Every time a cryptocurrency transaction is made a cryptocurrency miner is responsible for both ensuring the authenticity of information and also updating the blockchain with the transaction. The mining process itself is completed by a processor running the appropriate software with the purpose of solving computationally complicated mathematical problems. A mining pool offers miners a realistic chance of a consistent shared reward for processing effort.
Block reward & competition explained
Everytime a block is completed then a block reward is paid to the miner solving the problem. Operating individually the chances of getting this block reward are very small although the reward would obviously be very high. By working with other miners, the chances of one of the miners in the pool solving a blockchain is much higher than the chances of an individual solving a blockchain.
Mining pools began when the mining difficulty increased to the extent that a solo miner could take months or years to generate a block. As the value of cryptocurrencies has increased, more miners have been attracted to the industry, competition has been increased and the difficulty of mining has increased.
Any new blocks added to the blockchain must contain a proof of work (PoW). A PoW is a requirement of work from a service requester. In this case the miners processing time expended by their processor. In the case of Bitcoin, the difficulty of mining is adjusted every 2,016 blocks and PoW increases as more miners are attracted to the mining effort. So competition and difficulty (in terms of processing power) increases making it harder to get the rewards.
In a pool blocks can be generated more quickly and the miners can receive a portion of the block reward on a consistent basis. So rather than waiting years to get lucky mining in a pool can give consistent shared reward for processing effort.
How to select a mining pool?
There are wide range of mining pools easily found on the web. The majority are based in China but they can be found in every country. There are higher numbers of pools based in countries where there is a potential for cheaper energy costs (so the reduced cost of running processors increases the profitability of the mining operation).
In selecting a pool there are a number of questions to consider such as what is the reward method; any fees charged for withdrawal; how frequently is a block mined; how stable is the pool and how easy is it to withdraw money.
Mining pool reward methods
Pools reward miners differently. These are the most common methods
Method of reward offers an instant, guaranteed payout to a miner for their contribution to the mining effort. Miners are paid out from the pool’s existing balance and are able to withdraw their payout immediately. The main advantage of this method is it allows for the least possible variance in payment for miners. Another advantage (to the miner) is it transfers the risk to the pool’s operator
Proportional systems work by giving miners shares based on their contribution. When the pool eventually mines a block each miner gets a share of the reward based on the number of shares held.
The PPLNS method is similar to proportional, but the miner’s reward is calculated on a basis of N last shares, instead of all shares for the last round. Usually the amount of shares submitted during a round (which is the the time it takes to find 1 block) is variable due to luck. Under PPLNS it considers a fixed amount of shares that is not constrained by the round boundaries.Therefore, if the round was short all miners get more profit, and vice versa.
The Geometric method is based on a “score-based” system where each share submitted receives a score based on its age. The block reward is split between participants according to their score. The score granted for every new share, relatively to already existing score and the score of future shares, is always the same. This means there is no advantage to mining early or late in the round. This avoids miners hopping from one pool to another trying to game the system by joining at an advantageous time in the existing round.
The profitability of mining will vary across different cryptocurrencies fairly quickly based on a number of factors – the value of the currency itself, the number of miners involved in the mining effort, the time taken to mine a block and so on. A multipool will switch between different currencies evaluating and calculating which coin is at that moment the most profitable to mine.
Check out our other Blockchain guides here.