Mining Pools and How They Work
Mining pools consist of a collection of miners who have pooled their resources together in-order to mine a cryptocurrency. As the mining difficulty of a cryptocurrency increases, so too does the computational power required to mine it. This increase in computational power can often be too expensive for a solo miner to handle as it could result in higher energy costs, or the requirement of more specialised hardware. Therefore, miners form collectives in-order to better limit the cost of their mining activity. If you are unsure of what exactly the mining process is, check out this article here.
With mining, it is important to understand the different types of blocks that come with it because of the effect it can have on your expected income. This article provides a comprehensive insight into orphan, uncle & genesis blocks.
Even though there are Single Mining pools that mine for only a single cryptocurrency, Multipools allow a user to constantly switch between the mining of a cryptocurrency depending on the profitability of the coin at any given time. In-order to determine the most profitable cryptocurrency to mine at a given time, a Multipool will take into account:
- The difficulty of mining the coin
- The exchange rate between coins
- The block generation time
- The hash rate
Multipools are incredibly useful if a user is uncertain about which coin is best to mine at any given time. However, because the cryptocurrency that was just mined is typically immediately exchanged for another one, the price of the mined cryptocurrency can often end up declining slightly.
There are a variety of methods in which a mining pool can share the reward once a block has successfully been added to a blockchain. A few pool reward structures to consider including following:
- Pay-per-share (PPS): As one of the most basic pool reward structures, the PPS approach offers an instant payout for each share of the cryptographic puzzle solved. The payout is offered from the mining pool’s existing balance.
- Full-pay-per-share (FPPS): As well as benefiting from the block reward, the FPPS approach allows for participating miners to benefit from transaction fees. A transaction fee is calculated over a certain period, added to the block reward, and then distributed to the miners according to the PPS model described above.
Additional examples of pool reward structures can be found on the Bitcoin Wiki page.
Advantages Vs. Disadvantages of Mining Pools
To conclude, mining pools have their own advantages and disadvantages. A few advantages to consider when deciding whether to enter a mining pool include:
- More stable income
- Potentially lower costs of mining
- Potential of generating a higher income
Conversely, disadvantages of mining pools include:
- Mining pools may suffer interruptions
- Block rewards have to be shared
- Potentially unfavourable pool reward structure
It is important to understand what a mining pool is before deciding to engage with one. This article was designed to give you an in-depth but accessible insight into mining pools.
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