Straight into the Deep End - Understanding Mining Pools

Corey Baldwin | CEO

What is Pooled Mining?

As cryptocurrency mining has increased in popularity the difficulty of generating a block has increased. It is now almost impossible for a single user with limited hashing power to effectively mine a block for themselves. As a response to this difficulty, pooled mining has become very popular as a means to reliably receive payment for your efforts.

Pooled mining is when multiple users contributed their processing resources to a pool in order to generate a block while being paid a share of the earnings equivalent to their contributed computing power. If managed properly, pooled mining greatly smooths the earnings for a miner, preventing the granular nature of mining alone.

This technique is especially useful for miners with lower processing power as they are able to receive payment for completed blocks on a much more regular basis instead of waiting years to complete the generation of a block by themselves.

Payment from the mining pool will come in the form of a share. These are rewarded to the clients who provide a proof of work, which is a piece of data that is difficult to produce but easily verifiable by others. This proof of work presented will be of the same type that was used to generate the block that the miner is being paid out for, but of a lesser difficulty so that the generation time is less.

Popular Mining Pool Reward Approaches

There are many approaches to pooled mining that offer different features or advantages than others. All of these approaches have the same goal which is to prevent cheating by the clients and the server.

Slush

Slush's pool was the first mining pool known to be publicly available and dates all the way back to 2010. This pool follows a score-based method, which is designed to demotivate a client from switching between pools within a round. This is achieved by assigned a score to the shares that are issued from a completed round. Older shares in the round have a lower score than newer ones in the round and thus have a lower value. There is a fixed fee of 2% to compute within this pool as of December 2017. Capitol Crypto currently operates within the Slush's pool.

  • Flat 2% fee
  • Variance: Slightly Higher than Proportional
  • Transaction fees shared with clients

Pay-per-Share (PPS)

Pay-per-Share was first introduced by BitPenny and pays out a flat amount immediately for any share that is solved. This payout comes from a balance that is being carried by the pool itself and thus there is no delay in payment to the client. This approach does not require that a block be solved before a payout occurs. Since the payments occur at the moment a share is solved there is no way the pool operator can cheat the miners participating in the pool. Since this method produces no variance for the miner, all the risk is being taken by the pool operator. This means that the payouts are usually less than expected for a generated block because the operator needs to offset their risk.

  • Fees usually high to offset risk for pool operator
  • Zero variance, good for beginners
  • Immediate payout

Maximum Pay-per-Share (MPPS)

In this model every share that is submitted from miners is assigned a known value in advance. This value is rewarded to the client, provided that the pool has sufficient funds to cover this payment. If it does not, this value will be stored as a credit in the pool and will be paid out to the client once the funds are available in the pool.

  • Payments due to clients are always paid out based on what they earn, even if the pool moves on to the generation of a new block
  • Zero variance, good for beginners
  • High fees to offset pool operator risk

Full Pay-per-Share (FPPS)

Created by BTC.com, this method is similar to PPS except it aims to share transaction fees that are collected by the pool with the clients participating in it. This added reward is fixed at 12.5 BTC per block at this time and is awarded to the clients following the PPS method using their proportion of contributed computing power to the completion of a block generation.

  • Maintains all the advantages to the PPS model
  • Part of transaction fees shared with clients
  • High fees to offset pool operator risk

Proportional (Share-Based)

Arguably the most straight-forward approach, this method pays out shares in direct proportion to the processing power provided at the completed generation of a block.

Conclusion

There are many more pooled mining approaches in the world and some pools may use multiple approaches. The Bitcoin wiki has a helpful link here that details which pool has which reward type for easy comparison. Selected the right mining pool is as important a step in setting up your mining operation as selecting your hardware, and the decision you have made should constantly be audited to ensure you are operating in the best pool for you. 

 

Caroline Baldwin