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Mining Pools: 2 Reasons to Join

September 02, 2020

This piece considers two reasons to join a mining pool. It is intended for those considering joining a mining pool and assumes the reader is familiar with core mining concepts such as proof-of-work, block rewards, hash rate etc. For a more detailed overview of mining, see mining for non-miners.

As cryptocurrencies further permeate into the mainstream, many find themselves wanting to get more involved in the exciting time in history. From buying $25 worth of crypto on a mainstream exchange to investing $1,000s in mining equipment and setting up a rig, there are a number of avenues to getting involved. Here, we look at one of these avenues: joining a mining pool. We consider two reasons for joining a mining pool, one more obvious than the other.

What is a mining pool?

If you clicked this post, the assumption is you are already familiar with the concept of a mining pool. Check out our mining pool basics post if you’re new to mining pools and/or need a refresher.

In short, a mining pool is a collection of individual miners who join, or pool, their computational resources over a network in order to increase their chances of mining a new block and collecting the reward. The reward is split amongst pool participants, typically in proportion to the amount of computational power they contributed.

Reason #1: Generate Passive Income

The most obvious reason people choose to join mining pools is because they want to make money. Specifically, they want to smooth out their earnings from mining over a given period of time by joining a group of other miners. Joining a mining pool, fundamentally, is a risk/reward tradeoff over a given period of time, where risk is a function of mining costs and reward a function of getting block rewards.

If you choose to mine solo, you assume all the risk at the chance of collecting the full reward. If you choose to mine in a pool, you still assume all of the risk at the chance of collecting a partial reward. But the chance of you collecting that reward is higher.

Let’s exemplify how this might look on a proof-of-work blockchain using simple numbers for easy math:

Say the block reward is 10 tokens and the network hashrate is 1,000 GH/s. Your miner’s hashrate is 10 GH/s and you’re trying to decide if you want to join a mining pool or mine solo.

> If you mine solo, you have a 1% chance of collecting the reward (10/1,000 = 0.01). In other words, you have a 1% chance of winning 10 tokens.

> If you join a mining pool with 9 other miners who have the same setup as you, your chances increase ten-fold. Pool hashrate = 10 GH/s x 10 miners = 100 GH/s. Assuming the reward is split evenly, this means you have a 10% chance of winning 1 token.

> Considering these numbers on a 100-day time horizon, the probability of total rewards you collect is even. Mining solo, probability says you will collect the full 10-token reward one time. Mining in a pool, probability says you will win a partial 1-token reward 10 times.

> Assuming reality reflects probability (it rarely does exactly over such a short time horizon), then, in this scenario, the choice to join a mining pool is less a function of the amount of money you’ll make and more a function of the rate at which you earn that money.

Of course, it’s an oversimplification. This example ignores things like energy costs, difficulty adjustments, pool fees, miner type, etc. But it helps to illustrate why (or why not) you would join a mining pool based on your desired risk/reward tradeoff.

Reason #2: Low-Stakes Crypto Education

Making money isn’t the only reason for joining a mining pool. In fact, if money is the goal and your means are relatively limited, then mining might not be for you given the high upfront costs of mining hardware and the continued costs of energy.

However, the process of setting up a miner and joining a mining pool can be reason enough because of how much you’ll learn.

One way to think about joining a mining pool is that it’s like learning a game by doing it. You might have every rule in basketball memorized, but nothing beats learning about the sport like actually playing it. There are so many nuanced aspects of the game that the rules don’t capture so you’ll never actually “get” the game until you participate.

Joining a mining pool is a lot like participating in a game. It’s like learning by doing because mining is fundamental to cryptocurrency networks. .

Say you have a $100 miner. Reality is, you’re not going to make much (if any money) from mining, especially if you’re mining on a huge network such as bitcoin. That doesn’t mean it’s invaluable for you to mine, though. The value is intangible.

The process of setting up a miner gets you familiar with the nuts n’ bolts of crypto. There is priceless worth in this because you’re building an understanding from the ground up.

Similarly, joining a mining pool will not only teach you about how they work. The process will also teach you to assess various blockchains based on factors such as network, token price, electricity costs, etc. It will show you what others are mining and you’ll have a mental model to assess why they’re doing it.

This hands-on learning approach is low-stake with plenty of upside in education. And real-world education is hard to put a price on.