How do Cryptocurrency Mining Pools Work and How to Choose a Pool?

In today’s incredibly competitive cryptocurrency mining industry, most small-scale miners have a hard time finding a consistent and predictable source of cryptocurrency mining rewards. The only way to secure a steady mining income is to utilize a mining pool service for your mining rig’s power. Unless you’re wielding an immense amount of hash power, solo mining is a very risky venture and should be avoided if you are an entry-level miner.

Read also: How to Build a Mining Rig in 2021: A Step-by-Step Guide

For many miners, joining a cryptocurrency mining pool is the best way to start generating some serious mining income. Even if you plan to move on to solo mining, pool mining is a good way to get your feet wet. Not only that, but pool mining also helps you test out your mining equipment and find out its hash rate power.

Now, let’s start first with the definition of what pool mining really is. Pool mining can be defined as a group of miners acting as a team to find blocks. The block rewards are proportionally split across all miners who contributed to the pool’s hashed Proof of Work (PoW). In short, the more hashing power you’ve provided to the operation during a particular time period, the higher the share you receive for block rewards won by the pool.

The mining duration, or mining round, is the period of time between blocks mined by the pool. The round begins immediately after the pool has won the right to add a block to the blockchain and stops when it adds a block to the blockchain the next time. The round’s duration can range from few minutes to many hours depending on the pool’s size and luck.

There are many different mining pools out there. Some are better optimized for specific cryptocurrencies, while some of them allow you to utilize the full power of your integrated circuit hardware (ASIC), or your GPU-based mining rig. Depending on your hardware and needs, you should choose the right mining pool for yourself.

How to Choose a Pool?

Choosing the right mining pool for your cryptocurrency mining operations depends on multiple factors. Here are the three most important criteria to think about when choosing the right mining pool:

• Equipment: Some mining pools require that you have an ASIC mining rig. These pools usually just mine Bitcoin and ZCash. Other mining pools let you provide hash power from your CPU or GPU.
• Cryptocurrency: Different pools mine different cryptocurrencies. If you are a complete beginner, every pool will be good for you to get your feet wet.
• Payment: Different pools pay in different ways. With some you’ll share in the block subsidy, but not the transaction fees. With others, you’ll share in both. Some pools also charge a higher fee.

Many pools allow you to mine multiple cryptocurrencies, while others only list a small number of specific coins they support. For example, NiceHash (https://www.nicehash.com/) supports around 80 different cryptocurrencies, while Slush Pool (https://slushpool.com/home/) offers only Bitcoin and ZCash.

Some pools are also better optimized for lower hash rate hardware, while others offer proprietary mining software for mining using specialized ASIC hardware. Most PoW blockchains nowadays require the use of ASIC hardware, which is far more superior compared to ordinary CPUs and GPUs.

Good Starting Pools

These are the most popular and easy to use pools that are really good starting points, and provide great means to test out your mining equipment:

• NiceHash (https://www.nicehash.com/) allows users to buy and sell hash rate for a wide variety of crypto coins
• HoneyMiner (https://honeyminer.com/) allows users to mine using their desktop PC on whatever cryptocurrency is most profitable, but pays out rewards in Satoshi, which is basically Bitcoin

These two pools also function as hash rate marketplaces, allowing you to maximize return on your mining hardware. These marketplaces and services allow for easy and quick access mining access for beginners, and also enable you to turn any desktop or laptop computer into a cryptocurrency mining machine. Although there are many other good pools out there, these two are the most beginner-friendly when it comes to starting a cryptocurrency mining business.

When choosing a pool, be sure to choose the one that mines blocks frequently. You may want to avoid the very big pools to mitigate centralization issues, as well as prevent 51 percent attacks when a malicious party takes over 51 percent of blockchain’s hashing power, and disrupts the blockchain.

Here is a list of the largest and most popular mining pools per cryptocurrency in the alphabetical order:

Pool Rewards & Payouts

Different pools use different methods for calculating payouts. These methods are usually listed and well-defined on the pool’s website along with all the other information.

In the following list, you’ll see a few of the most popular payout calculation methods. All of these methods are based on the premise that miners are paid a proportion of gains made by the pool over a period of time.

Down below you can see a screenshot of Slush Pool mining results for a demo account. On the left you can see the average hash rate of a pool, which is 1.452 Eh/s. Underneath that number you can see that 56,247 workers are providing hash power to the pool. So, for Slush Pool, on average each miner is providing about 0.0017% of the pool’s hashing power.

Say that you provide that proportion of the hashing power during the mining round. You will earn 0.0017 percent of the payout from that mining round (after fees have been taken out by the pool operator). Keep in mind that you will earn proportional payout even if your hashing power may not have been involved in the actual winning blocks, because you provided hash power during the mining round.

However, payout calculations are often more complicated than a simple proportional payout. In the following list we’ll describe a few popular methods for calculating mining pool payouts. Here, we’ll use the term “share”, which refers to the proportion of the total hashing power during the mining duration that your mining rig contributes to the pool.

• Pay-Per-Share (PPS): With this method, miners earn a guaranteed income based on the probability that pool mines a block. This means, that this value isn’t calculated based on the actual performance of the pool. For example, the pool will sometimes perform better than the statistical probability, and sometimes worse. Either way, the miner gets paid on his or her contribution to the mean hash rate required to mine a block.
• Full Pay-Per-Share (FPPS): FPPS is quite similar to the PPS, except that FPPS also includes transaction fees as well as the block subsidy in the payout scheme. FPPS usually leads to larger rewards for pool participants compared to ordinary PPS.
• Pay-Per-Last N Shares (PPLNS): This method pays out rewards proportionally looking at the last number (N) of contributed shares. The PPLNS doesn’t take into consideration all the shares during the entire mining operation, but only the most recent share contributions at the time of block discovery.
• Shared Maximum Pay-Per-Share (SMPPS): This method is again very similar to the PPS, but rewards miners on the actual rewards earned by the pool, which means it never pays out more than the pool ever earns.
• Recent Shared Maximum Pay-Per-Share (RSMPPS): This pay out scheme is very similar to SMPPS method. Rewards are paid out proportionally to the total number of shares contributed during mining duration, but with more weight on recent hash rate shares. This means that shares that were contributed earlier in the round are worth slightly less compared to the shares contributed closer to the discovery of a mining block.
• Score Based System (SCORE): With this reward system, the miner gets paid according to the proportion of hash rate provided. However, more weight is given to more recent shares than earlier ones. This is very similar to the RSMPPS method, except SCORE is roughly a rolling average of your mining hash rate. If your mining rig was offline when a block was discovered by the pool, you won’t earn a reward equivalent to your total hashing you contributed, but an adjusted rate.
• Double Geometric Method (DGM): The DGM is a combination of PPLNS method and a geometrically calculated reward that equalizes payouts depending on mining duration. Basically, the longer you mine, the larger reward you’ll get by using this payout scheme.

All of these methods were designed to promote fairness between pool operators, and reward the miners who contribute the most to the pool. However, some methods are more successful than others.

Pool Policy

One thing that is often overlooked is the fact that mining pool operators work as for-profit businesses. This means that each pool has its own policy, or even business ideology. Some pool operators may act as benevolent actors, while some may hide their motives behind generating high mining rewards and revenues. Shady pool operators may promote mining empty blocks to game transaction fee rewards, clog transaction throughput, or even push alternative systems (e.g. cryptocurrency forks).

When choosing a mining pool, it is recommended first to connect with its community, and gain insights about community sentiments, and historical actions of the pool. However, the best way to understand pool’s ideology is to stay up to date on cryptocurrency news, regularly check forums, or visit social media sites such as Twitter or Reddit. It is worth pointing out that mining cryptocurrencies is a selfish business, however, selfishness also promotes cooperation, since mining power of a pool is far more powerful compared to the mining power of a single mining rig.

Pool Reputation

Another important thing when choosing the right mining pool is pool reputation. Some mining pools propagate scams and steal hash rate from its users. These types of pools usually do not last long, however, they can be very hazardous for its members. The best way to detect if a mining pool promotes shady tactics is quite simple. If its mining model sounds too good to be true, and has a very small online community that supports it, then it is probably a scam.

Shady mining pools usually offer guaranteed profits, are owned by anonymous individuals, and are based on multilevel marketing schemes. They also have no publicly auditable infrastructure, and offer no provable hash rate data.

Pool Fees

Pools can charge fees in various ways. Most pools have fees in range of 1 to 5 percent of total pool earnings. These fees help pools to maintain their online infrastructure, host servers for web applications, and run full mining nodes. Pool fees also help pool operators generate income.

No serious pool will claim that it charges no fees. Pools have to make money, and fees are the most economical way to do that. Pools also make money from individual transactions, as well as by block subsidy.

Does Pool Size Matter?

Yes, it does. Bigger pools usually have more members, and more hashing power, which means that they discover blocks much more often than small pools. However, being a member of a larger mining pool doesn’t necessarily mean bigger profits. No matter how much hashing power you have, you will always earn slightly less in a big mining pool than you would in a smaller pool.

However, over time, there’s no real difference. Whatever the size of the pool you join, your hashing power is the same percentage of the overall network’s, and thus, over time, you should earn the same percentage.

Keep in mind that, the larger the pool, the more frequently you will earn a reward. These rewards will be smaller compared to the ones you may get from a smaller pool, however, you will get them more often. Over the long period of time, the difference between big and small pools is negligible, so it’s up to you to decide which one you prefer more.

Creating a Pool Account

Once you select a pool, it’s time to create a pool account. In most cases, this is a fairly simple and straightforward process. Just like you would create an email account, so does the creation of a mining pool account look like. There are two prerequisites to make a proper mining pool account: 1) email account, and 2) cryptocurrency wallet address.

All mining pools usually provide detailed step-by-step guides on their website how to join them. Some of them may require of you to download their mining software, while some of them will let you decide to use whatever mining software you may consider more suitable for your mining equipment.

Most mining pools also have their own user manuals, online forums, and community FAQ pages, so be sure to check them out before creating a new mining pool account.

Server Choice

Although it is completely up to you to decide to which server within your mining pool network you want to connect to, it is recommended to choose servers which are mainly in your geographical location. Many mining pools have servers all across the globe, but you should connect to the closest one in order to reduce connection latency and avoid connectivity outages.

Configuring Mining Pool Settings

Specialized cryptocurrency mining hardware is usually equipped with an easy-to-use GUI. This interface can be accessed via Local Area Network, or simply via web browser by typing specific IP address of your mining computer.

Before you start mining, you will have to tell your mining rig to which mining pool should it connect to. All of this can be done by accessing the aforementioned graphical user interface, or by configuring settings files within your mining software’s folder. Some pools may require only your payout address to establish connection, while some of them may require more credentials for improved security. This will all depend on your mining pool’s policy and mining software.

Once you correctly enter all of the required information, you will be able to connect to your mining pool.

Payout Addresses & Thresholds

To be able to receive mining pool rewards, you will have to generate a cryptocurrency address. This can be done from any cryptocurrency wallet.

Read more: The Best Cryptocurrency Hardware Wallets in 2021

In cryptocurrency mining business, it is highly advised to use generated payout addresses only once. This will increase your overall security and enhance your anonymity.

Finally, there are payout thresholds. The payout threshold is the amount of cryptocurrencies you have to earn before you get paid out by the pool. Most pools allow you to define your own minimum payout limit. Setting the limit as low as possible will result in getting paid out more frequently. However, this may not be a good practice, as you may waste a lot of rewards on transaction fees. If you set the payout threshold too high, you risk losing all of your mined cryptocurrencies through hacking, fraud and theft attempts.

Solution to this problem is to find a sweet spot for you payout threshold. It is advised to set your pool payout threshold to the equivalent mining rewards projected to be earned from your mining equipment over a period of few weeks, or a month. In short, it should be like receiving a regular paycheck. With this method, you will receive a steady income of rewards, and you’ll also be able to easily keep track of your financials.

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