A deep dive into Bitcoin mining pools

Hold your breath because in this article we are taking a deep dive into mining pools. Whether you bought one ASIC to mine at home, start a bigger mining operation or make use of a hosted mining service, you will have to decide if you are going to join a mining pool. If that is the case, which mining pool should you use? Finding the right mining pool for your mining strategy is important because it can help you in optimizing profits. In this article I will provide you all the insights needed to come to a proper decision.

I will elaborate on the following:

• What is a mining pool?
• How does a mining pool work?
• Pay-out methods
• Thresholds & Fees
• What mining pools are out there?

WHAT IS A MINING POOL?

A bitcoin mining pool is a joint group of miners who combine their computational power (hashrate) over the network to strengthen the probability of solving a block. Subsequently, the mining pool shares the block rewards among the miners who partake in the pool.

As the Bitcoin Network grew and the amount of computers trying to solve a block increased, the probability of a single miner mining out a block became very low. This lead miners to organize and combine hashrate in a jointly operation.

Solo Bitcoin Mining means that you don’t participate in a pool and therefore you don’t need to share your profits with other miners. On the flipside, it also means that you don’t get to share the profits of thousands of other miners. The goal of joining a mining pool is to improve the stability of Bitcoin Mining profits.

 

HOW DOES A MINING POOL WORK?

Participants in a mining pool contribute their computing power toward the effort of finding a block. If the pool is successful in finding the block, the pool receives the block reward. The rewards are divided between the individuals who contributed, according to the proportion of each individual miner’s hashrate contribution relative to the whole group.

The greater the hashrate of the mining pool, the bigger the chance the pool will mine a block. However, each mining pool and miner have the same probability of finding a block.

To join a mining pool you need to undertake four steps:

1. Choose which pool you want to join and create an account

2. Input the Stratum addresses of the pool into your mining software

3. Connect a wallet that will receive pay-outs of the pool

4. Configure your miners to the chosen pool

PAY-OUT METHODS

When deciding which mining pool you would like to join, it is important to look into the payment method the pool offers. There are more than 15 payment systems but most pools operate on a basis of Pay Per Share (PPS), Full Pay Per Share (FPPS), Pay Per Last N Shares (PPLNS) or Pay Per Share + (PPS+).

The pay-out of profit in some of these payment methods are linked to the so-called luck of the mining pool. Mining is probabilistic by nature, if a miner finds a block earlier than another miner statistically should on average, that miner is lucky. On the contrary, if it takes longer the miner is unlucky.

To simplify this, imagine a pool provides 1 EH/s and the overall hashing power in the Bitoin network is 100 EH/s. The probability of the pool finding the block reward would be 1%. Meaning for every 100 blocks found, the pool statistically finds 1 of them. Now imagine that the pool finds 2 out of the 100 blocks, this means that the pool found a block earlier than it statistically should. This means the pool is lucky! Now imagine the pool found 0 out of 100, this would make the pool unlucky. Over the long run, statistically the pool should find on average 1 out of 100 or 1% of the blocks. However, there is short term variance.

Pay Per Share (PPS)

Pool operators with a Pay Per Share (PPS) payment method buy hashrate from individual miners for a fixed rate, regardless whether the pool finds a block within the given period of time or not. Pool operators are responsible for controlling profits and losses, this payment structure is riskier for the operators given the variance. For this reason it is usually the larger pools with a lot of reserves that can afford to take on this variance risk.

Important to note is that PPS only pays shares based on a block reward, network fees are not included in PPS pay-outs. After deducting the mining pool fees, the miners are given a fixed income every day making the returns for miners relatively stable.

Full Pay Per Share (FPPS)

Full Pay Per Share pools reward shares with pay-outs consisting of proportional amounts of each block’s reward and also include network fees. FPPS calculates a standard transaction fee within a certain period of time (usually las 24 hours / day) and distributes it accordingly to miners in the pool.

Pay Per Last N Shares (PPLNS)

Under a Pay Per Last N Share (PPLNS) scheme, miners are compensated based on their contribution to the total hashing power of a pool over the last N difficulty epochs (group of 2,016 blocks). Pool operators determine the number of difficult adjustments that N represents in the pay-out equation. This structure benefits miners who have contributed to the pool over a longer period of time, as newer pool members receive smaller initial payments (thus making it less attractive for pool hoppers).

In the case of PPLNS, the pay-outs consist of both block rewards and fees. Contrary to PPS and FPPS, the PPLNS system only pays miners after the pool has discovered the block. This means miners are only compensated once the block has been found.

If the mining pool finds multiple blocks in a day, the miners will have a high profit. On the other hand if the pool is not able to mine a block during the whole day, the miner will not have any profit for that day. In the short term, the PPLNS method is highly correlated with a the luck of a pool. In the long run the luck factor tends to average out to the mean.

Pay Per Share Plus (PPS+)

PPS+ offers a hybrid pay-out scheme that combines PPS and PPLNS. Miner pay-outs come from both the block reward and transaction fees. The block reward is settled according to the PPS methods. The transaction fee is settled according to the PPLNS method, meaning the actual transaction fees of a pool are distributed to miners based on how much hashrate they contributed.

THRESHOLDS & FEES

The mining pool pays the profits to the miners’ wallet. Because the payment has a service charge, the mining pool will set a minimum threshold (e.g. F2Pool pays out on a daily basis with a threshold of 0.005 BTC). If your balance does not reach the minimum threshold, the mining pool will accumulate your profits until the threshold has been reached and will pay-out that same day.

In order to join a mining pool you usually pay a fee (a percentage) of your pay-out. The fee varies per pool and rather than just looking at the how high the fee is, it is important to take into consideration what you get in return for that fee. Customer services, dashboards to monitor performance of miners and security are just a few aspects to look at.

WHAT MINING POOLS ARE OUT THERE?

 

• Foundry USA Pool: US based pool owned by blockchain company Foundry Digital. This pool is focusing on miners with a minimum hashrate of 25PH (25.000 TH/s or 250 Asics of 100 TH/s). Foundry is part of Digital Currency Group. Well known companies like Genesis Trading, CoinDesk & Greyscale are part of the group. This diversification enables Foundry Pool to have a 0% fee.

• Antpool: Antpool is a mining pool based in China and owned by BitMain the manufacturer of ASIC mining machines (has biggest ASIC market dominance).

• F2Pool: F2Pool was originally launched in 2013 in Beijing. One of the oldest mining pools still running and considered one of the best on the market.

• Poolin: Chinese-based mining pool started by the same founders of BTC.com and later acquired by Bitmain.

• ViaBTC: Founded in 2016 in China and part of a bigger ecosystem with products like the CoinEx Exchange and CoinEx Smart Chain.

• Binance Pool: part of the Binance ecosystem mostly known for their popular exchange and Binance Smart Chain.

• SlushPool: Started in 2010 and is one of the oldest Bitcoin mining pools. It was originally called “Bitcoin Pooled Mining Server” or BPMS for short. Most popular mining pools despite not being one of the largest.

• BTC.com: Another a pool run by Bitmain established in 2016.

• Luxor: This pool is part of Luxor Technologies, a companies that offers various services surrounding Bitcoin Mining like their ASIC trading desk and analytical platform Hashrate Index.

 

Below you can find an overview of the various pools comparing the fees they charge, the pay-out methods they use and the BTC threshold for pay-out.

 

GEOGRAPHICAL DISTRIBUTION

You can see that the location of the pools are concentrated in a few countries. China is leading with 64,62% of total hashrate (June 2022) because six of the ten biggest pools are located there. The US follows with 25,66% of the total pool hashrate whereby Foundry USA Pool has a big influence on this number with 22%. Noteworthy also is the Czech Republic (6,47%) where Slushpool is located.

 

 

 

 

 

Whereas an individual miner might stand little chance of successfully finding a block and receiving a mining reward, teaming up with others dramatically improves the success rate. In theory, the greater the hashrate of the mining pool, the easier it is to mine the block. But just from the perspective of probability, each mining pool and miner enjoy the same probability of finding a bock.

While it seems like a no brainer to join a mining pool it is important to be aware of two things. First, by taking part in a mining pool an individual miner gives up some of their autonomy in the mining process. Joining a pool means you are bound by terms set by the pool itself, which may dictate how the mining process is approached. Second, a small number of mining pools dominate the bitcoin mining process. Although many pools do make an effort to be decentralized, these groups consolidate much of the authority to govern the bitcoin protocol. This goes against the decentralized structure of bitcoin.

When you want to join a mining pool, elements to consider when selecting a pool are:

• Pay-out threshold and frequency
• Possible fees
• Size of the mining pool
• Pay-out method

With the PPS and FPPS payment methods, you will get paid no matter if the pool finds a block or not, making pay-outs relatively stable. In the case of the PPLNS pay-out method, the risks and rewards are higher for a miner. This PPLNS structure benefits miners who contribute to the pool over a longer period of time. Questions you have to ask yourself when looking at the pay-out methods are:

• Do you prefer stability (PPS/FPPS) or higher risk/reward (PPLNS) or perhaps a combination (PPS+)?
• Are you planning to frequently hop pools trying to maximize profit (PPS/FPPS) or do you plan to stick with one pool for a longer time (PPLNS)?

I hope this article was useful and provided all the information you needed in the process of selecting a mining pool. If you have any questions or would like to have a chat about mining pools or any other Bitcoin Mining related topic, feel free to connect with me via Twitter or LinkedIn.