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    What Is A Bitcoin Mining Pool & How Do They Work?

    Updated: Aug 22nd, 2022
    Kevin Groves
    Kevin Groves
    What Is A Bitcoin Mining Pool & How Do They Work?

    Bitcoin remains one of the most sought-after cryptocurrencies worldwide that can be purchased through hundreds of cryptocurrency exchanges. However, this is not the only way to acquire the digital asset. Bitcoin relies on a Proof-of-Work consensus mechanism to validate transactions and secure the blockchain. It is how the blockchain has remained decentralized since its inception in 2009. PoW relies on a process better known as mining, which rewards miners with BTC for the computational power they use to support the network. With BTC rewards on offer, the process of Bitcoin mining has attracted investors globally.

    However, Bitcoin mining is extremely computationally intensive. The more computational power a miner can provide the more chance they have of earning rewards. Due to continual technological advancements in processing power and the domination of Bitcoin mining by larger organizations, it has become nearly impossible for individuals to compete. Luckily, there is a solution available that allows individuals to participate in mining Bitcoin using widely available and accessible Bitcoin pools. In this article, we will explain what is a Bitcoin mining pool, how it works, the benefits of joining a mining pool and reveal the best mining pools for Bitcoin.

    What Is Bitcoin Mining?

    It can be useful to understand what Bitcoin mining is, how it works and why Bitcoin mining pools are required in the first place. Mining Bitcoin refers to a process that involves miners validating transactions and securing the blockchain network. To achieve this, Bitcoin miners compete to solve a mathematical formula. The miner that manages to solve the formula first and, therefore, prove a certain amount of ‘work’ has been completed, gets to validate the next set of transactions and add that block of transactions to the blockchain. For their efforts, the winning miner is rewarded with a BTC reward which is referred to as a block reward. For individual miners, it can take up to 1 year to mine a single Bitcoin. Importantly, the chance of winning a block reward increases with the amount of computing power that a miner can deploy; often referred to as hash rate.

    Bitcoin mining computations were first solved using CPUs (central processing units) and then subsequently via GPUs (graphic processing units). However, GPUs were eventually superseded by ASIC (Application Specific Integrated Circuit) miners. These are devices purposefully built to solve the Bitcoin mining algorithm.

    Related: What is Bitcoin and how does it work?

    Historically, one ASIC miner could produce enough mining power to give users a chance of winning a block reward. However, there are now hundreds of mining companies globally that deploy thousands of ASIC miners. As the amount of mining power, or hashrate, is proportional to the chance of winning a block reward, individuals with only one or a couple of ASIC miners simply cannot compete. The graph from Blockchain Explorer shows the relative measure of how difficult it is to mine a new block for the blockchain is shown below.

    The issue of competition is exactly why Bitcoin mining pools were created.

    Bitcoin network mining difficultyBitcoin network mining difficultyBitcoin network mining difficulty.

    What Is A Bitcoin Mining Pool?

    Bitcoin mining pools allow individuals to combine resources to increase the chances of winning block rewards. By increasing the chance of winning blocks, individual Bitcoin miners are more likely to earn consistent revenue. In other words, a Bitcoin mining pool allows individuals to trade luck for the stability of consistent returns.

    Mining pools are usually established by a centralized entity that maintains operations. For their services, a proportion of all mining rewards are collected as a fee. Although a fee is required, by combining resources, a pool of miners has a far greater chance of earning Bitcoin block rewards when competing against larger mining companies.

    Mining pools are also designed to be much more user-friendly than establishing an independent node on the Bitcoin network. The process of joining a Bitcoin mining pool can be completed far quicker once the hardware is up and running.

    How Do Bitcoin Mining Pools Work?

    Bitcoin mining pools allow miners to receive block rewards that are proportional to the amount of computing power contributed. This contribution is often referred to as a share. A share is defined as every attempt a miner makes to solve the PoW mathematical formula. The aim is to crack the formula and, therefore, find a valid block. Each attempt is acknowledged and when a block is eventually found, the number of attempts is used to calculate an individual’s reward.

    After a Bitcoin block reward is found, the associated transactions must be validated and sent to the Bitcoin network. It is then verified by other nodes in the network and, if accepted, is attached to the blockchain. The pool operator then calculates each user’s contribution and distributes BTC rewards accordingly.

    How Do Miners Split The Rewards?

    Reward payouts are determined by the underlying payout scheme employed by the mining pool. Most of the popular Bitcoin mining pools follow two broad payout schemes which are Pay-Per-Share (PPS) and Pay-Per-Last-N-Shares (PPLNS).

    Pay-Per-Share

    Pay-Per-Share (PPS) schemes allow miners to generate a guaranteed return that is proportional to the hashrate contributed. Rewards are distributed even if the mining pool does not find a block and earn a block reward.

    The number of shares required to find a Bitcoin block reward is estimated by the PPS mining pool operators. For example, assume that it takes 100 shares on average to find a Bitcoin block. The reward for block discovery is then also estimated. This is calculated by using the total number of miners in the Bitcoin network and the current Bitcoin mining difficulty. Again, for this example, assume that the block reward is $100.

    Using these network estimations, rewards are then proportionally distributed to miners depending on the number of shares contributed. If a miner contributed 5 shares out of a total of 100, the miner would receive a $5 reward - regardless of if the pool found a block or not. Mining pool operators take on this payout risk in return for a participation fee.

    Some mining pools also offer Full-Pay-Per-Share options. In addition to the block reward, transaction fees collected from the Bitcoin network are also distributed which can further increase miner rewards.

    Pay-Per-Last-N-Shares

    Pay-Per-Last-N-Shares (PPLNS) is the second most common payout method for Bitcoin mining pools. Unlike PPS, there is no guaranteed payout with this method. Instead, rewards are only distributed once a block is found. In addition to only receiving rewards once a block is found, the number of shares required to find a block is usually set to twice the difficulty level. This is better known as ’N’.

    For example, assuming that based on the current Bitcoin difficulty it takes 100 shares to find a block, the number of shares used to calculate rewards within the PPLNS method would be 200. Rewards would then be distributed in proportion to the number of shares that are contributed over that 200. Using a larger number of shares (N) encourages miners to stay loyal to one mining pool. Paying out only when a block reward is found also means that fees are much lower.

    Is PPS or PPLNS Better For Bitcoin Mining Pools?

    Neither payout option is better than the other and both offer distinct advantages. Choosing a method depends on individual payout preferences. PPLNS can offer slightly higher returns but miners will need to accept the higher volatility and inconsistency of payouts. Meanwhile, PPS will offer stability and a steady return, but the rewards captured may not be as high.

    Benefits & Risks of Bitcoin Mining Pools

    Before signing up for a Bitcoin mining pool it is important to assess the potential upsides and downsides. Although mining pools can increase rewards, some users might not be comfortable with the restrictions that must be followed.

    Benefits

    • Increased chance of block rewards. By combining resources from thousands of individual miners there is a much higher chance of finding block rewards in comparison to mining alone. This ultimately increases the chance of profitability.
    • Less hardware requirements. Miners can still earn BTC rewards without needing to invest in more powerful and, therefore, more expensive mining equipment.
    • Lower barrier to entry. Mining pools can greatly reduce the technical knowledge required to begin mining BTC. Establishing an independent Bitcoin node can be a complex process.

    Drawbacks

    • Fees. A miner must pay a fee to join a Bitcoin mining pool and capitalize from the resources offered. This fee can eat into any BTC rewards found.
    • Bound by mining pool rules. All miners that join a specific mining pool are bound by the rules set in place. These rules may change at any time and must be adhered to if a miner wants to continue earning BTC rewards.
    • Centralization. By grouping mining capabilities together some in the cryptocurrency community believe that it goes against the inherent nature of Bitcoin - which is intended to be decentralized.

    What To Look For When Joining a Bitcoin Mining Pool?

    When searching for a Bitcoin mining pool there are two keys factors to consider:

    • Reputation. There have been several instances in the past where Bitcoin mining pools have exploited users mining power and even stolen block rewards. Luckily, these actions are quickly spotted and brought into the public eye. However, it is still worth looking for red flags including anonymous operators, a lack of audit, and no clear hash rate statistics.
    • Fees. Understanding what the fees are for a mining pool is equally crucial. These fees will eat into profits accumulated from BTC rewards. How these fees are collected is also important. Are they removed from BTC block rewards? Or do they need to be paid as a separate transaction?

    What Are The Best Bitcoin Mining Pools?

    After launching in 2010, Slush Pool was one of the first ever Bitcoin mining pools created. From that initial innovation, hundreds of mining pools have now entered the market trying to capture market share. These are a few of the best Bitcoin mining pools to use based on reputation, mining fees, pay-out schemes and security:

    • AntPool. Established in 2014, AntPool is a mining pool operated by Bitmain technologies in China. It has grown to become one of the largest pools in the world. Alongside Bitcoin mining, it also offers users the ability to participate in Ethereum, Bitcoin Cash, Litecoin and Dash mining. AntPool offers both PPS and PPLNS payout options.
    • F2 Pool. F2 Pool launched in 2013, which makes it one of the oldest in the industry after Slush Pool. Like AntPool, F2 Pool is operated from China but is accessible for users globally. It can also be used to mine a range of other PoW cryptocurrencies.
    • ViaBTC. ViaBTC is one of the younger Bitcoin mining pools available but has become one of the most popular. Again headquartered in China, the pool first opened in 2016. Bitcoin miners can access daily payouts through both PPS and PPLNS payout options.

    The image below from BTC.com shows the dominance of Bitcoin mining pools by a percentage of distribution over the last 52 weeks. AntPool, F2Pool, Poolin, ViaBTC and Binance Pool make up the largest percentage of the distribution.

    Bitcoin mining pool distributionBitcoin mining pool distributionBitcoin mining pool distribution over the last 52 weeks.

    Conclusion

    Bitcoin mining pools offer individual miners an excellent way to access consistent Bitcoin block rewards. Without pools miners simply can not compete with the computing power deployed by larger organizations. By leveraging mining pools, individual miners can level the playing field once again.

    There are now hundreds of Bitcoin mining pools to choose from so it is important to understand the fundamentals of each. Start by understanding what payout scheme each mining pool employs. Understanding how rewards are calculated and distributed should factor heavily into which pool should be used. Alongside the payout options, determine what fees are charged and what the reputation of the pool is within the mining community.

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    Kevin GrovesKevin GrovesKevin Groves

    Kevin started in the cryptocurrency space in 2016 and began investing in Bitcoin before exclusively trading digital currencies on various brokers, exchanges and trading platforms. In 2019, he started HedgewithCrypto to publish informative guides about Bitcoin and share his experiences with using a variety of crypto exchanges around the world.

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