead of multiple machines running simultaneously. However, the downside is that the price per unit of computing power drops significantly when all miners agree to use the same pool for mining.
Is crypto mining profitable?
Cryptocurrency mining is extremely profitable for miners who use GPUs to solve computational problems, like bitcoin mining. If you already know how to mine cryptocurrencies, then you could create a profit from cryptocurrency mining. However, most people lose money when they first start mining cryptocurrencies such as Bitcoin and Ethereum. Mining requires expensive hardware and electricity costs, while others might find that the yield per unit of equipment is too low.