Bitcoin

What are Bitcoin Mining Pools?

Bitcoin Mining Pool

As the race to earn more bitcoins intensified, the competition increased to such an extent that it was extremely difficult and expensive going for solo mining. Another crucial factor was the constant rise in the difficulty level which further led to upping the ante in the game. Judging by the way things were moving, a solo miner with low- medium quality equipment could take years to generate just a single block. As a result, miners began to form groups so as to make use of their collective power and mine together- forming what is known as a bitcoin mining pool.

The collusion increases their chances of generating proof of work. In a pool, the profits are shared in proportion to the processing power contributed by each member. These pools are especially suited to miners who do not have high powered equipment. At the least, what one can expect is a noticeable decrease in its variance, if not much increase in the payout.

Mining shares

Work done in a pool is measured in terms of shares. You get one share for every proof of work. The proof of work in turn depends on the easiest level of difficulty. At this level, there are multiple nonces qualified as the solution to a particular computing problem. When one of the nonces fits in, proof of work gets generated against this difficulty level. Miners submit this proof to the pool and earn a share. Thus, share is the reward the entire pool earns which in turn is distributed to its members..

Fees and Payout

Depending on the payout method type, the bitcoin mining pools charge fees which usually range from 0.5% to 3%. Generally, the more risk one takes on, the more is the return generated. Hence there is higher payout for riskier mining. The payout method varies with different pools.

Usually the way to entice new bitcoin miners is to charge relatively lesser fee and give incentives based on shares, proof of work etc. A combination of this is how the pool GHash.io succeeded in attracting a lot of miners leading to it virtually the owner of 51% of the market in 2015 for some time. Also, all these methods also serve as a check for preventing cheating and fraud in their own ways.

Should you join one Bitcoin Mining Pool then?

If you’re a beginner with no experience, joining a mine is definitely the most appealing option. Even the bitcoin champions now join pools. Going solo can lead to a lot of headache in terms of the software, of which a majority is proprietary. Also, you would be responsible for fending for yourself from attack attemots. As of 2016, nearly all miners use pools and rarely go solo.

What are the benefits of Bitcoin Mining Pools?

  1. Economies of scale leads to more efficiency
  2. Cut down of costs
  3. Relatively less risk
  4. More chances of success
  5. Constant payout
  6. Loads of extra features
  7. Unlike in solo mining, here you do not need to keep your own copy of the blockchain

What should you be careful about Bitcoin Mining Pools?

  1. Their philosophy and motivation should be in agreement with your take towards Bitcoin. Nothing should be done to sabotage the network in any way. For eg: some developers threaten the network with software that could hard fork it or permanently cause a divergence in the block chain.
  2. Fraudulent scammers
  3. Fee charged
  4. Payout method
  5. How often a block reward is found
  6. Withdrawal of funds: automatic or threshold
  7. Reviews online about the owner being involved in any scam etc

As mentioned above, one of the most pressing concerns is avoiding being cheated by servers or other clients. There are many methods in place today to tackle that:

  1. Slush Pool: the oldest bitcoin mining pool, also known as Bitcoin pooled mining (BPM). It initially worked on the basis of a share strategy with the difficulty level set low artificially but this made it vulnerable to frauds. Now it makes use of a score based method. This basically means that shares of a later date are worth more than the earlier ones. Thus, this method depends on the time frame and is used to prevent miners from indulging in pool hopping. So, if your miner gets disconnected your entire score may fall to zero. For payout, the miner sets a threshold for balance release and till this is reached, the amounts keep accruing on the server itself.
  2. Pay-per-share: simply put, the bitcoin miners get paid for each share they submit. The payout depends on the difficulty level. Also, the fee tends to be the highest here as the pool operator assumes the maximum risk. This method is safer for the miners- they get instant payout per share and there is no risk from timing attacks. But this also means a lesser payout as compared to the riskier pools. BitPenny, the second oldest pool, was the first to introduce this method
  3. P2Pool Approach: This works on a share ‘chain’, similar to a blockchain. On finding a block, the reward gets divided among the latest shares.
  4. Maximum pay per share: This is considered to be ideal for beginners. Here the share has a value fixed in advance and known to all and is paid on submitting it. Sometimes, when the pool does not have sufficient funds, the residual amount is stored as credit and paid out at a later date.
  5. Proportional: As the name suggests, payout is in proportion to the amount of shares submitted.

Selecting a Bitcoin Mining Pool

Below is a list of some of the most popular pools available. To check out the latest scenario, Blocktrail can be used:

  1. F2Pool: Also known as Discus Fish, F2Pool is a China based pool. It opened in 2013. In July 2015, it spawned the biggest ever Bitcoin transaction to prevent a spam attack. Over the past year, it has mined about 22% of all blocks available.
  2. AntPool: Another Chinese based pool, operated by BitMain. BitMain recently evinced support for mining of Ethereum AntPool has a market share of about 17% and in the past year, has mined about 21% of all blocks.
  3. BTCC: yet again a china based pool, BTCC is the third largest in the world with a market share of 10.5% and in the past year, has mined about 13% of all blocks. It recently launched an international service to connect miners from all continents to the pool with ease. BTCC celebrated its fifth anniversary
  4. BitFury Pool: One of the major players in the mining hardware market, this pool has a market share of 7.5% and in the past year, has mined about 10.45% of all blocks. It is the world’s biggest bitcoin miner. It is also private and cannot be joined by all.
  5. BW Pool: One more China based pool formed in 2014. It currently has market share of about 8.4% and mines about 9% of all blocks.
  6. Slush: With a market share of about 7.3% and about 5% of all blocks mined in the past year, Slush was the first bitcoin mining pool to be set up.
  7. KNCMiner: With a market share of about 1.1% and about 2.96% of all blocks mined in the past year, this runs out of Sweden and mines bitcoins in their own warehouses.
  8. ViaBTC: a relatively new pool based in China, a market share of about 7.9% and about 2.88% of all blocks mined in the past year.
  9. BitClub Network: a market share of about 3.8% and about 2.75% of all blocks mined in the past year.
  10. Kano CKPool: a market share of about 1.1% and about 2.24% of all blocks mined in the past year.

What Are Bitcoin Mining PoolsWhat Is Bitcoin Mining Pools

Image Source: blocktrail.com

Large Bitcoin Mining Pools and risk associated with them

Typically, the larger the mining pool, more prone it is to the 51% attack, at least theoretically. A pool entity, when it gains control of 51% of the mining hashrate in the entire network, would be able to manipulate and control the system. In 2014, the mining Pool GHash.io had become about 42% of the network and then reached the dreaded 51% in July 2014. There was widespread concern about this and panic set in, causing GHash’s share price to dip. The bitcoin community held talks with GHash. Finally, It took some measures including a stop on accepting new miners. The backlash also caused miners to panic and leave the pool, bringing its size to about 38%.

However, it is not only about individual pools. More recently, there have been concerns about concentration of pools in China. Four of the biggest mining pools in the world- F2 pool, Antpool, BTCC and BW.com pool- are all based in china. If we look at the basic economic and political structure of China, we see China is a Communist nation and has a very secretive and intrusive governance system. It follows the policy of the great firewall and keeps a keen eye on the digital world. There is also the concern about it changing its policies tomorrow. If that happens and suddenly Bitcins are made illegal, it can cut off all traffic and sabotage almost 70% of the entire bitcoin network. Also, while the original intent was to decentralize bitcoin, with such big pools it is becoming more and more centralized.

In conclusion, unless you’re born with a silver spoon or have enough in your bank to invest in the high-end hardware and software, a mining pool is the way to go- cheaper, safer and with consistent payouts.

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