Cryptocurrency Mining For Dummies, 2nd Edition
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Pool mining is a group of miners acting as a team to find blocks. The block rewards are proportionally split across all miners who contributed to the pool’s hashed Proof of Work; that is, the more hashing power you provided to the operation during a particular time period (the pool mining duration or mining round), the higher the share you receive for block rewards won by the pool during that time period. (More specifically, there are a number of different ways that shares are calculated, but in general you are rewarded according to the proportion of the hash power you provide to the pool.)

Typically, the mining duration or mining round is the period of time between blocks mined by the pool. That is, a round begins immediately after the pool has won the right to add a block to the blockchain and stops when it adds a block to the block chain the next time. The round can range anywhere from a few minutes to many hours depending on the pool size and the pool’s luck.

Here's essentially how pool mining works:

  1. You sign up with a mining pool.
  2. You download and install the mining pool’s software on your computer.
  3. The software on your computer communicates with the mining pool’s servers; in effect, your computer has just become an extension of the mining pool’s cryptocurrency node.
  4. Your computer helps with the mining operations, contributing spare processing power to the pool’s PoW hashing.
  5. When the pool wins the right to add a block to the blockchain, and earns a block reward — the sum of the block subsidy and transaction fees—you get to share in the earnings based upon your individual contribution.
  6. Periodically the pool transfers cryptocurrency to your wallet address; you’re either paid in the cryptocurrency you helped mine, or that cryptocurrency is converted to another form (typically bitcoin) and the converted sum is transferred to you.
Regardless of the hardware you plan on mining with or the cryptocurrency you end up choosing, there is a mining pool for you. Whether you have cryptocurrency application specific integrated circuit (ASIC) hardware, a graphical processing unit (GPU) mining rig, or just a typical desktop computer with both a central processing unit (CPU) and GPU onboard, pool mining is the best method of consistently earning mining rewards for small operators.

Mining pools provide a way for the small operator to get into the game when his or her processing power is so low that solo mining simply isn’t practical. You can also use mining calculators, web pages into which you enter your hashing power, and in return get a calculation of how profitable mining a particular cryptocurrency would be, and how long it would take to mine your first block.

These calculators simply work on a statistical calculation based on the various numbers; the overall network hash rate (that is, the combining hashing power of all the computers mining that cryptocurrency), your level of hashing power, how often a block is mined, the block reward, and so on.

The calculators take all these numbers, and output the answers based on pure statistical probability. They tell you what you are likely to earn over a particular period, but your results can vary. You might mine your first block immediately, or you might mine your first block in twice the predicted time.

Well, for most small operators, these calculators can be a shock. You may discover, for example, that mining bitcoin using your paltry processor, will, statistically speaking, result in your first block being mined ten years from now. In other words, solo mining simply isn’t practical for you. In such a case, if you really want to mine bitcoin, you have to join a pool.

Mining pools are also very simple for the user to use, by design, and take a lot of the technical details and headache out of the mining process. Mining pools provide a service to individual miners, and miners provide hash rate to pools.

Pool mining incentives and rewards

Different pools use different methods for calculating payouts. Each mining pool’s website will provide information about which payout methods it uses and will go into deeper detail on how they specifically implement them.

The following list shows a few of the most popular payout-calculation methods. The premise of these methods: miners are paid a proportion of the gains made by the pool over a period of time. That period of time is known as the mining duration or mining round.

For example, take a look at Slush Pool’s mining results. In the image below, on the right side, you can see how long the current round has been operating, and the length of the average mining round (1 hour 39 minutes).

Slush pool The statistics page at Slush Pool, showing information from the current mining round (or mining duration).

On the left, it shows the average hash rate; 5.345 Eh/S; that is, 5.345 Exa hashes per second, or 5.345 quintillion hashes per second (5,345,000,000,000,000,000 hashes per second). Now, 14,662 miner accounts are providing hash power to the pool (see on the left side; the number of “workers” are individual computers owned by those 14,662 miners), so for Slush Pool, on average each miner is providing about 0.0068 percent of the pool’s hashing power.

Say that you provide that proportion of the hashing power during the mining round; you will earn 0.0068 percent of the payout from that mining round (after fees have been taken out by the pool operator).

Your hashing power may not have been involved in the actual winning blocks (perhaps your computer was operating at times when the pool did not win the right to add a block, for example), but because you provided hash power during the mining round, you earn your proportional payout.

Payout calculations are often (as everything in cryptocurrency mining is!) more complicated than a simple proportional payout. The following list describes a few popular methods for calculating mining pool payouts. The term share refers to the proportion of the total hashing power during the mining duration that your mining rig contributes to the pool.

  • Pay-Per-Share (PPS): With PPS, miners earn a guaranteed income based on the probability that the pool mines a block, not the actual performance of the pool. Sometimes the pool will do better than the statistical probability, sometimes worse, but the miner gets paid based on his or her contribution to the average hash rate required to mine a block.
  • Full Pay-Per-Share (FPPS): FPPS is very similar to PPS. However, with FPPS, the pools also include transaction fees as well as the block subsidy in the payout scheme. This usually leads to larger cryptocurrency rewards for pool participants when compared to standard PPS.
  • Pay-Per-Last N Shares (PPLNS): The PPLNS structure pays out rewards proportionally looking at the last number (N) of shares contributed. It does not consider all the shares during the entire mining round, but rather consider only the most recent share contributions at time of block discovery. (How many recent shares? Whatever number is set by N.)
  • Shared Maximum Pay-Per-Share (SMPPS): SMPPS is a similar reward method to PPS, but rewards miners based on the actual rewards earned by the pool and thus never pays out more than the pool earns.
  • Recent Shared Maximum Pay-Per-Share (RSMPPS): This reward scheme pays out miners in a similar way to SMPPS. Rewards are paid out proportionally to the total number of shares contributed during the mining pool, but with more weight on recent hash rate shares. That is, shares that were contributed early in the round would be worth a little less compared to shares that were contributed closer to the discovery of a block.
  • Score Based System (SCORE): This reward system pays you according to your proportion of hash rate provided but gives more weight to more recent hash rate shares than earlier shares in the mining round. That is, if your hashing was early in the period and a block was won later in the period, your hash power will earn a lower proportion than if it were provided closer to the time of the winning block.

    So this is similar to RSMPPS, but the scoring hash rate is roughly a rolling average of your mining hash rate. If your mining share is steady and constant, your scoring hash rate will be roughly constant as well. But if your mining rig was offline when a block is found by the pool, you won’t earn a reward equivalent to the total hashing you contributed over the block duration, but an adjusted rate.

  • Double Geometric Method (DGM): This reward scheme is a cross between PPLNS and a geometrically calculated reward that equalizes payouts depending on mining round duration. This creates lower mining rewards during short duration rounds and larger reward payouts for longer rounds.
Each of these payout methods were conceived and deployed in an attempt to maintain fairness between pool operators and in pool mining reward distribution to the individual miners contributing to the pool. Some are more successful than others. However, overall, they all have aspects of impartiality that balance the playing field for all the miners participating in the system.

For a more detailed discussion of pool-payment methods, see Wikipedia’s Mining Pool page and Comparison of mining pools page.

Pool mining ideology

One aspect that is often overlooked when selecting a pool to contribute your hash rate and mining power to is pool ideology. Ideology can be a tricky concept to nail down, especially when businesses are involved, and that’s what mining pool operators are: for-profit businesses.

Some are benevolent actors, and some have ulterior motives beyond mining reward and revenue. Some pools have historically attempted to undermine the cryptocurrencies they support. This can be seen in mining pools mining empty blocks in an attempt to game transaction fee rewards, clog transaction throughput, and push alternative systems.

Other mining pools have used their hash rate and influence to stall updates to the system or instigate and propagate forks of the blockchain they are mining. There is no tried and true or easy way to measure mining pool ideology.

However, community sentiment and historical actions are often a good barometer to measure if a mining pool is acting in a way that supports the wider ecosystem. The best way to sift through mining pool ideology is to stay up to date on cryptocurrency news, and to peruse online forums, such as BitcoinTalk.org, or social media sites like Twitter or Reddit.

Overall, ideology is less important of a factor when considering pools compared to mining reward process and pool fees. After all, cryptocurrency is an incentive-based system, and selfishness drives the consensus mechanisms and security of the various blockchains.

Pool mining reputation

Another important factor in pool selection is pool reputation. Some mining pools propagate scams and steal hash rate or mining rewards from users. These types of pools do not last long as news travels fast in the cryptocurrency space and switching costs for pool miners are very low, making it easy for users to leave pools that cheat miners.

However, despite this, there have been many examples of mining pool and cloud mining service scams. Some of the more noteworthy historically have been Bitconnect, Power Mining Pool, and MiningMax.

The best way to detect a scam may be the old-fashion mantra “If it sounds too good to be true, it probably is!” (Strictly speaking, Bitconnect wasn’t a mining pool, but it was a service that promised returns on a cryptocurrency investment.)

A bitcoin investor could lend bitcoin to Bitconnect and in return earn somewhere between 0.1 percent and 0.25 percent per day … yep, up to doubling his money each month. Of course, many investors never go their money back from this Ponzi scheme.)

Other clear hints of mining pool or cloud mining scams include but are not limited to

  • Guaranteed profits: Pools or cloud services that offer guaranteed profits are selling more than they can provide. Again, you know the old saying — if it sounds too good to be true.…
  • Anonymous perpetrators: Pools or mining services that are owned and operated by anonymous entities or individuals can sometimes be shady — buyer beware.
  • Multilevel marketing schemes: Some mining pools or cloud mining services offer larger rewards for those that recruit others into the scheme. This may not always mean the operation is a scam, but be careful to do your research carefully if MLM (also known as pyramid schemes) are present. (Many online companies pay recruitment bonuses, but MLM takes it to another level.) MiningMax, for example, was a pyramid scheme: Miners would pay to get into the pool and then get paid recruitment bonuses. Reportedly $250 million went missing.
  • No publicly auditable infrastructure: Pools or cloud mining services that are not transparent — that don’t publish videos of their mining facilities or publicize hash rate data, for example — may be scams.
  • No hash rate proof: Some pools publish provable hash rate data, proof that can’t be counterfeited and can be independently verified by any prospective miner. On the other hand, some pools simply publish their hash rate data without any kind of evidence, hoping you’ll just trust their claims. (For an example of how hash rate data can be independently verified, see Slush Pool’s explanation).
  • Unlimited hash power purchases: If a cloud mining service offers very large, unrealistic amounts of hash power to purchase, then they may just be trying to secure your cryptocurrency for themselves instead of offering any long-term services. Be wary of services that offer sizable packages; it may be more than they can deliver.
Reputation in the cryptocurrency mining industry is hard to gain, but very easy to lose. For this reason, many of the pool operators functioning today that have acquired large hash rate percentages on the cryptocurrency networks they support are not scams. If they were in fact scams or illegitimate actors in the space, enterprising miners would have already switched to a better pool.

This doesn’t always apply to cloud mining operators, as the switching costs for cloud mining contract purchasers are much higher, so this doesn’t mean you can let your guard down. Vigilance and due diligence are a must and highly recommended in this space.

How do you check on a pool’s reputation? Check the mining forums and search on the pool’s name to see what people are saying about it.

Pool percentage of the total network

How does the percentage that a pool holds of the overall network hash rate effect you? After all, a large pool is going to take a larger proportion of the money being made from mining than a smaller pool.

That’s correct, but it shouldn’t, over time, affect how much you earn. Here’s why. Remember, the network hash rate is the number of hashes contributed, by all miners and all pools, to mining a block. Depending on the cryptocurrency, it may take quintillions of hashes per second, for perhaps ten minutes on average, to mine a block (that pretty much describes bitcoin mining, for example).

So, you have all these machines, thousands of tens of thousands of them, hashing. Who is going to get to add a block to the blockchain? That’s a factor of the amount of hashing power provided, in combination with luck…chance. That means that the miner or pool that gets to mine the next block is very hard to determine.

It may be the pool that contributes more hashing power than any other pool or miner; but there’s chance involved, too, so it could be the miner with the tiniest contribution in the entire network. It probably won’t be, but it could be. That’s the way chance — probabilities — works.

Think about it like a lottery. The more tickets you have, the more likely you are to win…but you might win if you only have one ticket. Chances are you won’t … but it could happen.

Over the short term, then, it’s impossible to predict who is going to win the hashing contest, or even, over a few mining rounds (or even a few hundred mining rounds), what proportion any pool is likely to win.

However, over the long term, the closer to the hashing percentage the wins become. If your pool contributes 25 percent of all the hashing power, then, over time, the pool is going to mine 25 percent of the blocks.

Here’s another analogy: It’s like tossing a coin. What percentage of coin tosses are heads, and what proportion are tails? Over the short term, it’s hard to tell. Toss twice, and it’s entirely possible that it’s 100 percent one way or the other. Toss ten times, and it’s still unlikely to be 50:50. But toss a thousand times, and you’re going to get very close to that 50:50 number (assuming clean tosses of a balanced coin).

So, over time, a pool that represents 25 percent of the network hash rate should mine 25 percent of the network’s blocks, and a pool that represents 10 percent of the network hash rate should mine around 10 percent of the blocks.

All right, back to the question: Should you go with a big pool or a small pool? A big pool, over time, will win more blocks than a small pool. But, of course, you’re going to get a smaller proportion of the winnings than you would in a smaller pool.

Over time, this means there’s no real difference. Whatever the size of the pool you join, your hashing power is the same percentage of the overall network’s, and thus, over time, you should earn the same percentage.

There is one difference. The larger the pool, the more frequently you’ll earn a cut. That means more frequent earnings than from a smaller pool. Those earnings will be smaller, though; you can’t beat the math. You’re not going to earn more than your percentage of the earnings represented by your percentage of the hash rate. (Over the long term, that is; over the short term, you might earn considerably more or considerably less, which ever choice you make.)

So you might to like to go with a larger pool just so you see income more frequently, but don’t expect picking a larger pool to increase your earnings…long term.

How do you find the relative size of the pools? Many sites provide this information often in the form of pie charts. Check out this historic graphical view of network hash rate percentages by pool on the Bitcoin network.

About This Article

This article is from the book:

About the book authors:

Peter Kent is author of numerous technology titles as well as his own cryptocurrency video course, Get Crypto Clear: Bitcoin and Cryptocurrency Made Simple.

Tyler Bain is an engineer specializing in the electrical grid and keeping the lights on for all those Bitcoin miners, traders, and node runners. Peter and Tyler are also co-authors of Cryptocurrency Mining For Dummies.

Peter Kent is author of numerous technology titles as well as his own cryptocurrency video course, Get Crypto Clear: Bitcoin and Cryptocurrency Made Simple.

Tyler Bain is an engineer specializing in the electrical grid and keeping the lights on for all those Bitcoin miners, traders, and node runners. Peter and Tyler are also co-authors of Cryptocurrency Mining For Dummies.

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