Crypto Mining Pools Explained: Everything you need to know!

Bitcoin’s price has skyrocketed to a series of record highs in recent years. With this surge in price, the world’s largest and most popular cryptocurrency has gained even more investor interest. Given that the cost of one BTC is more than a year’s salary for many people, it might seem like the next best option to buying a token directly is to mine it. But as we’ll see below, there are barriers to individual miners which make this process prohibitive. So what is the solution? One option to consider is a crypto mining pool. Below we’ll take a closer look at how mining pools work and at some of their benefits.

Overview for Fast Readers

Cryptocurrency mining involves the use of specialized computer equipment to solve complex cryptographic problems in order to verify transactions and potentially earn a reward in the form of crypto tokens.
Mining as an individual has become unprofitable in many cases at this point due to the intense difficulty of the mining process and the high costs of electricity and equipment.
To address these issues, many miners work together in mining pools. Mining pools combine the resources of individual miners in order to increase the odds of earning a reward for their input.
While mining pools increase the chances of earning a reward, that reward must also be shared among the pool, meaning that each individual miner typically earns far less than they would if they could earn the reward individually.

What are Cryptocurrency Mining Pools and How Do They Work?

In short, crypto mining pools are groups of miners who work together to earn mining rewards. If and when they earn those rewards, they divide them across the mining pool, typically proportionally according to the amount of work each contributor performed. Mining pools take advantage of the fact that cryptocurrency mining requires computational power and that this power can be gathered from multiple sources. Because it is the best-known cryptocurrency, Bitcoin is commonly the target of mining pools. However, there are mining pools dedicated to mining other crypto tokens as well.

Crypto Mining Explained: How It Actually Works

In order to understand mining pools, it’s helpful to know the basics of how cryptocurrency mining works. While there are many different ways that cryptocurrencies can be mined, the most common process involves a group of computers working as part of the cryptocurrency network. These computers, called nodes, store the distributed ledger of all transactions involving that cryptocurrency as part of a blockchain. The work of mining accomplishes two things:

Verify and record new transactions to the blockchain (in groups of transaction records called blocks)
Release new crypto tokens into the global circulation in a controlled fashion

For those interested in digging deeper, the exact process of cryptocurrency mining is outlined in greater detail in another Thebitcamp post. For our purposes here, though, it’s helpful to know that Bitcoin miners use specialized computer equipment to generate long strings of characters called hashes. If these hashes meet a specific set of requirements, the hash is validated, and the block of transactions is verified and added to the blockchain. The miner then receives a pre-determined award in the form of newly minted crypto tokens. Thus, miners help to strengthen and grow the cryptocurrency ecosystem and are driven by the incentive of token rewards.

Profitability of Crypto Mining

Crypto mining has the potential to be incredibly profitable. As of this writing, the reward for successfully verifying a block in the Bitcoin network is 6.25 BTC, worth close to $350,000. Given that all it takes to earn that reward is a successful hash, mining for Bitcoin seems to be an excellent way to earn money.

Unfortunately, it’s not quite that simple. As cryptocurrency networks have grown larger, the difficulty of mining has increased dramatically. At the same time, costs associated with electricity used to power computing devices, the specialized hardware necessary to mine for cryptocurrencies (such as an application-specific integrated circuit miner, or ASIC), and similar concerns have priced many people out of the mining business altogether. Given the incredible level of competition, an individual miner working on Bitcoin mining stands very little chance of ever earning a reward.

Crypto mining pool organization Infographic

This is where mining pools come into play. The barriers to entry into a mining pool are much lower than those for an individual miner: the costs of energy consumption and the equipment required are lower. By combining resources with a group of other miners—potentially a very large group—an individual miner significantly increases her chance of earning a reward, although that reward will have to be split amongst the pool. Below, we’ll look more closely at how crypto mining pool rewards often work.

Crypto Rewards for Miners

Depending on the mining pool, participants may receive rewards according to one of several different general principles. These are some of the most common:

Proportional
One of the most common models for mining pool payouts is proportional. In this case, miners earn shares until the pool finds the block, and then the reward is paid out proportionally according to the number of shares each miner has.
Pay-Per-Share (PPS)
In a PPS model, miners contributing processing power to a pool receive shares for their contribution. A PPS pool provides a payout on a per-share basis at any time, regardless of when blocks are found. Thus, miners can exchange shares for a proportional reward payout at any point.
Full-Pay-Per-Share (FPPS)
An FPPS pool works similarly to a PPS pool in some ways. Miners receive the expected value of a block reward as they would in a PPS pool, but they also pay out a proportion of transaction fees, typically calculated based on the prior 1-day period. These transaction fees are added to the expected block reward payout.
Pay Per Last N Shares (PPLNS)
PPLNS pools only pay miners when a block is validated, meaning that payments may be irregular. When payments occur, they are divided proportionally according to the percentage of shares that miners contribute according to the total shares. One potential benefit of this system is that it incentivizes miners to remain with their pool.
Shared Maximum Pay-Per-Share (SMPPS)
An SMPPS pool functions similarly to a PPS pool, with the major difference being that the payout is limited to the maximum that the pool has earned.
Solo Mining Pool
A solo mining pool is a somewhat paradoxical setup for a crypto pool. In this case, miners work together to pool resources in order to increase their chances of earning a block reward. However, when the pool does earn a reward, the full reward goes to the individual miner who validated the block. This is therefore a high-risk, high-reward way of organizing a mining pool.

Which Crypto Coins Have Mining Pools?

A large number of crypto coins have mining pools. Among the most popular targets of mining pools are these coins:

Bitcoin
Ethereum
Litecoin
Monero Classic
Zcash

FAQs About Mining Pools

Are Mining Pools Worth It?

For the average miner who has not invested heavily in multiple mining rigs, mining pools are typically the most reliable way to generate earnings from mining. However, depending on the pool, the payout method, the cryptocurrency, and its price, miners participating in pools may only earn a few dollars per day. While there is the potential for much greater rewards, it’s likely that many miners will find this not worth the trouble.

How Long Does It Take to Mine 1 Bitcoin?

Every 10 minutes, roughly, a new block is added to the Bitcoin blockchain and a reward of BTC is paid out. Until sometime in 2024, at the next Bitcoin halving, this reward is 6.25 BTC. However, this is across the entirety of the Bitcoin network. For an individual miner or a pool, a much larger period of time is likely to go by before a reward is earned. And for a miner participating in a pool, the standard reward is often in the thousandths of a single BTC or smaller, meaning that it can take an incredibly long time for a pool miner to earn 1 BTC.

What Is a Pool Fee in Mining?

Many mining pools charge individual miners a small fee to participate. These fees may go toward administrative oversight and maintenance of the pool or similar expenses. Fees tend to be on the order of 2-4%. Miners should thus expect their rewards to be slightly smaller than they might be purely based on the calculation of how a reward is shared among the members of the pool, once they figure pool fees into the equation.

Summary

For most cryptocurrency miners today, mining as an individual is not profitable. This is due to the increasing difficulty of crypto mining and the high costs associated with owning and operating a mining rig. Mining pools aim to address these issues by allowing miners to pool their resources with others. Together, these pools of miners stand a better chance of earning a reward for contributing their computational power. On the other hand, though, miners in a pool must share their rewards with the rest of the pool, significantly diminishing the overall payout. While pools have the potential to be lucrative, many offer rewards that are quite small.