What is a Mining Pool?

Even with excellent hardware performance, not all problems can be solved. Even running multiple high-performance Application-Specific Integrated Circuits (ASICs) is just a "drop in the ocean" in the Bitcoin mining network. Despite investing heavily in hardware and consuming vast amounts of electricity, the probability of mining a new block remains extremely low, and there's no guarantee of when block rewards will be received—or if they will be received at all. If you seek a steady income, joining a mining pool might improve your luck.

Suppose you and nine other participants each possess 0.1% of the network's hash rate. This means you could expect to mine 1 block out of every 1,000 blocks on average. With an estimated 144 blocks mined daily, you would mine approximately 1 block per week. Depending on your financial capacity and investment in hardware and electricity, this "solo mining" approach might be a viable strategy.

However, what if the income isn’t enough to be profitable? In that case, you could collaborate with the nine miners mentioned earlier. Combining everyone’s hash power would give you 1% of the network’s total hash rate. This increases your chances to "1 in 100," allowing you to mine 1-2 new blocks daily. The rewards would then be evenly distributed among the collaborating miners.

In short, what we’ve just described is a "mining pool." Mining pools provide miners with relatively stable income and are now widely adopted.

How Mining Pools Operate

Mining pools are typically organized by coordinators who manage the miners. The coordinator ensures miners use different values to search for nonces, preventing them from wasting hash power on creating identical blocks. The coordinator also distributes rewards and pays fees to participating miners. Currently, there are multiple ways to calculate each miner’s workload and corresponding rewards.

Pay-Per-Share (PPS) Pools

Pay-Per-Share (PPS) is the most common reward distribution mechanism. In this system, each "share" submitted by a miner corresponds to a fixed reward amount.

A "share" records the hash power contributed by a miner. The reward per share is relatively small but accumulates over time. Note that a "share" here is not a valid hash value on the network but merely a hash that meets the matching criteria set by the pool.

Under PPS, miners receive rewards regardless of whether the pool mines a block. However, pool operators bear the risk and thus charge a fee. This fee can be collected upfront from miners or deducted from future block rewards.

Pay-Per-Last-N-Shares (PPLNS) Pools

Pay-Per-Last-N-Shares (PPLNS) is another popular distribution mechanism. Unlike PPS, PPLNS only rewards miners when the pool successfully mines a new block. After mining a block, the mechanism verifies the last N shares submitted (where N varies by pool). A miner’s reward is calculated by dividing their submitted shares by N, multiplying by the block reward, and deducting the pool operator’s cut.

For example: If the current block reward is 12.5 BTC (assuming no transaction fees) and the operator takes a 20% fee, miners receive 10 BTC in total. If N is 1,000,000 and a miner contributed 50,000 shares, their reward would be 5% of the block reward (i.e., 0.5 BTC).

While many similar mechanisms exist in the market, PPS and PPLNS remain the most common. Note that although we’ve focused on Bitcoin, most popular Proof-of-Work (PoW) cryptocurrencies have mining pools, including Zcash, Monero, Grin, and Ravencoin.

Do Mining Pools Threaten Decentralization?

Reading this, alarms might ring in your mind. Isn’t Bitcoin’s strength rooted in the fact that no single entity can easily control the blockchain? What if someone gains control of the majority of the hash rate?

These questions are worth exploring. If a single entity controls 51% of the network’s hash rate, they can launch a 51% attack. Successfully executed, the attacker could delete transactions and reverse completed ones, wreaking havoc on the cryptocurrency ecosystem.

Do mining pools increase the risk of a 51% attack? The answer is: Potentially, but it’s highly unlikely.

Theoretically, the top four mining pools could collude to hijack the network. However, such an operation would be pointless. If successful, Bitcoin’s price would plummet due to the compromised system, rendering the mined coins worthless.

Moreover, mining pools don’t necessarily own mining hardware. Participants direct their devices to the coordinator’s server, but the server can freely switch to another pool. For miners and pool operators, maintaining ecosystem decentralization is critical. Only if mining remains profitable can everyone benefit.

In some cases, the growing size of mining pools is concerning. Pools (and participating miners) often take measures to reduce their hash rate.

Conclusion

The introduction of the first mining pool revolutionized the cryptocurrency mining landscape. Miners seeking long-term, stable income became the beneficiaries. With new mechanisms continually emerging, everyone can find a method that suits them best.

Ideally, Bitcoin mining should become increasingly decentralized. At its current state, it can only be described as "sufficiently decentralized." In any case, no single pool can sustainably dominate the majority of the hash rate. Participants should remain vigilant against such threats—after all, Bitcoin is run by its users, not miners.