Mining Pool Meaning
What is a Mining Pool in Crypto?
In Proof-of-Work blockchains, the more processing power a miner has, the higher their chances of producing a block. This process can prove expensive for solo miners while mining some coins. To improve their chances of finding the next block, individual miners can join forces and combine their computing resources with other miners to form a crypto mining pool. The mining pool shares any rewards earned from successfully mining a block among the miners, based on their contribution to the pool.
How Do Mining Pools Work?
Think of software engineers trying to find a bug in thousands of lines of code. Every engineer has a powerful computer that could eventually identify the bug and fix it. But what if the first engineer to find the bug and fix it earned a monetary reward? This makes it a competitive venture. Instead of working individually, some of the software engineers could form a collective group to pool their resources for the hunt. This would improve their chances of finding the bug first, fixing it, and splitting the reward.
Crypto mining pools work in a similar manner. Instead of competing individually, miners combine their individual computational power to increase their chances of successfully mining blocks. The mining pool has a team leader or coordinator that assigns tasks to ensure the miners don’t waste resources trying to produce the same block. The coordinator is also responsible for sharing the reward based on the miners’ computing power contribution.
Mining pools operate in different ways, some of which include:
- Pay-Per-Share (PPS): Miners are paid a fixed amount for each “share” (the number of hashes matching the pool’s specification that have been submitted), regardless of whether the pool successfully mines a block. The pool operator may charge a fee upfront or from the block reward.
- Full Pay-Per-Share (FPPS): Like PPS, miners share the reward according to their contribution, but also receive a share of transaction fees. The pool calculates and distributes the average transaction fee based on the submitted shares.
- Pay-Per-Last-N-Shares (PPLNS): Miners are rewarded only when the pool successfully mines a block. The pool considers the last N shares and calculates rewards based on shares submitted within that range.
Some benefits of mining pools include:
- Increased chances of consistently earning rewards
- Reduction of variability through reward distribution
- Miners with less powerful hardware can still participate in mining
- Mining pools are more cost-efficient as miners share energy costs