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Mining Pools: Buzzin’ on the the Basics

September 02, 2020

Have you heard the term “mining pool” before but you’re still not totally sure what it means? If yes, check out this post for a digestible, non-technical explanation!

January 2016 marked a special moment in Powerball history. The lottery paid out its biggest prize ever - $1.6 BILLION USD!

In the weeks leading up to the payout, it was hard to miss the buzz as the jackpot steadily grew. From media coverage to regular office conversations, everybody wanted a piece of the action.

Office lottery pools were perhaps more popular than they’d ever been. That is, colleagues pooled their money to buy multiple lottery tickets, promising to split the winnings should their lucky numbers get called.

To the demise of countless employee dreams of early retirement, the ultimate winning tickets (3 total) did not come from an office pool. Although these particular collaborative efforts didn’t prove fruitful in 2016, pooling is nevertheless an effective strategy to optimize for overall success. It is a tradeoff between odds (risk) and potential payout (reward).

Cryptocurrency mining pools are no different.

What’s the Buzz?

Our 50K-foot view mining post takes a high-level look at mining. What is it? Who does it? Why do they do it?

The post draws a parallel between bees and miners: Just like bees need honey and pollen to build and protect the hive, miners need energy and computational power to connect to and secure the network. As a reward for their efforts, bees get shelter and protection. Similarly, miners are rewarded tokens (the cryptocurrency unit) in exchange for making the network run how it’s supposed to.

To summarize: Mining is the process through which cryptocurrency transactions are validated, processed, and recorded Miners dedicate their computing power to make this process happen Computing power = energy = money Miners are motivated to get rewarded in exchange for computing power to secure the network Mining rewards are tokens

The bee metaphor is helpful because it illustrates miners’ self-serving motivations for participating in a decentralized network. It also points to a specific way in which miners can choose to engage with the network: mining pools.

Beeswax: Mined Your Own or Share the Buzz

There are two primary ways to mine: solo or shared.

Mining solo essentially means a single person or organization that goes all in for numero uno. Higher risk, higher reward. Think of risk as the costs they assume (e.g. computers, electricity, operations) and bankroll from their own pocket book. On the flipside, if they get the reward, they get to keep it all to themselves.

Mining pools, on the other hand, are like shared mining. In other words, miners choose to combine their resources with other miners for a more even risk/reward ratio. In mining pools, a collection of independent miners combine their computational power. If the pool gets the reward, it’s split proportionately amongst the miners.

Mining Pools Defined

Hopefully things are starting to click. Now that you have a better sense of what mining pools are, let’s take a look a more official definition:

“A mining pool is a joint group of cryptocurrency miners who combine their computational resources over a network. Individually, participants in a mining pool contribute their processing power toward the effort of finding a block. If the pool is successful in these efforts and is rewarded with cryptocurrency tokens as a result, the mining pool divides up these rewards to individuals who contributed according to the proportion of each individual’s processing power or work relative to the whole group.” Investopedia

Back to the Office

Not all mining pools operate in the same way. However, to keep it simple for now, we’ll look at the most common way: proportional mining pools.

You and 9 co-workers decide to go in on an office lottery pool. Lotto tickets are $1 and you each put in $10 for 100 total tickets. The jackpot is $1 million and everyone agrees to split it evenly if you win.

Why would you do this? It’s about odds.

Say 1,000 total lotto tickets have been sold. That means your pool, with 100 tickets, has a 10% chance of winning. For you, this means $10 for a 10% chance to win $100,000.

If, alternatively, you chose to go solo, your odds of winning decrease but the potential reward is bigger. This means $10 for a 1% chance to win $1 million.

That’s basically how proportional mining pools work. It’s playing the odds.

Summary

Mining pools are groups of individual miners who choose to combine their computational power in order to increase their odds of winning a mining reward. Mining rewards come in the form of tokens (the cryptocurrency units themselves). Rewards, typically, are paid out to miners proportionate to the amount of computational power they dedicated to the pool.