In my post about Bitcoin mining, I had mentioned a few ways to obtain/mine Bitcoins. Mining Bitcoins, or for that matter, any other cryptocurrency is a computationally intensive process. Over the years, it has been noticed that the difficulty of mining has increased, so much so that special hardware is required to mine some cryptocurrencies.

A mining pool consists of a number of miners who try to find the solution to the block and split the rewards based on each miner’s contribution. In my post about consensus mechanisms in blockchains, I have explained the exact nature of the problem being solved, but in simple terms, it involves finding a hash for the block. In pooled mining, miners solve simpler versions of this problem and are rewarded according to the number of such small problems solved.

Now, you may ask what benefit does the pool operator have, since the rewards are being distributed proportionally. Pool operators invest money in maintaining a website and often develop software to allow miners to mine on pools. To make up and even profit off this investment, they charge some fees on each block found by the pool.

Advantages of Mining Pools

The primary advantage of mining pools is that it allows miners with relatively low-powered hardware to mine cryptocurrencies. Pooled mining decreases the variance of rewards when compared to solo mining, provided the miner is having a small hashrate and is a part of a large pool of miners. Moreover, working in a mining pool supports decentralization since a lot of people are motivated for incentives.

Shares

Another term frequently seen in mining pools is that of shares. As mentioned, a miner who is a part of the mining pool tries to find a solution to a simpler version of the problem. The problem involves finding a hash, but not at the real difficulty level of the blockchain. The problem involves finding a hash which would have been the block solution, had the difficulty been equal to 1. The number of such solutions found by a miner constitute his/her share to the pool.

Reward Schemes

A fair method of sharing rewards based on contributions of individual miners is a difficult thing to do. The block reward, obtained after the correct solution to the block, is how new cryptocurrencies are added to circulation. In solo mining (provided you have enough hashrate), the rewards of a block go entirely to the miner, but in mining pools, various reward schemes may be used to fairly distribute rewards. Some common schemes are:

• PPS
• FPPS
• PPLNS

PPS

PPS refers to the Pay-per-Share reward system. In the process of mining, a lot of uncertainty exists. In fact, so much that finding the block reward involves a lot of luck. As a result, there is a lot of variance in the income of the miners, statistically speaking. In the PPS scheme, a miner is immediately rewarded according to his/her share, no matter how many blocks have actually been found by the pool.

FPPS

It refers to Full-Pay-per-Share and is an improved version of the PPS scheme. It is also called the PPS+ scheme. In this scheme, miners are paid for their share even if no blocks are found, just like in PPS, but they are also paid transaction fees (if a block is found).

PPLNS

In the above two reward schemes, I didn’t mention any relation to the concept of a “round”. Rewards in PPS and FPPS are distributed to participants in a given round. PPLNS (Pay-per-Last-N-Shares) doesn’t use the concept of rounds. Instead, block rewards are distributed among miners based on the last ‘n’ shares sent to the pool. Some variants of this scheme prevent pool-hopping.

Enfin

To conclude, before selecting a mining pool, always note the reward scheme, and the fee charged by the pool operator. If you are using a special software to mine coins, ensure that you agree with the its terms. This is because some mining programs charge a fixed developer fee, obtained by mining cryptocurrencies using your computer. Most mining pools also have a mininum payout amount. This means that unless you mine a particular number of cryptocurrencies on the same pool, you won’t get any mined coins in your account. Nevertheless, patience has its own rewards, and I hope that you have a successful time mining. And lastly, ensure that you follow all legal requirements during, and after mining a cryptocurrency of your choice.

Further Reading

Analysis of Bitcoin Pooled Mining Reward Systems

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