How Do Cryptocurrency Mining Pools Work?

Fact checked by Katrina MunichielloReviewed by Erika Rasure

What Is a Mining Pool?

A mining pool is a group of miners who work together to solve the cryptographic problems required by certain blockchains which reward the miners with cryptocurrency. Pools were created when cryptocurrency mining reached a difficulty level that only miners with enormous capacity could accomplish. This crowded small miners out of the competitive mining process, forcing them to work together to compete with the large mining firms.

Key Takeaways

• Mining pools combine the efforts of individual or smaller mining groups to make them more competitive with the large mining operations that dominate the network.
• Mining has three purposes: it is the first verification of transactions, opens new blocks on the blockchain, and introduces new cryptocurrency into circulation.
• Mining pools split rewards based on how much work a miner contributes to the pool.
• Pools are essentially the only way to earn Bitcoin due to the centralization of the network’s mining capacity.

Understanding the Mining Process

Cryptocurrency mining involves two functions—releasing new cryptocurrency into the system and verifying and adding transactions to the blockchain. It is performed using internet-connected devices and software programs which perform the mining process.

Crypto mining is a calculation-intensive, puzzle-solving-like computation process that requires high processing power and electricity consumption. The miner(s) who first solves the puzzle gets to place the next block on the blockchain and claim the rewards. Mining rewards include newly released Bitcoin and fees for the work done. All transaction fees on the Bitcoin blockchain are paid for by the user to whoever solves the problem.

The cryptocurrency discovery process is configured so that if more miners are working, the difficulty level goes up. A decline in the number of miners eases the difficulty level. The rewards make mining a lucrative activity for monetary gains. As more miners attempt to grab a piece of the pie, finding new blocks becomes computationally more difficult, requiring more computing power. This is often impractical and too expensive for individual miners who can’t afford multiple mining-specific machines.

Pooling Resources: Let’s Mine Better, Together

Enter the mining pool, a collection or group of miners working together to increase their chances of finding a block at the group level compared to that at the individual level. Through these pools, miners combine their individual computational resources with those of the other members. This enhances their joint processing power and helps them become more competitive, increasing their chances of receiving a reward.

To draw an analogy, imagine a gold digger has the capacity to dig 100 square meters of land in one day. It would take them 100 days to explore one hectare of land for gold. Combining 100 gold diggers with the same capacity can complete the job in just one day. Any gold discovered can be split among all 100 diggers evenly, assuming all have put in equal effort to explore their assigned portions of land.

Similarly, one can combine nine mining devices, each generating mining power of 335 megahashes per second (MH/s), to generate a combined output of around three gigahashes. The output is faster and has an increased chance to solve the puzzle.

Important

It’s important to understand the scale at which the Bitcoin network mines. On March 14, 2024, the Bitcoin network mined at a rate of about 635 exahashes per second (quintillion). One of the mining pools consistently in the top few pools by hashrate is FoundryDigital, which had a total Bitcoin hash rate of about 171 exahashes on March 14, 2024.

However, this pooling, with better output and higher chances, comes at a cost. The reward earned through combined mining is split among the various pool members, as compared to sole ownership of the reward earned through individual mining. 

Functions of a Mining Pool

A mining pool essentially works as a coordinator for the pool members. The functions involve assigning work, looking for rewards through pooled efforts of available processing power, recording work performed by each pool member, and assigning reward shares to each pool member in proportion to the work performed after suitable verification.

The pool may also charge a fee from each member miner.

Work to each pool member can be assigned in two ways. The traditional method involves assigning members a work unit comprised of a particular range of nonce. This is a number that blockchain miners use to add to the block’s hash to generate a hexadecimal number to compare to the network target. Once the pool member completes the work on the assigned range, they place a request for a new work unit to be assigned.

A second mining method allows pool members the liberty to pick and choose as much work as they like without any assignment coming from the pool. The methodology ensures that no two members take the same range, just like no two gold diggers should explore the same piece of land.

How Do Mining Pools Share Rewards?

Successful identification of the block hash leads to reward for the pool, which is usually based on a shares mechanism. Shares describe how much work a particular member contributes to the mining pool. 

There are two kinds of shares—accepted and rejected. Accepted shares indicate that work done by a pool member contributes substantially towards discovering new cryptocurrency, and these get rewarded.

Rejected shares represent work that does not contribute to a blockchain discovery. Many pools generally do not pay for these. Even if a member’s computer performs work successfully but submits it late for that particular block, it constitutes rejected work.

A pool member ideally wants all their shares to be accepted. However, rejected shares are inevitable, as it is impossible for all the computations on a member’s computer to be useful in coin discovery and always be submitted on time.

Pool members are rewarded based on their accepted shares that helped open a block. A share has no actual value and simply acts as an accounting method to keep the reward distribution fair.

Based on the accepted shares, members get rewarded using different methods, some of which include the following:

• Pay-per share (PPS): Allows instant payout solely based on accepted shares contributed by the pool member, who are allowed to withdraw their earnings instantly from the pool’s existing balance.
• Proportional (PROP): At the end of a mining round, a reward that is proportional to the number of the member’s shares with respect to the total shares in the pool is offered.
• Shared Maximum Pay Per Share (SMPPS): A method similar to PPS but limits the payout to the maximum that the pool has earned.
• Equalized Shared Maximum Pay Per Share (ESMPPS): A method similar to SMPPS, but distributes payments equally among all miners in the bitcoin mining pool.

Other variations include the Double Geometric Method (DGM), Recent Shared Maximum Pay Per Share (RSMPPS), Capped Pay Per Share with Recent Backpay (CPPSRB), and Bitcoin Pooled Mining (BPM).

Before deciding to join a particular pool, miners should pay attention to how each pool shares its payments among members and what fees, if any, it charges. Typically, pools may charge between 1% and 3% as pool fees.

What Is a Mining Pool?

A mining pool is a group of cryptocurrency miners that combine their resources and attempt to solve the cryptographic mining puzzle.

Do Mining Pools Make Money?

Pool members can receive shares of any rewards, and the mining pool managers might receive fees for providing and administering the pool.

Is Joining a Mining Pool Worth It?

If you can’t afford several top-of-the-line mining machines but still want to mine a cryptocurrency, joining a mining pool is the only option. It is worth it if you have a machine capable of producing a significant amount of work for the pool. If you’re looking for a way to recoup the expenses of purchasing mining equipment, whether it’s worth it depends on your contributions to the pool and how much you get back.

The Bottom Line

With mining becoming more centralized toward large firms with thousands of high-speed mining devices, the chances of realistically profiting from individual mining are diminishing. Most individuals opt to join a mining pool, which allows them a high probability of limited profits instead of a low probability of high profits. Most people will not be able to earn a significant profit from mining in its current state.

The comments, opinions, and analyses expressed on Investopedia are for informational purposes only. Read our warranty and liability disclaimer for more info. As of the date this article was written, the author does not own cryptocurrency.

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