Contents

• Introduction
• What is a mining pool?
• The operating mechanism of the mining pool
• Pay-Per-Share (PPS) mining pool
• Pay-Per-Last-N-Shares (PPLNS) mining pool
• Do mining pools pose a threat to decentralization?
• Summary

Introduction

Mining is proof of work An important component of blockchain security measures. Cryptocurrency networks are secured by participants calculating hashes of specific attributes without the intervention of a central authority.

In 2009, when Bitcoin first came out, everyone could use ordinary computers to compete with miners to calculate the effective hash value of the next block. At that time, mining difficulty was low, the hash rate in the network was not high, and no specialized hardware was required to add new blocks to the blockchain.

So the computer that computes the highest hashes per second is able to mine more blocks, which leads to a major shift in the ecosystem. Miners began to use every possible means to gain a competitive advantage.

After traversing various hardware such as CPU, GPU, FPGA, etc., Bitcoin miners finally chose application-specific integrated circuits (ASIC). On these mining rigs, you can’t browse Binance Academy or log into Twitter to post cat photos.

As the name suggests, an Application Specific Integrated Circuit (ASIC) can only perform a single task: calculating hash values. These devices are purpose-built and extremely powerful, gradually replacing other types of Bitcoin mining hardware.

What is a mining pool?

However, no matter how excellent the hardware performance is, it cannot solve all problems. Even if it runs multiple high-performance application-specific integrated circuits (ASICs), it is just a "drop in the ocean" in the Bitcoin mining army. Even if a lot of money is invested in building hardware equipment and a huge amount of electricity is consumed, the probability of mining a new block is still very slim.

There is no guarantee when the block reward will be obtained. Maybe there is no harvest at all. . If what you want is continued income, you may have better luck joining a mining pool.

Assuming that you and the other 9 participants each own 0.1% of the network's hashing power, this means that you can expect to mine 1 block for every 1,000 blocks on average. It is estimated that 144 blocks are mined per day, so you can mine 1 block in about a week. Depending on your own financial capacity and investment in hardware and electricity, this "independent mining" method may be a feasible strategy.

However, what if the revenue is not enough to make a profit? Then you can work together with the 9 miners mentioned above. The total hash power of everyone adds up to 1% of the hash rate of the entire network. In this way, the chance increases to "one in a hundred", and 1 to 2 new blocks can be mined every day. The collaborating miners then share the reward equally.

In short, what we just described is a "mining pool". Mining pools bring relatively stable income to miners and are now widely used.

Operating mechanism of mining pool

Mining pools generally organize miners to mine through coordinators. The coordinator oversees the miners' use of different values to find nonces, making sure they don't waste hash power creating the same block. The coordinator is also responsible for distributing rewards and paying fees to participating miners. Currently, there are several different ways to calculate each miner's workload and corresponding rewards.

Pay-Per-Share (PPS) Mining Pool

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

"Share" is used to record the hash power contributed by miners. The reward for each "share" is relatively low, but will gradually increase over time. Please note that the "share" here is not a valid hash value in the network, but only a hash value that meets the matching conditions set by the mining pool.

In the PPS mechanism, miners can receive rewards regardless of whether the mining pool produces blocks. However, pool operators bear risks and therefore charge a fee. This fee can be charged to miners in advance or deducted from subsequent block rewards.

Pay-Per-Last-N-Shares (PPLNS) Mining Pool

Pay- Per-Last-N-Shares (PPLNS)is another popular allocation mechanism. Unlike PPS, PPLNS only rewards miners when the mining pool mines a new block. After the mining pool mines a new block, this mechanism will verify the N value of the previously submitted "share" (the N value varies depending on the mining pool). The "share" submitted by the miner is divided by N, multiplied by the block reward, and finally deducted from the mining pool operator's share, the miner's reward is obtained.

Let’s give an example: If the current block reward is 12.5 Bitcoins (assuming no transaction fees), the operator charges a 20% service fee, and the miner finally gets a reward of 10 Bitcoins. If N is 1 million, and the miner contributes 50,000 "shares", the miner's reward is 5% of the block reward (that is, 0.5 Bitcoins).

Although similar mechanisms emerge in endlessly in the market, the above two are the most common. Please note that although we have been discussing Bitcoin, the most popular PoW cryptocurrencies have mining pools. Typical examples include: Zcash, Monero, Grin and Ravencoin, etc.

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Do mining pools pose a threat to decentralization?

After reading this article, the reader may have a warning bell ringing in his mind. Isn’t Bitcoin powerful because a single entity cannot easily control the blockchain? What if someone controls the vast majority of hashing power?

These questions are worth exploring. If a single entity controls 51% of the hash power in the network, it can launch a 51% attack. If successful, the attacker deletes the transaction and reverses the completed transaction. Such attacks would leave the cryptocurrency ecosystem devastated.

Will mining pools increase the risk of 51% attacks? The answer is: maybe, but the probability is very low.

April 16, 2020, by mining pool 24-hour hash rate breakdown. Source: coindance.com

Theoretically, the top four mining pools may collude to hijack network. However, this operation doesn't make much sense. Assuming the attack was successful, the price of Bitcoin would plummet as the system was breached. The end result is that the tokens mined by the mining pool depreciate in value.

In addition, mining pools are not necessarily equipped with mining equipment. Entities will point devices to the coordinator's servers, but servers are free to move to other pools. For miners and mining pool operators, keeping the ecosystem decentralized is a top priority. Only when mining continues to be profitable can everyone get a share of the pie.

In some cases, the size of the growth of mining pools is indeed worrying. Mining pools (and participating miners) generally take steps to reduce the hash rate.

Summary

With the introduction of the first mining pool, the landscape of the cryptocurrency mining market has changed. It has been completely overturned. Miners who hope to obtain long-term stable income become the beneficiaries. With new mechanics being introduced all the time, everyone will find what works best for them.

In an ideal world, Bitcoin mining would become increasingly decentralized. Judging from the current level, it can only be called "full decentralization". In any case, no one will be able to obtain the vast majority of hashrate from a single pool for a long time. Participants should be prepared to guard against this threat, after all, Bitcoin is run by users, not miners.