What is Mining pools

Groups are a way in which miners, whether on the job test (mining group or mining pools) or participation (participation or staking group), work together to increase efficiency and convenience while dividing the rewards. In the case of proof of work, the miners pool their resources and share their computing power while distributing the reward based on the amount of work they contributed to the generation of a block; in the participation test, the participants delegate their decision power to another who runs a complete node and thus avoid doing so and losing rewards.

Group mining began for the first time when the difficulty of mining in the Bitcoin network increased to the point where it could take years for the slower miners to generate a block. The miners’ solution to this problem was to group their resources so that they could generate blocks faster and therefore receive a portion of the Bitcoin reward block on a constant basis, instead of randomly once every few years.

The mining group works together to achieve the same block, using the cryptocurrency address of the group manager or operator (a complete node) as the reward recipient. The manager is responsible for publishing the blocks to work and after distributing the earnings per block achieved (commissions included) to the members, based on the amount of work each one performed, which is proportional to the processing power that each member controls. By performing this work, the group operator keeps a percentage of the profits, called the group fee (pool fee). The group share is commonly around 0-4% of the earnings per block.

The operator of the mining group can use different algorithms to account for the payment to its workers. The most common are Pay-per-share (PPS) and Pay-per-last-N-shares (PPLNS). In the first, the miners receive a fixed payment for each valid attempt (share) or solution they make, regardless of whether or not the next block has been achieved by the mining group; while in the second, the miners get a payment based on the last N valid attempts they make until they get a block, N being a number defined by the mining group operator. PPS is one of the algorithms that provide more uniform payments to miners, transferring all the risk to the group operator. On the contrary, payments under PPLNS can vary drastically and depend both on the miner’s loyalty to the pool (continuous connected time), due to the N factor, and the general luck of the group to get blocks.

Bitcoin cryptocurrency mining groups

Bitcoin mining group market share. Image taken from Blockchain.info on 11/01/18.

To choose a cryptocurrency mining group it is important to take into account that: full rewards are paid per block (new issue plus commissions), the pool has a relevant market share and a quota close to zero, the online time of the pool is close to 100% and the payment method is to the user’s liking.

Slushpool, the first mining group, was launched on November 27, 2010. Since then, mining in groups has become a common practice, almost entirely prevailing over solo mining. Also, it has spread to mining many of the best-known cryptocurrencies: Bitcoin, Litecoin, Dash and Ethereum, among others.

Pros

They reduce the uncertainty of undermining a block and with it, the economic risk; they allow small miners to participate profitably and keep the miner’s validation software updated.

Cons

They promote the centralization of the network, discourage miners from running full nodes and make it more cumbersome (in some cases impossible) to exercise the will of the miners to vote on changes in the network.

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