What is a Mining Pool and why do I need one?
In a Mining Pool, multiple miners combine their Hashing Power and share all the rewards, but why is that? The answer is simple – to guarantee themselves constant income in short periods of time. The process of decoding a new block involves high levels of hash rate. This results from the pooled mining power of each gear participating.
As I mentioned earlier, the mining of a certain coin tends to increase the difficulty of the network. This is because a lot of people mine to earn crypto coins. With this situation present, the overall hash rate in the network increases and each block will be mined earlier than the targeted block time. Therefore, each blockchain has a self-regulating mechanism which adjusts the mining difficulty. It intervenes in setting the time when mining. That, on the other hand, depends mainly on:
- Difficulty – for a valid hash, the automatically set target value must be always higher, even when it’s periodically adjusted by the crypto protocols. Lower the target value, higher the difficulty. Here your hash function needs to be repeated more times to succeed. This action is profitable when done in a pool. When the difficulty is higher, miners must use more nonces per each block.
- Nonce – a random number used only once in one output. This relates to the one-way function of running transaction data through a hash algorithm. When certain requirements are met, a new block is found. The nonce has the mission to include something different from the data to obtain a new hash.
The hunger for blockchain-based services is arising at full tilt. This results in developing technology and all this thrives at a rapid pace. It is an attractive gadget for numerous business fields. Its nature of open electronic ledgers that distribute the database system, can rationalize operations for everybody who’s involved.
When you try mining solo, there are a lot of other users making an effort to do the same. The only one will get the reward though – just like in a lottery. For example, the actual block reward for bitcoin now is 12,5 BTC with a high price in USD per BTC. Now, you can hope to be lucky and become the one winner in a million participants or simply join one of the best mining pools and combine all your hashing power to increase the chance of earning something.
In other words, the reward is split between all miners contributing to the pool. This automatically means smaller, but frequent rewards. To relate to the BTC example earlier, instead of earning some amount once in your lifetime, you can get a few cents for nearly every new block mined. This may not sound much, but when summed up in time, it will be probably equal to a single average solo mining single profit (if I ignore the pool fee for the moment). Let us remind you, that when mining on your own, this reward may occur in years.
Your luck to find the next block depends on your hashing power in comparison to the overall network hashing power.
Your reward is the full block reward (100%)
The combined hash power of a pool has a way better chance, but the reward is split within the pool
Your reward after pool split is only a small fraction (0,0001%)
Оf course the reward is split between all miners contributing to this pool, this will result in smaller rewards but more frequent. So instead of maybe earning 125.000USD once in your lifetime – you can earn a few cents for nearly every block. This sounds not much but will sum up with time and on average the same profitable than solo mining (if I ignore the pool fee for the moment)
How does pool mining work?
The basic way mining pools work is straightforward. They have a connection to the blockchain in order to be constantly up to date. Its server communicates with the blockchain through the downloaded full node software. Without it, the pool can’t really function, because nobody will know which block is already found and which one is up next. None of you wants to mine already existing blocks and waste time and money.
All users in the pool connect to its server. It is collaborating with the blockchain and the network assigns the direction of each miner’s work in the pool. Every report for each job done or any result is to be reported back to the server. This is needed to keep the order of the blocks and all information to be saved and updated constantly.
In case a block is found, the decipher of its code will be reported back to the pool. The then announces it to the network and the whole blockchain. Everything is up to date. The reward goes to the pool and will be split accordingly and transferred to all the participants. The pool’s advantage is the fee it keeps for the provided service and support. Usually, it varies between 1-2% of the whole reward.
If a pool’s fee is 1%, the results for a 10min block are quite the chunk of money. That sound like a lot! If you keep on reading, you will see, that the actions behind the scene are worth every cent. Here is a glimpse of the whole process in the background, which is a bit more complicated.
I would like to point out a few of the main time and effort consuming actions, that pools are required to do, in order to be attractive to users and earn crypto rewards. Here they are:
- Accounts and Statistics – the pool hosts the accounts of thousands of miners. That is not all, it provides…