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How Cryptocurrency Mining Pools Work: The Advantage of a Separate Pool

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This year’s cryptocurrency boom has been a headache for gamers looking to score the latest graphics cards, as growing Bitcoin prices have gotten desperate miners to wipe out all viable GPUs in-store. BTC mining is a process where anyone with a powerful computing device can earn coins by securing a hash on the Bitcoin blockchain. This creates a new block in the series of public transactions, essentially helping the network operate without a central authority.

While Bitcoin mining was once a hobby activity that enthusiasts did for fun, it’s become a multi-billion dollar industry where competition runs deep-especially considering how the network’s Proof-of-Work (PoW) algorithm only favours one winner every mining cycle, or approximately one every ten minutes. With millions of miners relying on the block’s BTC reward to churn a profit, some found ways to increase their chances of winning, namely through a cryptocurrency mining pool. 

What is a Mining Pool?  

Due to the competitive nature of PoW mining, some organisations have set up major mining operations, running hundreds of powerful ASIC rigs or dedicated Bitcoin mining machines, which increases their chances of getting ahead of the minefield and scoring a large amount of BTC. That puts independent miners at a disadvantage, as a few GPUs or one mining rig can’t possibly win against hundreds of higher-end machines. 

To put things into perspective, suppose your ASIC rigs make up 0.2% of the network’s total hashing power, which is the function required to solve the cryptography behind PoW systems. Each BTC mining cycle occurs every ten minutes, meaning that there are approximately 144 cycles per day. Given your position based on the hash rate, you have a chance of winning about 0.288 or approximately a quarter of a BTC price per day. But since block rewards are a fixed 6.25 per win, you theoretically need over 21 days to score. Most, if not all, of the USD equivalent may end up going to repaying the capital investment and electricity costs of the operations. 

Even then, more powerful organisations are likely to win since mining rewards are not distributed on a cycle, only the fastest to solve the puzzle every round gets the BTC. In short, it’s not profitable to mine alone with a small number of computers. As a result, much like how rewards are pooled in a betting game, individual miners can pool together their computing power to increase their cumulative hashing power and gain an edge over organisations. 

How Does a Mining Pool Work? 

Frequently, a pool organiser manages the entire operative, assigning different values to each miner and ensuring that no redundancies happen during the actual mining process. They’re also responsible for splitting rewards based on each person’s hashing power or other predetermined conditions. Tasks are either assigned by a coordinator or chosen by the miners themselves. What’s important is that no two computers are given the same nonce to ensure that the work is distributed evenly. 

There are two kinds of mining pools that are common in PoW mining. 

  • Pay-Per-Share (PPS)

The PPS system is one of the most common payout methods used by mining pools. Each miner receives a reward based on their hash contribution to the overall pool. Hashing power is calculated through Th/s, or how many trillions per second a machine can calculate. If you own one ASIC that can calculate 40 Th/s in a pool with a total power of 4,000 Th/s, you essentially contribute 1% to the mining operation. That will merit you 1% of the reward. 

What’s great about the PPS is that you receive a reward regardless of whether or not the mining pool successfully mines a block. Even large-scale operations don’t have a 100% success rate due to the sheer volume of competitors on the network, hence why PPS is ideal for miners looking for profit stability. In return, however, the pool fees, which you need to pay to the operator to join the mining cycle, tend to be higher. Since the payout is guaranteed, you can calculate expected earnings against the cost of running your machines with a profitability calculator to determine whether it’s worth the time and effort. 

  • Pay-Per-Last-N-Shares (PPNS)

The PPNS operates similarly to the PPS, wherein the payout deducts the pool fee from the equation and then divides the money based on each miner’s share. Likewise, if you contributed to 20% of the operation, you will receive 20% of the block reward minus fees. What makes PPNS unique is that it doesn’t guarantee a payout each round, as rewards are only provided whenever a block is successfully mined. It’s much riskier on the miners’ end, as there is a 50-50 gamble for profit or loss. 

As a result, PPNS isn’t a viable option for pool hoppers who alternate between various pools each round. Without a guaranteed payout, the only way to beat the risk is to stay for the long haul, wherein extra wins from lucky rounds will offset no-profit rounds. While this process may seem cumbersome, the pool fees, which are often calculated through percentages, are smaller than that of PPS, allowing stronger miners the opportunity to earn more. 

Advantages of Joining a Mining Pool

Unlike anchored coins like TPR cryptocurrency, which used a smart-contract-based non-collateralised algorithm, Proof-of-Work and some Proof-of-Stake models are algorithms that rely on external computers for decentralisation, which is where mining comes in. While it offers a great way for people to earn coins through “working,” rather than purchasing from exchanges, it can be a resource-heavy process, especially when dealing with large networks like Bitcoin and Ethereum. In that case, mining pools offer independent, small-scale miners a higher chance of churning a profit compared to dealing with the work on their own. In particular, the work in each pool is divided per member, so each rig works less to merit greater results. As resources are shared, it will cost less to mine with others than going solo. 

However, joining a pool isn’t a walk in the park, either. For one, more people means more liabilities, resulting in downtimes caused by disconnection, blackouts, and other uncontrollable circumstances. The smoothness of the behind-the-scenes operations is also left in the hands of the mining coordinator, who must ensure that everyone is assigned different jobs and that there are no redundancies in the process; otherwise, you could miss out on profit due to inefficiencies. And finally, joining a mining pool is not free, so you should carefully calculate possible profit against the cost of mining to determine the venture’s viability. 

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