What are mining pools and how do they work?
Have you ever tried to mine crypto yourself? This can be very difficult in some cases, especially when using a Proof of Work
(PoW) algorithm. This is because you will have to compete with others here. Therefore, it can be wise to work with others in a mining pool. That way you have more computing power to mine, but lower returns.
How does the blockchain works?
To understand what a mining pool is and how it works, it is important to know how blockchain
works. Fortunately, we can explain this easily.
A blockchain consists of a network of hundreds if not thousands of computers. These are all connected to each other. When someone makes a transaction, by sending a Bitcoin
for example, all these computers simultaneously check whether this (and all other) transactions are valid.
The moment that it is, all these transactions are joined together in a block. This block is then converted to a hash. You can compare this to the files you put in a folder, after which you zipped the folder.
All these blocks are connected to each other because the hash of the previous block is added to the new block. So, there is a chain of all the zip files that are linked together, so to speak.
What is a mining pool?
When you work together, in many cases you can achieve more than when you work alone. This is also the premise of a mining pool. In fact, it can be quite difficult to be allowed to add a new block to the blockchain. This is because the moment a blockchain uses Proof of Work
, you must be the first one to have validated all the transactions.
You can increase the chance of you being the first to validate the transactions by getting more computing power. That means you need better hardware. Or, on the contrary, you need more hardware. That's why there are a lot of people who have large server rooms that are mining.
Anno 2021, even this is no longer enough to be among the best miners. As the average computing power of hardware advances every year, miners can mine new crypto coins faster and faster. As a result, it is often no longer feasible for a private individual to mine. The costs are so high that you can't make a profit anymore.
Mining pools are the solution
A solution to this problem is to join a mining pool. In effect, you are pooling your computing power with that of others. This also means that the reward you receive is lower. This is because it must be divided among all the participants in the mining pool. Often the reward is distributed based on how much processing power you provided in relation to the rest.
Mainly for blockchains like Bitcoin and Ethereum
it is necessary to join a mining pool if you want to mine for these blockchains. This is because there are so many participants in these blockchains that it is virtually impossible to join as a private individual.
Disadvantages of mining pools
The biggest advantage of blockchain is its decentralization. Data is not stored in one place, which means that there is no single organization, government or institution that owns this data. The middlemen are eliminated, so there is more transparency.
However, mining pools throw a spanner in the works here. Decentralization means that the data is not managed by a single entity. It is often the case that new blocks of Bitcoin are added by only a few mining pools. And these are also always the same pools. So this means that centralization occurs.
This is also exactly the reason why there are many people who are not fans of the Proof of Work algorithm. Because this algorithm rewards miners based on the computing power they provide, only the groups with the most money (that they can invest in hardware) can survive. Partly because of this, Ethereum is in the process of switching to Proof of Stake (PoS), where there are no miners, but validators who add blocks to the blockchain.
High energy costs
Another disadvantage is that it takes an awful lot of energy to validate transactions when using mining pools. There are an awful lot of machines working together to add one block to the blockchain. This takes an awful lot of energy, which is not exactly good for the environment.
It also involves high costs for the miners, which means that the reward that remains for the individuals of the mining pool is often not profitable.
How to choose the right mining pool?
Would you like to mine in a mining pool? Then you can start looking for a mining pool that meets your needs. There are many different mining pools for the big and well-known blockchains. This makes it difficult to choose the right mining pool for you. We will tell you what to look out for when choosing a mining pool
Size and market share of the mining pool
To maximise your chances of generating income, it is in your interest to choose a mining pool of size. You can look at the number of miners that are members of a pool for this purpose, for example, although the hash power that the pool has said much more. However, as a miner, you must be careful and avoid mining pools that have too large a market share. This way you ensure that decentralization is maintained.
Remuneration of the mining pool
A mining pool will always tell you in advance how much you will be paid. This can be quite low (between 1% and 2%), but in some cases it can be high (up to 5%). However, the latter is a rather rare occurrence.
It also happens that mining pools don't pay out any reward at all during a certain period (the beginning). In this case you will only incur costs and will not receive anything in return.
Examples of mining pools
These are the largest Bitcoin mining pools based on market share:
These are the largest Ethereum mining pools based on market share:
Thus, a miner may choose to join a mining pool to be able to join forces with those of other miners. This way the miner has a greater chance of participating in adding new blocks to the blockchain.
Nowadays it is very difficult for an individual miner to participate in the blockchain network. This is because there is more and more competition, which means that you need to have the most computing power to come out on top.
However, there are also many disadvantages to joining a mining pool. For example, you contribute to the centralization of the blockchain, and the fees you receive are very low. This is the reason why more and more people are choosing to stake or farming to make money with crypto in a different way.