In the cryptocurrency mining industry, a mining pool is a group of cryptocurrency miners who combine their computing resources over a network in order to maximize the likelihood of mining larger portions of cryptocurrencies.

Rather than competing against one other for processing power, mining pools combine resources together in order to find a block. Successful pools are compensated by receiving some type of cryptocurrency in return for their contributions. 

It’s typical to distribute the rewards based on the amount of processing capacity or energy each person contributes relative to the total group effort. Some payments may be withheld if individual miners cannot give confirmation of their work.

Guidelines for evaluating yourself before joining a mining pool

Most crypto users will find mining to be a frustrating and time-consuming experience. There are a variety of services available to make getting into mining easier, but whether mining is a worthwhile undertaking depends on a number of complex considerations.

Among the various considerations that miners must make are:

  • The cost of the equipment needed
  • Electricity costs
  • How long it will take to recover equipment expenditures
  • What effect, if any, costly modifications will have on profitability
  • How swings in the crypto asset’s price may affect profitability
  • Willingness to contribute towards the purchase of new, more powerful machines are required if it turns out that the older ones are no longer cost-effective
  • Keeping track of all of these factors is essential for a miner to remain successful

Payout calculation

In cryptocurrency mining, payout calculations are usually more complex than a basic proportional payout, which is understandable given the nature of the industry.

The methods listed below are some of the most commonly used when determining mining pool payments. In cryptocurrency mining, the phrase “share” refers to the percentage of the overall hashing power that a particular mining rig contributes to the pool throughout the mining period.

Pay-Per-Share: With this approach, miners receive a guaranteed payout regardless of whether or not the pool mines a block. The pool’s performance can be better or worse than expected, but miners are compensated depending on their share of the average hash rate necessary to mine a block.

Pay-Per-Last N Shares: In this approach, incentives are distributed proportionally based on the number of shares (denoted by N) provided in the most recent period of time. In other words, it simply takes into account the most recent share contributions made at the moment of block discovery and ignores previous share contributions.

Full Pay Per Share: This is a variation of Pay Per Share, but with a minor difference. The difference is that FPPS includes transaction fees and block subsidies in the payout plan. Pool members typically receive greater amounts of cryptocurrency as a result, compared to ordinary Pay Per Share.

Shared Maximum Pay-Per-Share: This reward scheme compensates miners depending on the actual rewards that the pool generates. Consequently, miners in such a pool only earn what the pool has earned and nothing more.

Score Based Method: This system offers greater credit to recent hash rate contributions than older contributions. If blocks are won later in the period, and your hashing occurs early, your hash power will earn less than if it occurs in the time leading up to the discovery of a block.

Recent Shared Maximum Pay-Per-Share: When calculating rewards, the weight is given to the most recent hash rate shares rather than the overall amount of contributions made during the mining pool’s lifetime. As a result, early contributions will have a lower value than contributions made nearer to the discovery of a block.

The advantages and disadvantages of pool mining

Advantages

  • Regular payouts – whether it is daily or after reaching some criterion, pools normally pay you more regularly. It takes a painfully long time to find a block when mining alone.
  • Pools typically allow you to check the status of your miners from any location, as well as receive notifications of payouts and the like, which would require a significant amount of additional setup work if you did it yourself.
  • Pool miners have an advantage over solo miners in that solo miners must retain their own copy of the blockchain, which takes up space. All of that is taken care of by pools on their own.
  • Pooled mining requires less setup time and is relatively easy to go about it than setting up your own.

Disadvantages

  • A lesser payout can be expected if a pool charges a fee and/or uses a skewed reward structure such as Pay Per Share.
  • Being dependent on third-party systems to mine may be costly if the sites crash because it would mean that your miners can stay idle until the system gets fixed.
  • You have to trust that the mining pool owner will not create fake miners whose profiles will show up but will earn money without contributing any hash rate to the pool.  

In summary

Pool mining is a collective effort by a group of miners to locate blocks as a team. The pool’s hashed Proof of Work is divided among all miners who participated in it to ensure a fair distribution of block rewards.

Different mechanisms are used to calculate how the mining rewards are shared in different pools. It is, therefore, essential that you find a pool that uses a reward-sharing formula that is favorable to you. Using mining pools allows smaller operators to participate in mining even if their processing capacity is low.