How do Mining Pools in Cryptocurrency Work?

Bitcoin was originally designed to be mined with the CPUs of everyday computers, and the first Bitcoin miners had a decent chance to win their block reward right from their bedrooms. Now, the story’s a little different, and even miners operating industrial-scale rigs need to join a mining pool.

Many cryptocurrencies, even those you may not have heard of, can be mined. At the heart of mining lies a certain level of difficulty, which in turn requires a certain amount of computing power to crack.

There’s a little more to it than just that, but the bottom line is that the days of solo mining are all but over. But plenty of people use their GPU or CPU to mine. Most, if not all, of those people put their mining power toward a mining pool.

Read on if you want to learn about crypto mining, mining pools, and how to put your computer to work and earn a side income with crypto mining.

What is Cryptocurrency Mining?

Blockchains are often referred to as “distributed ledgers.” This is because they’re decentralized, existing as a network of multiple independent computers and serving as an immutable record of transactions.

If you were to send some crypto from one wallet to another, that transaction would be grouped with many others like it and forged into a block. This block also contains a cryptographic hash of the previous block’s contents. So if you were to try and change a transaction in the previous block, the hash would change too, and the chain would break—that’s how blockchains are immutable.

This hashing and grouping of transactions together into blocks is called block production. Blocks are also verified once produced, which is called validation. In a proof-of-work cryptocurrency like Bitcoin, block production and verification are done by miners.

How do Blocks in Cryptocurrency Work?

Essentially, blocks race with each other to solve the hash, and miners with more processing power (or hashing power) are at a distinct advantage.

The key part here is that one miner produces the block, and the rest validate it. This, essentially, is the entire decentralized network coming into agreement on the truth. Hence why proof of work is called a consensus mechanism and why it’s so revolutionary.

There are other consensus mechanisms, such as proof of stake, proof of authority, proof of history, and even proof of burn, but proof of work is the OG. It is used in Bitcoin and countless other cryptocurrencies, although Ethereum has given up on proof of work in favor of proof of stake.

Mining is crucial for a blockchain since it establishes consensus and ensures nobody’s cheating with their transactions. Therefore, all blockchains incentivize miners to connect their hardware to the network and help out. The more independent miners there are, the healthier the network.

This incentivization is provided via the block reward. The miner who wins the race to the aforementioned cryptographic puzzle gets to produce the next block of the blockchain, and with it comes some network currency. In Bitcoin’s case, the block reward is currently 6.25 BTC.

What is a Mining Pool?

Assuming you’re a layman with no more than a couple of PCs at home, you can compare cryptocurrency mining to a lottery. Your computer is the ticket, which guarantees entry to the lottery as long as everything is working fine.

Mining is even better since every single block is a lottery, and you can keep your computer going for days if you want.

The thing is, the odds of winning a lottery are incredibly low. According to various estimates, you have a 1 in 139,000,000 chance of winning EuroMillions, which has a jackpot between $15 and 230 million. Given how much you need to pay for a ticket, that’s a great business model.

Unfortunately, not so great for you, though. According to the US CDC, you’ve got far better odds of being struck by lightning, killed by sharks, or even killed by fireworks. What’s more unlikely than winning the EuroMillions jackpot? Winning another lottery, such as the Powerball.

The way to beat the system, as one little Belgian village figured out, is to pool your resources. It’s still horribly unlikely, but would you prefer a 1 in 100 million chance to win $1 or $100 million? That’s basically what a mining pool is.

In crypto mining, the odds aren’t as bad as with a lottery, and there are no intermediaries who take their cut before paying out. Therefore, mining pools are a great way for you to add your hash power, however small, and ensure a guaranteed stream of income rather than hoping for that one big payout.

How do Mining Pools Work?

Mining pools give miners a greater chance of earning rewards by combining the hash power of all participants, allowing the hash function to be processed much faster. This is the basic idea, but you may encounter mining pools that execute things differently.

One of the most common types of mining pool is called the “proportional” mining pool. Participants receive “shares” of the pool in these pools based on how much of the pool’s total hash power they have contributed. When the pool finds a block, it pays out block rewards to miners proportional to how many shares they hold.

Then there’s the “pay-per-share” pool. These pools also give miners shares, but they also provide instant payouts, irrespective of when the block is found. Shares can also be exchanged for rewards at any time, making this a versatile and quite compelling pool model for miners.

The third major type of mining pool is called the “peer-to-peer” mining pool. These aim to combat the issue of centralization in mining pools by integrating a separate pool-specific blockchain. The objective of these pools is to prevent the pool operators themselves from misbehaving and to remove any single point of failure from the pool itself.

Advantages of Mining Pools

Mining pools exist for every proof of work cryptocurrency out there, so let’s take a look at some of the reasons why that is:

• Guaranteed payout. As mentioned, it’s really difficult to make it as a solo miner. It’s not as bad as a lottery, but the concept is the same, and there’s absolutely no guarantee of ever winning a block reward. A mining pool, especially one that has a decent amount of the blockchain’s total hash power, can guarantee an income rather than leaving it purely to chance.
• Regular payouts. Mining pools remove the possibility of your winning the jackpot of a block reward, but they do directly convert mining time into cryptocurrency. Especially if you use pay-per-share pools, you can earn a regular income from mining.
• Convenience. Solo mining is a tricky business and low on rewards, but it’s easy to mine with a pool. Working from home and watching your GPU idle? Fire up your mining software, let your PC earn a little crypto in the background, and then shut down when you’re done for the day.

Disadvantages of Mining Pools

Despite the benefits for you if you’d like to put your devices to work earning a little crypto, it isn’t all hunky dory with mining pools. Let’s look at some of the cons:

• Centralization. Cryptocurrencies were created very much with the principle of decentralization in mind, but mining pools, by nature, bring a lot of the network’s hash power together into clumps of power. If you’re a purist regarding crypto, you may not like this. Unfortunately, given the way mining works, it’s the only way for small-scale miners to earn an income, although innovations like peer-to-peer mining pools do help.
• Single point of failure. This centralization of mining power also means that attacking or compromising a big mining pool could adversely affect the network. Pool operators could also try and cheat. Take a look at Bitcoin’s mining distribution—that’s a lot of power (and risk) getting centralized with the biggest pools.
• Profit focus. Even if all goes well, mining pools–and crypto miners in general–are usually motivated by profit. Even though you might mine crypto to accumulate, it’s a primary revenue stream for many miners. How do they pay the bills? They sell their crypto earned through mining for fiat.

How to Mine a Pool

Now that you’ve got a detailed understanding of how mining works and its pros and cons, you might be interested in joining a pool and earning some crypto.

Here’s what you need to do!

#1. Pick a Cryptocurrency

Which cryptocurrency you should mine will depend on a lot of things. If there’s a particular proof of work cryptocurrency you have faith in and want to accumulate, mining is a great way to do it. On the other hand, if you simply have an unused or underutilized computer and electricity costs aren’t bad, you can add a little bit of crypto to your monthly income.

GPUs were so expensive in 2020 and 2021 because Ethereum was booming, and it was really easy to connect to an Ethereum mining pool and make a steady little income. Ethereum mining was a no-brainer for many people back then, but the landscape is a little different now that ETH has shifted to proof of stake.

Still, there are several great cryptocurrencies that you can mine right from your PC, such as Ergo and Ravencoin. Monero is also an option and can be mined in parallel with the others since Monero only uses computer CPUs.

#2. Buy Mining Equipment

You can skip this step if you decide to mine cryptocurrencies based on the hardware you already have. Although, if you reckon the mining pool profit and ROI are really attractive, you could certainly invest in more hardware.

Cryptocurrencies like Bitcoin may actually force you to invest in additional hardware since they aren’t ASIC-resistant. ASICs are specialized mining computers that push out a lot of hashes, eclipsing even the very best of GPUs. These are a must-have if you want to get into Bitcoin mining pools.

#3. Review Available Mining Pools

You’ve probably already done this before buying any mining gear, but it’s worth reinforcing and even going over the mining pool list again with a fine-tooth comb.

Check out the mining pool stats on offer, what sort of hash power they have, and how they work. Make sure that the pool is transparent and that the payout schemes are in order.

If you’re connecting with a comparatively low-end amount of hash power or just your home PC, check the minimum payment threshold—you should be able to find a pool that’ll pay you every few days at the very least, even if you’re not mining 24/7.

Remember, social media and online reviews are your friends. It’s always good to know what experiences others have had with the different mining pools out there.

#4. Choose and Join a Mining Pool

Once you’ve found a mining pool that suits you, join up. Some pools require registration since they operate as a service, but with most pools, it’s just a matter of downloading their miner pool software.

If you don’t have a crypto wallet at this point, remember to get one! You’ll have to configure the mining pool software with your wallet address to receive any payouts. If you’re using GPUs to mine crypto, it’s also worth researching how to best configure them for longevity or performance.

Types of Cryptocurrency Mining Pools

We’ve already looked at three different types of mining pools based mainly on the payout model. There are other ways to classify mining pools as well, for instance, by geographical location—there are cloud-based mining pools that you can connect to from where you are, but you’ll have to tote your machines physically to join a mining farm.

Let’s look at some of the best-known mining pools out there:

• Slushpool. Established in 2010, Slushpool is the pioneer regarding mining pools. It’s been going strong since then and still counts over 10% of Bitcoin’s hashrate.
• AntPool. They do say that the best way to profit off a mining boom is to manufacture shovels, and Bitmain, the manufacturer of the Antmain ASIC mining machines, runs AntPool.
• BTC.com. Server availability for this pool is limited, but it’s very popular thanks to its innovative “full-pay-per-share” system that adds a portion of transaction fees to user rewards.
• FoundryUSA. New compared to the rest but now the top Bitcoin mining pool, FoundryUSA also uses the full-pay-per-share system and focuses on large-scale US-based miners.

Key Takeaways

Mining pools have become necessary when mining cryptocurrencies like Bitcoin, and some view them as a necessary evil. They have several definite drawbacks, one of which is centralization, a big issue since that flies in the face of Bitcoin’s vision itself.

However, mining pools are one of the best ways to earn an income from participating in the crypto ecosystem. Whether just by putting an idle GPU to work or even buying ASICs, it’s quite easy to get set up as a crypto miner and earn a fairly regular income as a miner.

Staking has emerged as a competitor to mining, and major cryptocurrencies such as Ethereum have already embraced proof of stake. As long as proof of work continues to endure, it’s unlikely that mining pools will go away anytime soon.