What is a Bitcoin Mining Pool?

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What are Bitcoin Mining Pools?

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Last updated 10th March 2014
When the Government
Knocks at Your Door

One of the first questions that anyone interested in mining cryptocurrencies faces is
whether to mine solo or join a 'pool'. There are a multitude of reasons both for and
against mining pools. However, if the hash rate distribution across the bitcoin network is
anything to go by (and it is) then most miners are opting to join a pool. Heres what you
need to know.

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Pros and cons

If youre deciding whether to join a mining
pool or not, it can be helpful to think of it like
a lottery syndicate the pros and cons are
exactly the same. Going solo means you
wont have to share the reward, but your
odds of getting a reward are significantly
decreased. Although a pool has a much
larger chance of solving a block and winning
the reward, that reward will be split between
all the pool members.

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Therefore, joining a pool creates a steady stream of income, even if each payment is
modest compared to the full block reward (which currently stands at 25 XBTC).

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It is important to note that it is important for a mining pool to not exceed over 51% of the
hashing power of the network. If a single entity ends up controlling more than 50% of a
cryptocurrency networks computing power, it could theoretically wreak havoc on
the whole network. In early 2014, many voiced concerns that the GHash.io bitcoin
mining pool was approaching this threshold, and miners were urged to leave the pool.

Currency difficulty
In bitcoin's case, the current difficulty level is so high that its practically impossible for
soloists to make a profit mining. Unless, of course, you happen to have a garage full of
ASICs sitting in Arctic conditions. If youre a beginner, joining a mining pool is a great
way to reap a small reward over a short period of time. Indeed, pools are a way to
encourage small-scale miners to stay involved.

What to mine?
Of course, bitcoin is not the only currency out
there its easy to find lists of mining pools
for your chosen cryptocurrency.
One method of mining that bitcoin facilitates
is merged mining. This is where blocks

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What is a Bitcoin Mining Pool?

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solved for bitcoin can be used for other

currencies that use the same proof of work
algorithm (for example, namecoin and devcoin). A useful analogy for merged mining is to
think of it like entering the same set of numbers into several lotteries.
First-time miners who lack particularly powerful hardware should look at altcoins over
bitcoin especially currencies based on the scrypt algorithm rather than SHA256. This
is because the difficulty of bitcoin calculations is far too high for the processors found in
regular PCs.
If youre not sure which currency to mine, there is a pool called Multipool which will
automatically switch your mining hardware between the most profitable altcoin.
Multipool updates every 30 minutes, and over time youll see balance grow in multiple
altcurrencies. If required, the pool does allow you to fix your hardware on just one
altcurrency too.
However, Mark from nut2pools.com said of this type of switching pool: Loyal coin
followers hate them because as soon as the difficulty of a coin drops, the profitability of
it rises. Then all the multipools swing round, push the difficulty through the roof in a few
hours, then leave again. It leaves the loyal coin followers having to mine the difficulty
back down again at very low profitability.

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Pool rewards
When deciding which mining pool to join, you
need to weigh up how each pool shares out
its payments and what fees (if any) it deducts.
There are many schemes by which pools can
divide payments. Most of which concentrate
of the amount of shares which a miner has
submitted to the pool as proof of work.
Shares are a tricky concept to grasp. Keep two things in mind: firstly, mining is a process
of solving cryptographic puzzles; secondly, mining has a difficulty level. When a miner
solves a block there is a corresponding difficulty level for the solution. Think of it as a
measure of quality. If the difficulty rating of the miners solution is above the difficulty
level of the entire currency, it is added to that currencys block chain and coins are
rewarded.
Additionally, a mining pool sets a difficulty level between 1 and the currencys difficulty. If
a miner returns a block which scores a difficulty level between the pools difficulty level
and the currencys difficulty level, the block is recorded as a share. There is no use
whatsoever for these share blocks, but they are recorded as proof of work to show that
miners are trying to solve blocks. They also indicate how much processing power they
are contributing to the pool the better the hardware, the more shares are generated.
The most basic version of dividing payments this way is the 'pay per share' (PPS) model.
Variations on this puts limits on the rate paid per share; for example, equalised shared
maximum pay per share (ESMPPS), or shared maximum pay per share (SMPPS). Pools
may or may not prioritise payments for how recently miners have submitted shares: for
example, recent shared maximum pay per share (RSMPPS). More examples can be
found on the bitcoin wiki.
The other factor to consider is how much the pool will deduct from your mining
payments. Typical values range from 1% to 10%. However, some pools do not deduct
anything.

Starting to mine with a pool

Having decided which currency to mine and which pool you'll work for, it's time to get
started. You need to create an account on the pool's website, which is just like signing
up for any other web service. Once you have an account, you'll need to create a
worker. You can create multiple workers for each piece of mining hardware youll use.
The default settings on most pools are for workers to be assigned a number as their
name, and x as their password, but you can change these to whatever you like.
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NEXT: HOW DOES CLOUD MINING BITCOIN WORK?

INDEX: A BEGINNERS GUIDE TO BITCOIN

What is Bitcoin?

Why Use Bitcoin?

How Can I Buy Bitcoins?

How to Buy Bitcoin in the UK

How to Store Your Bitcoins

What Can You Buy with Bitcoin?

How to Sell Bitcoin

How to Accept Bitcoin Payments for Your Store

How do Bitcoin Transactions Work?

Is Bitcoin Legal?

It's a decentralized digital currency

It's fast, cheap to use, and secure

From an exchange or an individual

Buying bitcoin in the UK

Use a digital or paper wallet

Spend your bitcoins

A guide on how to sell your bitcoins

Learn about bitcoin POS systems

Bitcoin addresses and private keys

The current regulation around bitcoin

Who is Satoshi Nakamoto?

The founder of bitcoin

How Bitcoin Mining Works

By confirming transactions

How to Set Up a Bitcoin Miner

Generate bitcoins yourself

What are Bitcoin Mining Pools?

How Does Cloud Mining Bitcoin Work?

How to Calculate Mining Profitability

How to Make a Paper Bitcoin Wallet

What is the Difference Between Litecoin and Bitcoin?

How to Buy Litecoin

How to Mine Litecoin and other Altcoins

Understanding Bitcoin Price Charts

What are pools how and how to join them?

Alternative bitcoin mining solutions

Can you make a ROI?

Creating an unhackable bitcoin wallet

It's the silver to bitcoin's gold

How to buy the bitcoin alternative litecoin

How to generate your own altcoins

A primer on bitcoin price charts

Bitcoin E-Commerce Services for Merchants

Bitcoin Glossary

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Explanation of all bitcoin terms

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